Franchisor or franchise owner
Marwan Kojok, director, Baybridge Lawyers , looks at the differing legal obligations of franchisors and franchise owners.
Are You a Franchisor?
Putting aside the challenges faced when moving from a sole operator to a multi-unit operator and then becoming a franchisor, you need to consider whether your business structure meets the criteria provided under the Franchising Code of Conduct (the Code). Whether you like to label your business structure a license, or dealership, if it meets the following criteria, you are deemed to be operating a franchise model. What does this mean?
Well, it simply means that your business operation will be regulated by the Code and accordingly, specifically if you are a franchisor, you are required to provide a Disclosure Document to your prospective franchise owners along with meeting other conditions such as providing a "Cooling-Off" period.
The Four Pillars of Franchising
1) Is there an agreement?
It need not be an agreement in writing and may be made orally between the parties.
2) Is it substantially or materially associated with a trademark or commercial symbol?
We all are familiar with the McDonalds golden arches or the Boost Juice brand. It has been well argued that the makings of a franchise model are generally based or founded on the trademark or commercial symbol of the business. It is behind this that goodwill is generated and interest is developed.
3) Is there a payment of a fee?
In most franchise models, whether it is in Australia or overseas, the franchisor receives a fee generally known as a royalty fee for the continued use of the brand and systems developed by the franchisor.
4) Is there a system or business plan substantially determined or controlled by the franchisor?
The Code does not define "System" or "Business Plan", and there is limited case law on this matter, however it can be argued that where there is an element of control by the franchisor on the franchise owner to do certain things in respect to the operation and marketing of the business then it satisfies this criteria.
If the above exist then you, as the franchisor, must ensure compliance with the Code. This means that you must issue to a prospective franchise owner, 14 days prior to the franchise owner signing or paying any money, a current disclosure document. This disclosure document will provide the franchisor's company details (directors, associates and experiences of the office holders in respect to the business), historical & current information pertaining to the franchise operation, ownership of the intellectual property, obligations of both the franchisor and franchise owner in the franchise agreement and a solvency statement.
Once you have determined that the Code regulates you, you should locate and instruct a lawyer with franchise expertise to prepare a disclosure document and franchise agreement - the contract between the franchisor and franchise owner. It is imperative before you launch the franchise that you have made all efforts to protect your intellectual property. First and foremost ensure your brand (including name and any logo) is applied for registration as a trademark.
This exercise may also include protecting any designs that you may have created and ensuring that copyright in your system and relevant systems and documents belong to you.
Once you have completed the above it would be wise to contact an accountant to liaise with your lawyer to setup the correct structure for the operation of the franchise. In most cases you will find that franchises are structured in a variety of ways to protect itself from liability.
Each franchise has its unique qualities and the above is a general view on getting yourself ready for franchising your business and advises that you seriously consider appointing the right people to assist you in the further expansion of your business.
Are you a Franchise Owner?
Owing and operating your own business is daunting in itself without the responsibility and the obligations that you have to a franchisor. Notwithstanding this, it has been well documented that a franchise-operated business attains a higher level of success than an independently owned and operated small business.
Franchising has become such a successful model today because, if done properly, it is an efficient method of expanding a brand quicker across a state, country or the globe by forming partnerships with like-minded people to achieve the same goal - success!
Before getting into a franchise business it is imperative that the franchise owner does their homework. Many individuals view franchising as a quick and easy way to start their own business. However, the purchase of a franchise consumes a substantial sum of your money and provides no guaranteed path to success. Investing time and effort to read the material provided to you by the franchisor will paint a clearer picture of what's to be expected.
Any success you may have in franchising is essentially a combination of factors:
1) That the information provided to you is true and correct.
2) Your true understanding of your obligations under the franchise agreement.
3) Your ability to operate the franchise business as required.
4) The franchisors experience in conducting business and supporting franchise owners.
Franchising is founded on open and honest relationships between you and the franchisor and on realistic expectations about the franchised business. There is no better way to ensure a mutually successful franchise relationship than for you and the franchisor to enter into the business fully aware of each others rights and obligations.
I suggest that most franchise owners speak to their accountants or financial advisers in relation to the documents to determine whether the financial aspect of the business meets your expectations. Find a lawyer who is experienced in providing franchise legal services because it will ensure you receive experienced legal services from a lawyer who has experience in respect to franchise documentation.
Before you sign a franchise agreement, get your lawyer to assist you and guide you through the process of due diligence. Due diligence is the process of gathering and studying all the relevant information that you can find about the business you are purchasing or starting.
During your due diligence you should look at:
1) Financial information;
2) Data about assets and liabilities;
3) The history of the business;
4) The historical tax returns of the business;
5) Possible contingent liabilities including employee claims and environmental claims;
6) The performance of similar franchises in your area and beyond;
7) The history of the franchisor's relations with its franchise owners;
8) The reputation of the franchise brand among consumers;
9) The historical profitability of the brand's franchise locations; and
10) Information about many other issues.
Start with information provided by the franchisor, but prepare to quickly move beyond this limited and sometimes biased information. Existing franchise owners are the single most valuable source of due diligence information to a prospective franchise owner. Do not be reluctant to approach existing franchise owners.
They are usually more than willing to share great amounts of information including information about sales and profitability. In addition to the information about the franchise brand generally and the historical experience of similar franchises, a prospective franchise owner must look very carefully at the details of the operation he/she is about to acquire. Do not make the mistake of waiting to contact a lawyer until you have been presented with a purchase and sale agreement. It is wise to work with your lawyer during the due diligence process before signing a contract.
Issues with which you are unfamiliar can then be fully, examined with the guidance of a professional accustomed to purchases of businesses. Also many of the things learned during the due diligence process will influence the terms and conditions that you will want to see in the purchase and sale agreement.
If you wait to retain a lawyer until you have been presented with a purchase and sale agreement or your franchisor is pressuring you to sign a franchise agreement you will tend to have fewer negotiating opportunities in the transaction.
What happens after the terms of the agreements have been negotiated?
Once the franchise agreement has been negotiated, you will enter into the agreement and pay the required fees. At this stage, you may be required to attend a training program provided by the franchisor. During this time, your cooling off period under the franchise agreement often expires. Be sure you make your decision soon after the signing of the franchise agreement or during the training program (within 7 days from signing the franchise agreement or making any payment under the agreement) to decide whether you want to proceed with the franchise.
From experience, the secret to success can be increased if you have taken your time in making the right decisions and seeking experienced advisors to assist in your decision making. 20.08.2007
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