Advice for Intending Franchisees
A prospective franchisee faces considerable legal, accounting, financial and commercial issues in considering whether, to go into a franchise business.
A franchise arrangement often involves some or all of the following transactions: the grant of the new franchise or transfer of the existing one, the sale or transfer of a business, grant of a new or assignment of an existing lease, employment law issues, selecting appropriate business structures and taxation issues, intellectual property issues , financing and security documentation.
Regulation of the Franchising Industry and Disclosure
The parties to a franchise arrangement are subject to the Franchising Code of Conduct ("the Code"). The Code is a Federal Law under the Trade Practices Act and has the force of law and provides a regulated environment of disclosure and conduct in relation to franchising.
A franchisor must give you a Disclosure Document before he can sell you a franchised business.
The Disclosure Document must follow the form set out in the Code. The Code sets out what must be contained in the Disclosure Document.
The Disclosure Document must contain the following:
- the business experience of the people who manage the franchise system;
- details of any litigation in which the franchisor has been involved;
- names of existing franchisees, including the business address and telephone number;
- whether in the last three years any franchised business cease to operate or whether the franchise agreement was not renewed when it expired and whether a franchise business was bought back by the franchisor;
- whether the franchisee will be given a geographical area within which it can operate exclusively without competition from other franchisees or the franchisor;
- whether the franchisee has to buy any goods or services from any specified supplier in order to carry on its business;
- whether the franchisor is getting any financial benefit from those supplies;
- whether there is a marketing or other co-operative fund to which the franchisee has to make contributions, details of any such fund including who contributes to it, how much the franchisee must contribute, kinds of expense to which the fund can be used and the funds expended for the last financial year;
- the range of costs to start operating franchised business;
- a summary of conditions of the franchise agreement which deal with certain topics including length of time for which a franchise agreement will operate on the transfer of the franchise;
- the franchisor's financial position.
The franchisor must also give you a copy of the Franchising Code of Conduct.
The franchisor must give you a copy of the Disclosure Document and the Franchising Code of Conduct at least 14 days before you enter into an agreement with the franchisor or before you pay any non-refundable money to the franchisor.
Franchisee to get independent advice
The Code provides that before a franchisor can sell you the right to operate a franchised business, it must have received certain written statements from you. The first statement is a statement saying that you have received, read and had a reasonable opportunity to understand the Disclosure Document and the Code. You must also provide a statement saying that you have been given independent advice by a legal adviser, business adviser or accountant.
Due Diligence
A critical matter in assessing any franchise business is the accuracy and reliability of any projections or estimates of turnover/ sales which the franchisor may provide you. This has been a source of frequent disputes between franchisors and franchisees and there have been many cases which have come before the courts. Ultimately each case has turned on its own facts as to what was said and what the documents provided and it is never certain whether a party will be successful in such litigation. Litigation is an expensive and uncertain process and therefore it is very important that any projections be carefully and professionally analyzed before committing to a franchise.
It is usually too late and too risky to rely upon suing a franchisor to recover losses based on any wrong projections. Most franchise agreements attempt to protect franchisors from liability in respect of such projections. Therefore realistic due diligence is required before entering into the franchise and this would involve analyzing the basis of the projections. An experienced accounting firm should be retained to analyse any financial information. Often financial information provided by a franchisor is statistical in nature and may not relate to the specific franchise in question.
A close examination of the Disclosure Document may reveal hidden problems with the overall franchise arrangement. For example evidence of termination of other franchises in the last three years may indicate problems in the franchise arrangement. Also disclosure of litigation may be an indicator of trouble.
Legal Advice
Most franchise arrangements are governed by lengthy and complex documents setting out every aspect of the franchise relationship and the legal rights and obligations of the parties. In addition, there are usually detailed operations manuals. Furthermore, the franchisee may require a lease of premises from which to operate the franchise business and this will involve consideration of the leasing aspects of the transaction. The documentation may even be daunting to experienced business people and lawyers not familiar with franchise agreements.
Often it may be difficult, if not impossible, to get the franchisor to agree to changes to their standard franchising documentation. However it is essential to understand the full impact of the franchise agreement so that you appreciate what may happen in future in various circumstances. For example, what happens if you were to become injured or incapacitated? What happens if you decide to sell the business? What fees are payable to the franchisor in such a circumstance?
Advice from a lawyer experienced in franchising documents is essential.
Site location
Site location and selection will be critical to the success of the franchise. Shopping centre leases require particular attention and may contain onerous provisions regarding payment of a percentage of turnover to the landlord. Security of tenure and options to renew may be crucial to the success of the business.
Legal structure of franchisee
You will need to consider what legal structure you are going to established to operate the franchise business and you will require legal, accounting and tax advice at the outset as it could be difficult and expensive to change the structure later.
Research and Links
There is much information publicly available to assist intending franchisees. The Franchise Council of Australia (FCA) is a very useful organization and can be accessed at www.franchising.org. Particular attention should be directed to the Education field at that site and the subsection, "Getting Started in Franchising" which includes the following:
- a thorough background of Franchising and what to look for when selecting a System;
- a detailed Personal Checklist;
- a video program -- "Franchising - Is It Right You?"
An online workshop developed by the Department of Innovation, Industry and Regional Development in Victoria concerned with evaluating yourself, a franchise system and seeking professional advice together with other useful and educational links.Go to www.business.vic.gov.au.
For further information please contact Tony McMinn on (02) 9957 4501 or at acmcminn@rbhm.com.au
|
Back