Franchising - Institute of Public Accountants · Who should you trust? Franchising What every franchisor, franchisee and their advisers need to know Tom Meagher Murfett Legal Presented

Who should you trust?

Franchising What every franchisor,

franchisee and their

advisers need to know

Tom Meagher

Murfett Legal

Presented by:

Tom MeagherDirector – Commercial & Succession Law

© Murfett Legal 2017

All rights reserved – no reproduction permitted

© Murfett Legal 2014 – All rights reserved

Tom Meagher | Director - Commercial Law

Tom has over 25 years’ business experience including: working for major

national and local law firms; being the national operations manager for a

financial advisory IT platform provider; owning and managing an IT business;

and being a director and in-house counsel for a public company.

Tom’s clients include an extensive range of local, national and international

businesses as well as numerous organisations and individuals. He also has

excellent communication, technology and personal skills with a proven ability to

develop business relationships.

He is also a regular publisher of articles, and one of Australia’s leading

presenters of legal seminars to and for various professional bodies,

associations and government authorities on a wide range of business law

topics including:


All rights reserved – no reproduction permittedSlide 3

WA Department of Commerce • Institute of Chartered Accountants of Australia • Law Society of WA •Innovation

Centre of WA. • LegalWise • The Tax Institute • Institute of Public Accountants • Governance Institute • National

Electrical & Communications Association • Australian Hotels Association • Small Business Development Corporation •

Australian Institute of Conveyancers • CPA Australia • Mortgage & Finance Association of Australia • City Insolvency

Discussion Group• Stirling Business Centre • Institute of Certified Bookkeepers • Western Suburbs Business

Association• Business Foundations Inc. • WA Business Assist•WA Reckon Partners.

Disclaimer

The information presented in this seminar is intended only as a guide, as to

the topic and the matters discussed.

This seminar is not legal advice and must not be relied on as such.

If you have a matter which relates to this seminar or you require legal

advice, careful review and analysis of your matter’s particular facts,

information and documents is required before proper legal advice can be

given or applied to your matter.



Quick Overview

• New code’s ‘good faith dealings” - since January 2015

• The new statutory franchisee ‘Information Sheet’

• Lack proper, comprehensive advice before going to franchising

• Understanding the highly & prescriptive (and sometimes very short-term) nature of

their franchise business

• Lack of training & failure to comply operations manual

• Territory ‘splitting’ & an disclosure relating online sales by franchisors and

franchisees

• Singular franchisee entity for multipole franchise

• Failure of ‘mum & dad’ lender to secure their initial, primary loan to their franchisee

• Franchisor Advertising & Marketing Funds – separate , audited fund

• Capital Expenditure- upgrade & refits/ Franchisors are prevented from imposing

substantial capital expenditure except in limited circumstances.

• Termination & franchisor’s selective w/down business asset (note: not goodwill) buy-

backs



Quick overview (cont)

• Minimum Required Revenue Increases

• Contractual restrictions and requirements of Franchisees ‘selling’ (i.e transferring or

assigning) their franchise business e.g first right of refusal, not unreasonable

consent of franchisor

• Post-exit Restraints of trade

• Leases – direct or sub licence/lease/ expiry term and no new lease. Move and make

good costs

• Securities – residual risks for personal guarantors

• ‘De-debadging’ – done properly by formal surrender/settlement or badly by walk-off

etc..

• Dispute resolution – mediation before court , unless genuine breach.

• ACCC’s ability to now ‘fine’ franchisors

• Damage to the entire Franchise brand & goodwill/reputation by one or individuals

franchisees’ actions, or inactions… (e.g. recent chicken treat, Nandos & the Lenards

matters)



(Relatively) Recent Amendments to the

Franchise Code of Conduct On 1 January 2015, the old Franchising Code was repealed and replaced with a new

Franchising Code of Conduct. The new Code applies to conduct on or after 1 January 2015.

The new Code:

introduces an obligation under the Code for parties to act in ‘good faith’ in their dealings with one another.

Introduces financial penalties and infringement notices for serious breaches of the Code.

requires franchisors to provide prospective franchisees with a short information sheet outlining the risks and rewards of franchising.

requires franchisors to provide greater transparency in the use of and accounting for money used for marketing and advertising and to set up a separate marketing fund for marketing and advertising fees.

requires additional disclosure about the ability of the franchisor and a franchisee to sell online.

prohibits franchisors from imposing significant capital expenditure except in limited circumstances.

These are significant changes and it is important that franchisors, franchisees and potential franchises understand their rights and responsibilities under the Code.



Franchise Documents

• Franchisor needs to issue the following documents:

– A disclosure documents (which complies with the Code), which must be

regularly updated and will include amongst other things:

general historical and business information about the Franchisor

and its management, including details of other Franchisees and

legal action taken against the Franchisor;

financial details of the Franchisor;

what rights will be granted to a Franchisee;

a copy of the proposed Franchise agreement;



any lease to be taken by the Franchisee;

various fees and changes to be paid and the circumstances

under which they become payable;

a copy of the Code and Franchise Information Statement;

a Franchise Agreement;

a Franchisee advice statement;

a guarantor statement (if applicable); and

operations manual.



• Individual borrows money/loans money to their new

Buyer/Franchisee entity to buy or establish franchise

business.

Example

1. Mum and Dad are directors of a new company and wish to buy a

business.

2. They use their home as security to obtain a loan from a bank and

they effectively on-lend this money to their new company to buy the

business but the loan is not secured against their buyer company…





Last thing you want to see is

that the other secured parties

e.g. overdraft financier, lessor,

franchisor, suppliers have

priority over Mum and Dad.

4. Therefore there needs to be a formal loan with GSA between Mum

and Dad (Lenders) and the New Company (Borrower) asap!

5. What security will be provided? e.g. ALLPAP Who gets priority?

6. Make sure that all documents are signed and registered BEFORE the

Franchise Business purchase!

• Essentially, a Franchisor has to choose between either:

– Taking the head lease of sites, and then licensing or subleasing the sites

to the Franchisees; or

– Requiring Franchisees to directly take the leases of the sites

usually in this case, Franchisor has the right to approve the terms

and conditions of the lease.

Ensure that the lease (or by way of a separate deed) contains the

right for Franchisor to assign the lease to itself or its nominee, if the

Franchisee breaches the Franchise agreement or the Franchise

agreement is terminated.



Leases & Franchises

– Embedded in Franchise agreement and Operation

Manuals.

– Must be clear and specific.

– Should set realistic targets increasing each year.

– Understand what happens when the minimum

performance indicators are not met.



Minimum Performance Criteria

What can go wrong with Franchisees?

− (“3 Ds” - death, divorce & dementia)

− Competitors & market saturation, even franchisor predation!

− Minimum Operating Targets (annual increases)

− Rents vs. franchise fees,

− Single franchisee, multi-site owners

− Personal guarantees & securities,

− Expiry of Lease and/or Franchise term

− Lease relocation & Franchisor rebranding,

− Technology/ system upgrades



Restraints on Franchisees− Non-exclusivity and RoTs,

− First (and last) rights of refusal,

− Buy-back of assets only on written-down value

− No 'goodwill'! – no ownership of customers,

phone/fax/email/website, database, trading name and

‘notional goodwill’

− Insolvency of franchisees - who usually has the first claims:

financiers, franchisors & lessors

− Walking away can be the worst – negotiate a formal surrender

and release of franchise (and possibly the lease)

− ‘Debadging’



What can go wrong with Franchisors?

− untried or new franchise system

− lack documented systems and operations/ procedures manuals

− non-compliant franchising systems (e.g offering finance broking,

mobile-liquor sales or real-estate-relate business but not

notifying prospective franchisees they had to be appropriately

licensed)



What can go wrong with Franchisors?

− ‘Brand damage’ by bad franchisees

− Bad, or change in proven, management,

− Poor site selection,

− Litigation/ group actions/ ACCC actions,

− termination/ expiry of head license,

− Lack of Marketing and Marketing Fund disputes

− IP and the PPSR vs. IP Australia Registry

− Buy-back of poor performing Franchisees


All rights reserved – no reproduction permitted

• IP Australia

http://www.ipaustralia

• Franchise Council of Australia

http://www.franchise.org.au

• ACCC



http://www.ipaustralia/

http://www.franchise.org.au/

• Don’t rely on ‘mates’, agents, Google! or other non-qualified third parties

for “advice”. They:

a) do not act for you,

b) do not owe you no fiduciary duty; and

c) are not qualified (or insured!) to give you proper legal advice.

• Engage a lawyer at the right time – e.g. you do the deal but before you

accept a contract, be sure to obtain appropriate legal advice.

• Business lawyers can add value and can be better than

warranty/insurance claims or litigation!

• If a dispute arises, be sure to clarify the issues in writing, keep all material

information/documents and seek advice early (also, if applicable,

promptly notify your relevant insurer – rights of subrogation).





• Business / Commercial Law

• Business Structures

• Business Succession

• Business Turnaround

• Contract Advice

• Debt Collection

• Employment Law

• Estate Planning

• Franchising

• Hospitality Law

• Insolvency

• Intellectual Property

• Leasing

• Liquor Licensing

• Litigation

• Property Law Advice

• Restructuring

• Settlements

• Sports and Entertainment Law

• Strategy and Negotiation

• Superannuation

• Taxation

• Trusts

• Wills

Seek professional, friendly legal advice

so you can make an informed decision.



www.murfett.com.au +61 (8) 9388 3100

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Level 2, 111 Wellington Street, East Perth WA 6004

PO Box 6314, East Perth WA 6892