Tuesday, 17 April 2018

Franchisee Illness, Incapacity and Death


health, stethoscope, report, apple
What happens if you have entered into a Franchise Agreement, and then you (or a Nominated Representative):
  • suffers a more serious illness which prevents you from operating the Franchised Business for an extended period; or 
  • suffers a permanently incapacitating injury; or 
  • dies. 
Typically, where the Franchisee is a company a director will have been appointed as Nominated Representative under the term of the Franchise Agreement - being the individual directly in charge of managing the day-to-day operations of the Franchised Business. Where the Franchisee is an individual, the Franchisee and Nominated Representative are usually one and the same person.

If the Franchisee is a company with a sole director or the Franchisee is an individual, any serious illness, incapacity or death of that person will have a dramatic effect on the Franchised Business.

There are mechanisms you can put into place in the background to mitigate risk and to help manage the situation. Which mechanism to adopt will vary depending on the structure utilised for the Franchisee entity (eg. whether it is a sole director or multi-director company as Franchisee, a sole individual Franchisee or Franchise operating under a Partnership). Types of strategies which can be used might include one or more of the following, depending on the circumstances:
  • accident, trauma and life insurance; 
  • key man insurance; 
  • having an up to date and appropriately drafted Will; 
  • using an Enduring Power of Attorney (and/or Company Power of Attorney). 
The Franchising Code of Conduct (“the Code”) does not specifically deal with the issue of illness, incapacity, or death of a Franchisee (or a Nominated Representative). As a result, it’s important to check the terms and conditions of the Franchise Agreement to see what the agreement says is the process where such an event occurs.

Some poorly drafted Franchise Agreements maybe entirely silent on the processes for dealing with illness, incapacity, or death of a Franchisee (or a Nominated Representative). However, Franchise Agreements that are better prepared may offer a range of processes if such an event occurred, such as:
  • entitling the Franchisor to manage the Franchised Business until the Franchisee or Nominated Representative regains their health; or 
  • another Franchisee in the network (or nominated party) being able to manage the Franchised Business until the Franchisee or Nominated Representative regains their health; or 
  • allowing the Franchisee’s personal representative (such as an attorney) or even family members (with appropriate training) to manage the Franchised Business until the Franchisee or Nominated Representative regains their health; or 
  • allowing the Franchisee (or their personal representative) to sell the Franchised Business; or 
  • entitling the Franchisor to elect to buy back the Franchised Business through a first right of refusal arrangement; or 
  • the Franchisor simply offering to buy back the Franchised Business; or 
  • a negotiated surrender of the Franchise Agreement; or 
  • enabling the Franchisor to terminate the Franchise Agreement. 
Depending on the circumstances, one or more of the above may apply and there may be other possible solutions that can be noted in the Franchise Agreement or negotiated.

Illness, incapacity and death is a very important issue that should not be overlooked when considering a franchise.

If you are an intending Franchisee, we recommend you obtain legal advice from solicitors experienced in franchising law, such as Greyson Legal, before you sign a Franchise Agreement. We can:
  • review the documents; 
  • help you understand your rights and obligations; 
  • give you a comprehensive report on the terms and conditions of the franchise documentation; 
  • advise you where we recommend changes be made to the documents; 
  • alert you to issues you should clarify with the Franchisor; and help you negotiate with the Franchisor. 
For assistance with Franchising, contact Greyson Legal.

Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2018, All rights reserved.

Thursday, 12 April 2018

Proposed Inquiry into the Franchising Sector


In late March 2018, Nationals MP John Williams put forward a motion for a Parliamentary Inquiry into the Franchising Sector in Australia.

The motion was passed unopposed in the Senate.

The Inquiry arises, in part, from a number of recent scandals involving the Retail Food Group (which owns Gloria Jeans Coffees, among others), Domino's Pizza, 7-Eleven and Caltex.

If you are an existing participant in the franchising sector or looking to buy a franchise, it will be important to keep yourself informed of the progress and outcomes of the Inquiry.

For assistance with Franchising, contact Greyson Legal.

Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2018, All rights reserved.

Franchisor Breach of Franchising Code of Conduct - Failure to properly Disclose (ACCC v Morild Pty Ltd)

Disclosure, Transparent
The ACCC were successful in the Federal Court in November 2017: (ACCC v Morild Pty Ltd [2017] FCA 1308), against both the Franchisor company and its director.

The Franchising Code of Conduct ("the Code") prescribes that certain information must be disclosed in a Disclosure Document and given by the Franchisor to its prospective Franchisees 14-days before a Franchisee enters into a Franchise Agreement.

Elements of the information to be disclosed include, among others:
  • financial details of the Franchisor;
  • operating costs and fees;
  • contact details of existing and previous Franchisees;
  • the business experience for the past 10 years of each officer of the Franchisor;
  • whether there is an exclusive territory; 
  • conditions for renewal; and 
  • default and termination details. 
The Court held that not only did the Franchisor (Morild Pty Ltd) fail to create a compliant Disclosure Document but the director also knowingly failed to disclose his previous directorship of an insolvent Pastacup franchisor and his relevant business experience.

As a result, Morild Pty Ltd was fined $100,000 for its breach of the Code and the director personally fined $50,000 for being knowingly concerned in the breach.

In addition to the penalties, Morild Pty Ltd was also required to give certain declarations, injunctions were imposed and Morild Pty Ltd was ordered to contribute towards the ACCC's legal costs.

The Code requires Franchisors to provide prospective Franchisees with a Disclosure Document which contains important information about the Franchise System, the Franchise Business and the Franchisor. Full and accurate disclosure by the Franchisor is essential to enable prospective Franchisees to make informed business decisions.

This case shows:
  • for Franchisors - it is important they are transparent and disclose all relevant information to their proposed Franchisees - a failure to do this exposes the Franchisor and any directors to penalties and other legal action, as well as damage to their reputation;
  • for Franchisees - they should undertake appropriate due diligence; not accept blindly what is set out in the Disclosure Document; and obtain legal advice from lawyers experienced in franchising - before entering a Franchise Agreement.
Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2018, All rights reserved.

Sunday, 18 March 2018

Franchisee Training

Lecture theatre, learning, training, studies, university
One aspect prospective Franchisees should investigate as part of their due diligence is the extent to which they will be provided with training by the Franchisor.

Training is typically broken up into:
  • initial training; and 
  • ongoing training. 
This training might be broken down into smaller segments based on the specific task to be learnt, such as:
  • corporate history and philosophy; 
  • pre-opening procedures; 
  • daily operations; 
  • insurance requirements; 
  • reporting requirements; 
  • stock control; 
  • point of sale; 
  • product placement; 
  • converting leads to sales; 
  • financial management; 
  • marketing and advertising; 
  • etc. 
The training program adopted by the Franchisor to educate their Franchisees should ideally be backed up by either a specific Training Manual or incorporated as one or more sections in an Operations/Procedures Manual.

It is also necessary to clarify where the training will be delivered. Is it to be conducted at the Franchisor’s head office, on-site or at some other training venue (or some combination of these.)

Another element is to determine how the training will be provided. For example:
  • formal lectures in a classroom style; 
  • videos; 
  • webinars; 
  • written material;
  • hands-on work; 
  • Franchisor assistance at the Franchisee's location; 
  • attending at another Franchisee's location to see how things are done;
  • etc, 
or a combination of these.

A further consideration is the training conducted by Franchisees with respect to their own employees. How is this to be done ?

Franchisors can utilise regular regional or national franchise conventions/conferences as a means to provide ongoing training.

Franchisees should also consider general business, management and industry specific courses, outside of the training the Franchisor is offering, to help the Franchisee to become a successful business operator.

Prospective Franchisees should check the costs to be imposed by the Franchisor in respect of its training. Sometimes the initial training costs are incorporated as part of the Franchise Fee, but that may not always be the case. There are also the costs of ongoing training to be clarified.

It’s important for prospective Franchisees to check the Franchise Agreement and verify with the Franchisor:
  • what training will be provided; 
  • where it will be conducted; 
  • how it will be delivered; 
  • when and how often will training be provided; 
  • the costs of the training; and 
ideally obtain a copy of the Training Manual or Operations Manual and review it before signing the Franchise Agreement.

Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2018, All rights reserved.

Saturday, 17 March 2018

Franchise Conferences

A key element of any successful franchise system is open communications between the Franchisor and its Franchisees. Franchisors often incorporate annual or bi-annual conferences as part of their franchise system as a means of encouraging such communication.

Attendance at conferences by Franchisees is typically set out in the terms and conditions of their Franchise Agreement.

Conferences can be an expensive exercise for both the Franchisor and Franchisees so it is important that it be conducted well.

For Franchisors there are the issues of:
  • Location; 
  • Timing; 
  • Costs; 
  • Logistics of setting up; 
  • Preparation time; 
  • Obtaining appropriate speakers; 
  • Determining topics to cover;
  • Preparing and collating any relevant documents or material;
  • Etc 
For Franchisees there is:
  • Time away from the franchised business; 
  • Travel costs; 
  • Accommodation costs; 
  • An opportunity to voice any concerns with the franchise system or more generally;
  • Etc 
Generally, Franchisors adopt conferences as a method for:
  • Encouraging Franchisees to get to know other franchisee participants in the network; 
  • Knowledge transfer; 
  • Strengthening bonds and camaraderie within the network; 
  • Reinforcing the strategic direction of the franchise system and brand; 
  • Operational matters related to the franchise system; 
  • Gathering feedback from Franchisees; 
  • Introducing new or innovative products or services; 
  • Providing training; 
  • Assessing competencies; 
  • Acknowledging outstanding achievements by particular franchisees through internal awards. 
If undertaken well, a conference can help drive sales, uplift franchisee satisfaction, increase franchisee skills, foster greater alignment between the Franchisor and Franchisees, improve system compliance, and otherwise encourage overall positive outcomes for the network.

Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2018, All rights reserved.

Franchise Business Life Cycle

It's not unusual for retirees and other people looking for a career change to consider buying an existing Franchise business or acquiring a greenfields territory within a particular Franchise system.

Even though the Franchise system itself may have been in existence and operating for some time, and although the Franchisee may be provided with initial training in the system, procedures and processes - all new Franchisees to that system still need time to get up to speed on how best to operate the Franchise business with a view to its ongoing growth and staying profitable.

A factor which Franchisees should make themselves of is the business life-cycle.

Business Life Cycle Diagram

By understanding this cycling process, Business owners will be in a stronger position to recognise trends, adapt business planning, and put appropriate strategies in place to remain profitable.

Introduction

The introduction or establishment stage is the birth of the Business. In this stage:

  • New services and products introduced at this stage are more susceptible to failure. This may be attributed to:
    • Technical issues with new products/services;
    • Delays in product/service availability;
    • Reluctance by consumers to change established behaviours and adopt the Business owner's new product or service;
    • The Business owner not fully understanding customer pricing behaviours.
  • Detailed planning should have been commenced pre-start up;
  • Customer numbers are low; 
  • Sales turnover is low; 
  • Expenses are higher; 
  • Profit is likely to be negligible (if any); 
  • The Business owner needs to more aggressively market the products/services of the Business to break into the marketplace; 
  • The Business owner's aim should be to get the Business onto a stable foundation of profitable sales and a consistent cash flow as soon as possible. 
Growth
  • Typically after the Business survives the introductory phase, product and service sales will experience more rapid growth; 
  • However, progressively over time as more customers purchase new products or services, the size of the potential customer base decreases and new customers become more difficult to find; 
  • Assets needed to operate the Business should now have been acquired; 
  • Cash flow will remain positive; 
  • Expenses will still increase but at a reduced rate; 
  • Profit will be positive; 
  • Customer satisfaction may be more challenging if resources are insufficient. There may be an increasing need to employ more staff and/or outsource Business functions; 
  • The operation and management of the Business will likely become more complex as it grows; 
  • Planning must be revisited on a regular basis; 
  • Marketing remains a key focus; 
  • There is likely to be a greater need to make capital injections, for example, to update equipment. 
Maturity
  • As the market approaches saturation, Business growth will slow until sales stabilise; 
  • Income continues to rise for a period, then levels off; 
  • Profits will peak then begin to decline. This might be attributed to: 
    • Increasing numbers of competitive products and services in the market;
    • Increasing costs related to research & development to find better versions of the product;
    • The product or service starts losing its distinctiveness.
  • Because of the potential profit erosion, it will be important for Business owners to put appropriate strategies in place. Such strategies may aim to extend the product or service life cycle, resulting in renewed growth followed by further stabilisation at an overall higher level of sales. This could be achieved by: 
    • Promoting more frequent use of your products and services among existing customers;
    • Attracting new customers;
    • Promoting a wider or different range of products and services;
    • Product or service improvements;
    • Repackaging;
    • New pricing regime; or
    • New advertising/marketing campaign. 
  • Ultimately the aim is to maintain profits as long as possible before they start to fall; 
  • The customer base will be relatively strong for a period but will start to decline; 
  • Cash flow should remain consistent for a period; 
  • As growth slows more detailed long term planning is required; 
  • Finances need to be monitored; 
  • Spending will need to be reduced to match income. 
Decline

Triggers for decline in a Business may include:
  • Technological innovation which may make the Business owner's products and services obsolete;
  • Changes in the economic environment – the 2008 global financial crisis (GFC) being a prime example.
  • Where a product or service is declining the Business owner needs to consider either: 
    • Removing the product or service from their Business without delay; or
    • Gradually phasing the product or service out over a period of time; or
    • Looking at ways to rejuvenate the product or service;
  • Income and profits consistently drop; 
  • Competitors are increasingly able to entice away the Business owner's customers either with better service, lower prices or more modern products/services; 
  • The Business Owner needs to advertise aggressively to maintain their customer base; 
  • The Business owner needs to continually look at ways to differentiate from the competition. 
Conclusion

In order for businesses to continue to exist they need to reduce their dependence on individual product or service lines. Instead they should develop a portfolio of products or services so that when one product or service may be in decline, a different product or service will be in the growth stage.

Difficulties arise where the Franchisor has a significant degree of control over the Franchise system and the individual Franchisee has less flexibility to alter price, products and services and engage in marketing activities outside of what the Franchisor approves.

Prospective Franchisees should include as part of their due diligence investigations an assessment of:
  • at what point is the Franchise system along the business life cycle;
  • the business life cycle in respect of the individual Franchise Business;
  • the degree of control exercisable by the Franchisor over the Franchisee and the Franchise  Business, taking into account how this control can impact on the Franchisee's ability to manage the business life cycle of the Franchised Business.
Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2018, All rights reserved.

Monday, 5 February 2018

Franchising versus Licensing


What is a Licence ?

A licence is a right granted by one person (the licensor) in favour of another person (a licensee), allowing the licensee to do certain things. For example, it could be to:

  • use the licensor’s intellectual property. Eg. access to a trade mark; or
  • sell the licensor’s products,
within a certain territory.

A right granted by a licensor to exclusively distribute the licensor’s products (eg. ABC Widgets) in say Queensland through a Distribution Agreement, would be a form of licensing arrangement.

Licensing is generally quite limited in its scope compared to a franchise.

Licence of Franchise – Which is it ?

Licensing arrangements are perceived to be less complex and a cheaper alternative to franchising due in part to franchising being a regulated industry. Just because a document or arrangement is called a licence or viewed by the parties as a licence does not mean that the document or arrangement will not be deemed a Franchise Agreement and the Code then apply.

Getting this distinction wrong can be very costly. Generally:
  • If you possess a degree of control over another party’s methods of operation; or 
  • You agree to provide support in respect of the other party’s operations; and 
  • You receive a fee as a condition to the other party commencing and continuing its operations, 
then you should proceed with caution and check if the arrangement might constitute a franchise and be caught by the Code.

If there is doubt as to whether an arrangement is a licence or franchise, it is best to lean on the side of caution and structure the arrangement as a franchise from the outset.

Franchising Code of Conduct

In Australia, Franchising is regulated under the Franchising Code of Conduct, which is a mandatory industry code prescribed under section 51AD of the Competition and Consumer Act 2010 (CCA).

When is a particular business model a Franchise ?

The Code sets out what falls within the definition of a Franchise Agreement. The Code provides as follows:

Element One

A franchise agreement is one:
  • which can be in writing, oral or implied; and 
  • where a person (the franchisor) grants to another person (the franchisee), 
Element Two
  • the right to carry on the business; 
  • of supplying or distributing goods or services; 
  • under a system or marketing plan, 
substantially determined, controlled or suggested by the franchisor; and

Element Three
  • under which the operation of the business will be substantially or materially associated with:
    • a trade mark; or
    • advertising or a commercial symbol;
  • owned, used, licensed or specified by the franchisor or an associate of the franchisor; and
Element Four
  • under which, before starting or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example: 
    • an initial capital investment fee; or
    • a payment for goods or services; or
    • a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; 
    • a training fee or training school fee.
In determining whether a franchise applies to a particular business model, it is necessary to check the model against the above elements.

The more that these elements apply to a business model, the more likely it is that the business model is a franchise, in which case the Code would apply.

System or Marketing Plan

The Code does not define what is a system or marketing plan nor does the Code state when it is necessary to consider if such a system or plan is present.

However, the courts have set out certain factors which may indicate the presence of a “system or marketing plan”, in which case the Code would apply (not a licence). For example:
  • compensation structures for selling goods or services;
  • centralised bookkeeping;
  • centralised record keeping;
  • centralised computer operations;
  • suggestions as to the retail prices to be charged for products or services;
  • requirement that only certain products must be produced or sold;
  • specifying certain methods for providing goods or services, which must be followed;
  • detailed advertising or promotional programs to be adopted;
  • right to screen or approve promotional material;
  • setting sales quotas;
  • right to approve who is employed;
  • mandatory training programs;
  • customer information to be gathered and provided;
  • restrictions on what other products can be sold.
These are just examples of some of the factors and are not exhaustive.

Substantially determined, controlled or suggested by the Franchisor

The Code also does not specify when a system or marketing plan is substantially determined, controlled or suggested by the franchisor.

There is some overlap of these two concepts. The courts have said that there a number of factors to assess in determining this question, such as:
  • the extent to which the arrangement between the parties incorporates the sale of an alleged franchisor’s products;
  • the appearance of some centralised management;
  • presence of uniform standards as regards the quality and price of goods or services sold;
  • whether or not there is an obligation (imposed by the franchisor) to advertise or to conduct promotions;
  • the extent to which the alleged franchisor controls the franchisee’s business having regard to matters such as:
    • prescribing the hours and days of operation;
    • providing advertising and support;
    • auditing of books;
    • inspection of premises;
    • control over employee uniforms;
    • setting prices;
    • setting sales quotas;
    • management support; and
    • training.
Trade Mark/Brand

If the business that the other party is to operate is substantially or materially associated with a brand, name or logo, then that may indicate a franchise (not a licence). It would be a matter of checking the extent to which the other elements may apply.

Fees

If certain fees are to be paid, such as the below, that would tend to indicate a franchise (not a licence):
  • royalty payments; 
  • up-front fees; 
  • advertising payments; 
  • commissions; 
  • training fees. 
It would be a matter of checking the extent to which the other elements may apply.

Avoiding being captured by the Code

Some businesses seek to avoid being captured by the Code by:
  • not providing a system or marketing plan; or 
  • not providing the other party access to a trade mark, brand or logo. 
That is, they seek to avoid carrying on a business model that satisfies all 4 elements (as per above).

Conclusion

It is important to understand the difference between a licence, distribution agreement, dealership agreement and franchise.

Getting this wrong can have adverse effects on the rights and obligations of the parties to the agreement.

Contact us for further information:


Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

Copyright © Greyson Legal 2018, All rights reserved.