Franchise Agreements

Food For Thought: Franchising

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Each franchising arrangement can be entirely unique, but there are a number of key considerations that ought to be at the forefront of any franchising arrangement. Below are just a few of the key considerations for franchising.

 

1)    What does the franchising arrangement provide? Both the Franchisor and the Franchisee should examine whether or not the franchising arrangement covers off at least the key elements that are expected in a franchise. These key elements include:

 

a.    Intellectual property and brand – it is particularly important that the Franchisor actually owns the trade mark and associated intellectual property and has control over brand fundamentals. Ownership of the brand name by the Franchisor is critical and the brand name ought to be trade marked. If the Franchisor does not have the trade mark, there can often be substantial risks to all the parties in a franchising arrangement longer term;

 

b.    Business systems and manuals- these should be comprehensive, clear and valuable. Whether you are the Franchisor trying to encourage Franchisees to set up a franchise with great business systems and manuals, or whether you are the Franchisee looking to see what you’ll be getting for your franchisee fee, the business systems and manuals are paramount; and

 

c.    Exclusivity- It is important the parties are happy with the area that the Franchisee will control and benefit from under the franchising arrangement. Protections are typically put in place to ensure that the Franchisee obtains good value for money for a clear, defined, exclusive area or territory for the franchise.

 

d.    Goodwill – the franchise and Franchisor should have an excellent reputation built (typically) a significant period of time.

 

2)    How is risk allocated between the parties? – which party is in the better position to control the risks associated with the franchise arrangement? What are the particular risks for each franchise and how have these been covered off in the franchising arrangement and documented?

 

3)    What level of control is appropriate for the Franchisee? Both the Franchisor and Franchisee should be clear and upfront about what the Franchisee will control and what will be controlled by the Franchisor. Often a Franchisee will control the day to day business, client interactions and transactions and the Franchisor’s role in this regard is to ensure that the business systems and manuals provide transparency and an effective, demonstrated way to run the franchise business in these areas.

 

For example, the business systems and manuals may provide a process and manner for the Franchisee to manage and control its own social media, marketing and incoming client calls. The Franchisor provides an efficient system and consistent way to deal with these things, as opposed to the Franchisor centrally controlling all the social media, marketing and incoming client calls. Generally speaking, the parties should consider the end client and which party is best to manage that end client relationship.

 

4)    From the Franchisor’s perspective, how do each of the individual franchises interact or overlap? How the Franchisor deals with other franchises from a broad, overarching perspective is critical. It can be easy for a Franchisor to simply deal with each individual franchise independently, without taking stock of how each of those individual franchises stack up as a whole and the impact of one individual franchise on another franchise. Individual franchises should be considered by a Franchisor particularly as to how each one will protect its exclusivity and customer base transparently and fairly and maintain the key things that make the franchise arrangement viable. From the Franchisee’s perspective, the benefits of the franchise arrangement can be watered down if there are insufficient overarching considerations given by the Franchisor to the viability of each individual franchise.

At Coutts, we regularly prepare franchise agreements and suites of documents for Franchisors including disclosure statements and franchise agreements. We also review and provide legal advice on franchising documentation for Franchisees. We love conducting risk allocation workshops to ensure that each franchise is set up properly from the onset.

Please contact Alexandra Johnstone if you require assistance with your franchising arrangement or want legal advice or assistance on any proposed franchise. We are here to help!

Alexandra Johnstone
Partner
alexandra@couttslegal.com.au
02 4607 2110

 

This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.

How to buy a business

If your New Years Resolution is to buy a business you might be surprised to know that buying a business can be quite a complicated process, depending on what you are buying and how you are buying it. That's not to say you shouldn't do it, if you have had a dream to buy a business, it is definitely worth doing, however getting the right advice will help you to make the best decision on what to buy and the process to buy a business. Coutts has expertise in advising clients on buying and selling businesses, including franchises, Pty Ltd companies and Sole traders. We can also advise you on the best structure to use to buy a business- you don’t need to keep the structure you are buying.

If you are buying an established business you need to first determine what exactly you are buying- stock? Equipment? A registered business name? In some cases, you might also be buying debt, employees with long service leave entitlements and a bunch of creditors you have no chance of pursuing.

A properly prepared Contract for Sale of Business will note down everything included in the sale and will also set out the conditions that you are buying the business on. Making sure the Contract is correct can involve what seems like a lot of “to and fro” between the solicitors, however, it’s the contract that protects all parties so it is vital it is correct. Even if both the seller and the buyer have agreed on the big picture items, such as the price and the date for handover, there are lots of smaller details that your solicitor will confirm, such as:

  • Are you buying stock? At what value?

  • Is the equipment included in the sale or is it lease?

  • Are any of the employees staying on after the sale? Do they have long service leave entitlements about to crystallise?

  • Do you need a licence to run the business?

  • Is the soon-to-be former owner prevented from opening up a competing business nearby?

Do you know you cannot buy a lease? If a business operates in a leased premises, that lease must be either assigned (transferred) to you, or, a new lease will be offered. Bear in mind it is up to the landlord to decide to you give you a lease, it is not up to the seller. What will you do if you buy a business, but cannot get a lease on your terms? It is standard for the incoming tenant to pay the landlord’s legal fees (in addition to their own) associated with transferring the lease or obtaining a new lease.

Do you know you need to pay stamp duty on purchases of businesses? You may also need to pay Capital Gains Tax and GST.

Buying a business can be an exciting time when you finally become your own boss. But there is also a lot that can go wrong. You need a trusted, legal adviser to make sure that you are getting everything you think you are getting and leaving out the things you don’t want. You need enforceable contracts to protect you if things go pear shaped. You need to understand your lease. You need to be fully aware of the financial circumstances of the business and know that all of its debts are paid. Buying a business with unpaid tax debts, pending lawsuits and old stock would be a costly purchase indeed. Good advice is often worth far more than it costs and when you use a solicitor you are paying for their expertise and your peace of mind.

For any further advice or legal assistance on this issue, please contact us at Coutts on 1300 268 887.

What situations can cause franchise disputes?

What do pizza and petrol have in common?At the moment there are two big businesses making headlines for franchise disputes- Pizza Hut and United Petroleum. Around 80 owners of Pizza Hut Franchisees are currently in the Federal Court claiming the $4.95 pizza range the franchisor has required them to sell is too cheap- they cannot make any profit and remain in business. Part of their argument is that the franchisor is not acting in their best interests and it is unconscionable to require the franchisees to sell pizzas at such a low rate. Initially unsuccessful in obtaining an order to stop the requirement to sell the cheap pizzas, the matter is now chugging along towards a final decision. It is expected that the judgment, whomever the Judge agrees with, will provide much needed clarity on exactly what kind of care the franchisor owes to the franchisee.  

A more recent conflict to emerge involves a franchisee of United Petroleum. While in some respects it is hard to imagine not turning a profit from petrol, the franchisee is claiming that he was required to sell gas bottles and confectionery at a high price and was forced to change electricity suppliers that charged a much higher price. United was able to terminate the franchise agreement due to Mr Nijhawin’s failure to pay electricity bills. In speaking to the ABC’s news service, the franchisee said “We're devastated, totally. Financially, emotionally, physically…we're finished,"[1].

A lawyer representing two other (now former) united Petroleum franchisees, claims that it is in the interests of United Petroleum for a franchisee to commit a breach, so they can then take back the business and re-sell it to a new franchisee, netting around $145,000.00 each time the business changes hands[2]. Another disgruntled franchisee commented that his business struggled because United dictated what products its franchisees sold and at what price, including United Petroleum home branded products[3]. He shut up shop in March 2015.

If you are considering a franchise you must, must, must fully understand the franchise document. You need to be aware of clauses that allow the franchisor to dictate your resale price. If you get caught in the cross fire of a pricing war, as is currently raging between Pizza Hut and Dominos, your business could be the first casualty. If the franchiser dictates your supplier and you can get a better deal elsewhere- what are your rights to go elsewhere? Read between the lines- is this document passing on all the risk of running the business solely to you, without giving you the power to make decisions that impact on its profitability? While the franchising model of business can be a profitable way of running a business, often enjoying instant brand recognition, training, support and extensive marketing, as with most of life’s decisions, your decision to buy a franchise must be an informed decision. Coutts have experience in reviewing a variety of franchising documents as well as acting for parties in franchising disputes.

If you are thinking of starting a franchise business. Coutts Solicitors is hosting a FREE Webinar on Monday 7th September 2pm with the ABC's of starting a business. Our Commercial Law expert Adriana Care can help you decide the best way to set your business up, to be a success from the start!

To register for the ABC Business Start up Webinar click on the link:

https://attendee.gotowebinar.com/register/4031324567032270850

or if you would like to talk to one of our business lawyers call

1300 268 887

for a free initial consultation.

Franchising and Supply Agreements

Can a franchisor require the franchisee to buy all supplies from an approved supplier? Known as third line forcing, a franchising agreement can require you to use supplies from a specified supplier. Generally such provisions are anti-competitive and may fall foul of the ACCC’s (Australian Competition & Consumer Commission) policy on promoting competition. However, where a franchise agreement provides for this arrangement, it is possible for a franchisor to seek the ACCC’s approval first and then include this arrangement in the agreement. If approval has been received, it is very difficult for a franchisee to then have that approval revoked and ask the ACCC to investigate.

Sometimes an agreement allows you to choose your supplier but will specify a certain quality or standard of goods are to be used.

Working along side the ACCC and the law surrounding competition is The Franchising Code of Conduct. The Code requires franchisors to disclose the name of the supplier, if they will receive a rebate or financial benefit from any supply arrangements and whether they share the rebate or benefit with the franchisee. Franchisors do not have to state the amount or value of the rebate or financial benefit.

If you are entering into a franchising agreement, check if there are any provisions that require you to purchase goods from a specified supplier. Ask for a copy of a current price list so you know how much it will cost to re-supply your business. It may be that the nominated supplier is more expensive then an alternative you wish to use. However, the ACCC has recognised that a franchisor has an interest in maintaining a level of quality of goods used by individual franchisees and the increased efficiencies for the franchisor in using the one supplier.

We provide a detailed advice to prospective franchisees that include considering third line forcing issues. It is important that any concerns you have about the nominated supplier, are raised with the franchisor before you enter into the agreement. Being unable to afford the supplier’s price or being unhappy with their service will not allow you to end the agreement.