DEACONS: Welcome to the July issue of Franchising Focus.
by
Norton Rose
The Federal government has announced yet another inquiry into franchising, this time to be conducted by the Federal Government's Parliamentary Joint Committee on Corporations and Financial Services. The announcement comes on the heels of the Federal Mathews Committee inquiry in 2006 and separate franchising inquiries by the South Australian and Western Australian Governments in early 2008. One wonders, how many franchise inquiries are enough?
The franchise sector is experiencing a dearth of quality franchisees, caused largely by the strong Australian economy and skill shortages that are driving up wage levels in an economy close to full employment. This in turn puts pressure on franchised businesses to deliver a superior return on investment given job insecurity ceases to be a significant factor in motivating people to acquire a franchised business. However, the negative perception that is likely to be created by such a plethora of inquiries into franchising is not helpful.
Deacons Lawyers partner Stephen Giles has completed for the Franchise Council of Australia a detailed response to the WA and SA inquiries. The WA inquiry essentially provided a positive endorsement of franchising, recommending an emphasis on pre-entry education as critical to address any concerns. Although the SA inquiry considered essentially the same information, it handed down a report that was more critical, with many recommendations failing to receive endorsement from the peak industry body.
For more information contact Stephen Giles.
When does regulation become red tape?
The Franchising Code of Conduct has been widely recognised as being one of the pillars upon which the recent success of the Australian franchise sector has been built. However, with the changes to the Code that took effect March 1 2008, the Code has moved substantially closer to being a compliance burden that is failing to address the original purposes of the legislation. If some of the radical changes recommended by the recent SA inquiry into franchising were to be implemented the Code could well tilt from being on balance useful to being excessive red tape.
The Franchise Council of Australia Legal Committee, chaired by Deacons partner Stephen Giles, and the Australian Competition and Consumer Commission have been working collaboratively to identify opportunities to clarify the Code and reduce compliance costs. The FCA Legal Committee has yet to provide its report to the ACCC, due in part to the very significant number of issues requiring clarification. Last count there were over 30 significant issues that the FCA considered required clarification. Some of these matters may require legislative amendment, as the ACCC has already flagged that its role is not to make rulings on the interpretation of the Code.
When the franchise agreement, collateral documents and a copy of the Code are included, the average disclosure document is probably now in excess of 100 pages. If further Code changes are made as recommended by the SA franchising inquiry, this is only likely to increase the size of the document, with minimal increase in utility. Franchisees, already reluctant to seek legal and business advice, will face even higher costs from advisors, who by necessity need to charge for the time taken to read the documents. As a consequence the intent of the Code, being to provide information useful to prospective franchisees and of assistance to advisors, is at risk of being frustrated.
Given the breadth of our client base Deacons will be one of the major providers of input into issues requiring clarification. We have already provided substantial input. However, in case we have missed anything or if you have any matters you consider need clarification please send them through to Stephen Giles, Tamra Seaton or to Greg Hipwell.
Use of geographic name denied
Tyrell’s Vineyards and Ors had applied to the Geographical Indication Committee for determination of a Geographical Indication in relation to the Rothbury region of New South Wales. Rothbury Wines owned a trade mark including the word Rothbury.
The application was denied on the following basis:
- the evidence shows limited use of the word ‘Rothbury’ as a place name to designate an ill-defined area in the Lower Hunter Valley;
- the majority of people and businesses within the proposed Geographical Indication identify their location by use of the word Pokolbin;
- the boundaries and indeed the existence of the old Parish of Rothbury were unknown to many residents;
- the word ‘Rothbury’ has very little force as a geographical word;
- the word ‘Rothbury’ has acquired a secondary meaning as a trade mark indicating the wines of Rothbury Wines, distinct of any geographical origins it might have had;
- because of the nature of ‘Rothbury’ as a trademark, use of the word ‘Rothbury’ would be confusing; and
- the objector has made out its grounds for objection, and to determine ‘Rothbury’ as a GI would cause considerable inconvenience to the Objector.
For more information contact Susan Spicer.
Acquiring franchise networks - shares v assets
One of the fundamental issues that needs to be addressed very early in the process of an acquisition of a franchise network is whether the acquisition will proceed as a share purchase or a business purchase. This decision will not only influence the content and structure of the sale documentation, but can also have significant tax and risk implications.
Some of the advantages of a share purchase are:
- simplicity - the entire business is transferred, without the need to separately identify and convey each asset; material contracts (such as franchise agreements) are generally unaffected unless they contain change of control provisions;
- there are no issues in relation to the transfer of employees;
- there is less likely to be stamp duty payable (and the amount of stamp duty is likely to be lower); and
- the purchaser may have access to any tax losses in the entity being acquired.
Some of the advantages of a business purchase are:
- the purchaser can be selective about the assets it acquires and the liabilities it assumes;
- the purchaser can be selective about the employees that it takes on;
- the purchaser may be able to increase the cost base of capital assets for tax purposes; and
- there is no need to negotiate with minority shareholders.
An acquisition of the business is generally the preferred approach for a purchaser to avoid any liabilities of the existing entities being transferred. However, these risks can be managed through a rigorous due diligence process and a comprehensive warranty regime. Given that the franchise agreements are likely to be the most valuable asset of the business, a potential acquisition of shares should be given due consideration in the acquisition of a franchise network.
For more information, contact Marshall Bromwich.
Deacons is Australia's leading franchise law firm, with offices in Melbourne, Sydney, Perth, Brisbane, Canberra and in 11 locations in Asia. We have assisted over 200 franchise companies, from large international corporations to start up franchisors. We do not handle franchisee matters.
FCA Member
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