Plan to franchise
A franchise business plan should be developed and address issues such as the appropriate corporate structure, holding intellectual property, funding the franchisors operations, feasibility studies and market research, financial modelling for both the franchisor and franchisee, approved suppliers and identifying appropriate systems, support and personnel.
The initial business was successful most likely due to a business plan developed by the owner or founder. Often that business plan was not a written plan however the founder was successful as a leader by implementing his business plan by communicating with their management team and staff. Franchising is however a more complex business model which can provide great rewards but certainly has greater challenges and responsibility.
The Franchise Code does not differentiate between a high cost retail franchise model where the investment by a franchisee may be in excess of $300,000.00 or a low cost franchise such as a service franchise.
The purpose of the Franchising Code of Conduct, as stated in Part 1 of the Schedule, is to regulate the conduct of participants in franchising.
The Franchising Code provides that a franchisor must provide a Disclosure Document to a prospective franchisee where the franchise business has an expected annual turnover at any time during the term of the Franchise Agreement of $50,000.00 or more in accordance with Annexure 1 (full disclosure).
Where the franchise business has an expected annual turnover of less than $50,000.00 the short form Disclosure Document may be used. This is rarely relied upon if the franchise system was only likely to generate turnover up to $50,000.00 per annum, in our view the franchise would be unsustainable and should not be on the market.
Franchisors obligations under the Code
The Franchising Code sets out certain obligations on the franchisor for disclosure. The Code also imposes on the franchisor certain other obligations and restrictions which include:
- Not inducing a franchisee not to form an association (as between the franchisees such as a Franchisee Advisory Council (FAC);
- The Franchise Agreement must not contain or require the franchisee to sign a general release of the franchisor from liability or a wavier of any verbal or written representations;
- To maintain and account where there is a marketing fund;
- Ongoing obligation to disclose materially relevant facts;
- Disclose end of term arrangements, that is, notify franchisees at least 6 months before the end of the term of the Franchise Agreement whether they intend to renew or not renew the franchise or to enter into a new Franchise Agreement;
- A process for termination with or without notice and mediation.
Many franchisees, obtain advice as to the rights and obligations of the franchisor and franchisee before entering into the franchise and then continue to hold a view (often mistaken) that the Franchise Agreement contains positive obligations on a franchisor to do certain things such as provide training, systems, marketing, ongoing business administration and support of the franchisee.
However most franchise agreements use expressions such as “the franchisor may” (that is, if it chooses to do so at its discretion) or “may use its best endeavours” to do certain things which are not, in legal terms, a contractual obligation.
In the absence of a clear contractual obligation in the Agreement, for example, the franchisor “will” or “must” do certain things. It is difficult for a franchisee to assert there has been a breach of a contractual term by the franchisor.
This was recently highlighted in a case of VIP Home Services NSW v Swan & Anor 2011 SASC 110. The Court found in this case that the franchisors failure to allocate regular customers to the franchisee was a breach of an essential contractual term which entitled the franchisee to terminate the Franchise Agreement. This is an unusual case where the franchisee succeeded.
What can you expect from a low investment franchise when franchisors have limited obligations even in a high cost Franchise model?
A franchise opportunity should always be assessed on a purely financial basis and not an emotional or lifestyle basis.
Franchisees need to ask themselves before committing:
- Is there are return on my investment. even if that investment is a low up front cost?
- What are the real costs of my operating the franchise, not just franchise fees but incidental costs such as petrol maintenance, insurance, staff;
- Will I be able to draw a salary and/or profit as I go for my effort.
- Who controls the revenue stream, is all the revenue paid directly to the franchisor who then remits it to the franchisee?
- If so, how and when will I receive my revenue and how will I manage my cash flow and working capital requirements if the franchisor delays payment?
Non Reliance Clauses
Franchise Agreements generally contain a provision often overlooked to the effect that the franchisee cannot rely on any verbal promises or representations made by the franchisor or any of its agents which are not set out in the Franchise Agreement or in writing.
Therefore if it is not in writing, the franchisee cannot rely on the verbal representations made.
The Great Divide
We often see a real disconnect in franchising between franchisees expectations and what the franchisor is obliged to deliver.
In many low cost franchises the franchisee may simply be paying a licence fee for the right to operate under a brand and nothing more. The sourcing of business is left to the franchisee. There may be limited training and/or little, if any system or support from a franchisee.
The adage that you get what you pay for also applies in franchising.
On the other hand, some franchisors, despite the discretionary obligations in their Franchise Agreement go over and above the obligations set out on their Agreement understanding that a supported and happy franchisee making a reasonable return on their effort, will contribute to a successful franchise system.
Franchisors do need to challenge themselves in this economic climate, and consider what a franchisee might reasonably expect over and above the terms of their Agreement.
Is it reasonable for a franchisee to expect the franchisor to:
- express interest in the franchisees financial bottom line, that is are they profitable. Does the franchise model work for the franchisee?
- should franchisors be more involved with assisting franchisees to develop and implement a business and marketing plan;
- encourage communication between franchisees in their system;
- encourage a positive, open and transparent relationship with their franchisees rather than a closed door policy.
About Robert Toth
Robert Toth is the Franchise Partner at Wisewould Mahony - Franchise Lawyers. Robert Toth is an Accredited Business Law Specialist, a member of the International Franchise Lawyers Association (IFLA), a member of the Australian Institute of Company Directors.
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