Across Australia, 2006 was a busy year for the franchising sector. In June, the Federal Government announced its review of the Franchising Code of Conduct (the Code). The purpose of the review was to focus on the adequacy of the disclosure sections of the Code. The disclosure document, by itself, is not sufficient in making decisions about whether to acquire a franchise or not. The franchise agreement is the fundamental document governing the relationship between the franchisor and franchisee and sets out the rights and obligations of both parties.
What happens when the franchise ends? When the
franchise agreement finishes, the right to conduct the business under the franchise ceases - generally with no right of compensation.
As the franchisee generally owns the fixtures and fittings or the plant and equipment, in some circumstances, the franchisee may be left holding the relevant assets. Many franchise agreements also contain restraint clauses that prevent franchisees from carrying on a business similar to the franchise, after the end of their franchise.
If the franchisee has retail premises, I ask them to also look at the term of the current lease of the premises.
Clients need to understand that there may not be an option to renew the relevant lease for the premises.
Franchisee financial obligations Typically, the franchise agreement would include the following types of obligations:
- To pay an initial franchisee
- To pay a periodic ongoing royalty
- To pay a contribution towards advertising
- To pay a fee when the franchisee sells the business
- Fees in respect of training
- Fees in respect of paying the franchisor's legal costs and stamp duty
- To purchase stock directly from the franchisor or approved supplier
- To fit out the premises or acquire relevant equipment directly from the franchisor
Many franchise agreements go to great lengths to detail the franchisee's obligations in running the business. These can include:
- Maintenance and cleaning of premises and equipment
- The fitting out of premises
- Providing financial and reporting information to the franchisor
Franchisor obligations The primary obligation of the franchisor must be to provide the relevant intellectual property and the components of the franchise system to you. This is often done by training and support and should be reflected by the operations or procedures manual, which articulates in detail the substance of the business and how it is to be conducted.
Industrial relations
You will need to determine whether, under WorkChoices, you need to put in place a collective workplace agreement or an individual AWA.
Other investigations Prospective franchisees must carry out their own due diligence. This has to include:
- Talking to other existing and exited franchisees
- Talking to the suppliers of the franchisees
- Seeking advice from advisors, such as
franchise lawyers, who practice in the franchising sector
- Making an assessment of the business, based on a sound business plan
- Ensuring that they have the relevant skills and attributes to run the type of business on offer
- Ensuring that they deal with a franchisor that works with their franchisees.
This article appears courtesy of
Mason Sier Turnbull.
30-Aug-2007