LL.B (Hons); MIP; B.Com; GDLP
Christopher BruceP: (08) 8216 3363
Chris has significant commercial experience and has developed particular expertise in relation to franchising, intellectual property (IP) and wills and estates matters.
He acts for both franchisors and franchisees and provides assistance with respect to drafting, reviewing and advising on franchise documentation, as well as advising clients in disputes. In the area of IP, Chris provides advice on general protection issues and commercialisation strategies in a range of areas including trade marks, patents, designs, copyright and domain names.
Chris also drafts wills and other estate documents and assists clients with estate administration and planning matters.
Member – Law Society of South Australia
Committee Member (SA) – Intellectual Property Society of Australia & New Zealand (IPSANZ)
Committee Member (SA) – Licensing Executives Society of Australia & New Zealand (LESANZ)
AREAS OF PRACTICEFranchising Intellectual Property Wills & Estates Planning Wills & Estates Administration Commercial Agreements Commercial Lawyers
7 Issues to Consider When Purchasing a Franchise Business
While buying a franchise can be a quick way to establish yourself in a small business, there are certain issues which tend to surface in franchise arrangements.
Prospective purchasers should be particularly wary of the following matters:
- Financial Commitment – while certain fees will be obvious (e.g. the upfront franchise fee), it is often the ongoing obligations that bring franchisees unstuck. Costs such as royalties, marketing levies, equipment fees, stock, rent and refurbishment obligations can present a significant issue for cash flow, particularly for new franchise owners. An accountant experienced with small business operations is often invaluable.
- The Term – by purchasing a franchise business, you are purchasing a licence to use the franchisor’s system for a limited period. Franchisees need to plan for what happens when the franchise agreement expires, particularly after any renewal rights have been exhausted.
- Shopping Centres – retail franchisees can find their lease terms with shopping centres becoming difficult to meet over time. Rent reviews, refit obligations, new lease negotiations and even relocation can cause major issues for a franchisee’s viability.
- Performance of Franchisees – the Disclosure Document will normally contain contact details for other franchisees including ex-franchisees for the last 3 years. This gives you an opportunity to confirm what you are being told by the franchisor, and to discover any issues you might not have known.
- Franchisor Control – franchise agreements impose varying levels of control including the use of certain products, suppliers, advertising mediums and content. A good question to ask is if the franchise allows room for innovation, which may better suit the local market.
- Exit Strategy – it is possible that you may wish to leave the system prior to the expiry of the franchise term. What are the conditions for selling the franchise business and what happens if a buyer cannot be found? Does the franchise agreement give you the ability to terminate and, if so, what are the conditions? Are you likely to be restrained from working in any way after the franchise has come to an end?
- Personal Guarantees – the majority of franchise agreements contain guarantee obligations, which make the guarantor(s) personally liable for the franchisee’s obligations. While franchisors will typically be unwilling to remove guarantor provisions, some may agree to cap liability or limit the guarantee to a specific person.
If you have any questions about purchasing a franchise business, or any other queries about franchising, we welcome you to contact Duncan Basheer Hannon via our online form, or free call 1800 324 324.
Thinking of buying a franchise business or establishing a franchise system?
Running your own business is a desirable prospect for lots of people. But there are barriers to starting one up, particularly the associated costs.
That’s why franchises are so popular. They give you access to an existing business model, brand name that people already know and training and support to get the business up and running.
Or if you have built up your own business and brand name from scratch, you may want to consider starting up your own franchise, and using the model to develop the brand and expand the system.
These are big decisions and you will need some legal advice along the way.
If you are thinking about buying a franchise business or starting a franchise system, here are a few questions to ask yourself first.
1. What are the potential benefits of a franchise model?
- For Franchisors, the primary advantage is access to other people’s funds (capital) and labour to develop the brand, resulting in expansion faster than could otherwise be achieved by natural growth or via lenders/investors.
- For Franchisees, benefits include initial training and ongoing support, operating under an established and known brand, marketing support and having a network of peers for advice and assistance.
2. Is my business suitable to franchise?
While franchising can be an attractive business model, not every business is suitable to franchise. Some of the questions to ask about the business include:
- Is there a successful prototype business?
- Can the business be replicated, including will the model work in different markets?
- Can I sell franchises? What will attract prospective franchisees?
- Can my franchisees expect to receive an adequate return from their investment?
- Do I have the initial funds required – for setting up the business structure, advice, protecting intellectual property and marketing materials?
3. As a prospective franchisee, what can I negotiate in my Franchise Agreement?
The more established franchise systems will generally not agree to any amendments to the base Franchise Agreement. This keeps the system largely the same in respect of the rights and obligations of all franchisees. That being said, the following may be open to negotiation with a Franchisor:
- A discount to the upfront franchise fee
- The term of the franchise, particularly if a lease is involved
- The size of the territory (if there is one)
- A first option to acquire another territory (if there is one)
- Conditions for renewal/sale (such as a reduction in the renewal/transfer fee)
4. What are some common issues that arise between Franchisors and Franchisees?
- Franchising is not immune to problems and conflict that can occur in commercial relationships.
- For site based franchises, having a mismatch between the Franchise Agreement term and the lease term can cause issues, potentially requiring relocation (normally at the franchisee’s cost).
- Former franchisees may be restricted from earning a living in the same industry, once exiting the franchise.
- Good franchise systems will have in-house processes to attempt to resolve issues, with minimum disruption to the system
5. Why should I seek independent advice?
Having an experienced advisor will assist you to identify provisions that are important, unusual or may be particularly onerous, and to identify what realistically might be able to be negotiated with the Franchisor.
Dallas Buyers Club: A Landmark Decision
Last year the US company Dallas Buyers Club LLC applied to the Australian Federal Court seeking disclosure of account details from Internet Service Providers (ISPs) for customers, who the company alleges, have infringed its copyright. Australian ISP iiNet opposed the application.
Earlier this month the Federal Court ruled in favour of Dallas Buyers Club LLC’s application. The practical result is that iiNet (and certain other ISPs) may be required to effectively reveal the identities of those customers with IP addresses that have been captured as having shared the film Dallas Buyers Club without consent.
This is the first time an Australian court has been required to give practical consideration to the tactic of ‘speculative invoicing’. The tactic involves rights holders writing to customers who the rights holders allege have infringed their copyright, indicating that in exchange for paying a defined sum of money, the customer can avoid having to defend the matter in court. The missing piece in the puzzle for rights holders had previously been obtaining the contact information of alleged infringers. This issue may now be solved.
Unlike other jurisdictions, such as the US, the Court will effectively supervise the letters that Dallas Buyers Club LLC may ultimately send to the alleged infringers, to ensure that exorbitant settlement fees were not being sought.
iiNet is considering whether it will appeal the Court’s decision.
Industry praises franchise changes
BY ALEXANDRA ECONOMOU
THE new federal Franchising Code of Conduct has been welcomed by industry and is expected to provide a more level playing field.
Following a review of the code by Alan Wein, Small Business Minister Bruce Billson announced changes which would take effect from January 1.
Among the changes was a general duty on franchisors and franchisees to act in good faith when dealing with each other.
It also outlined the requirement for franchisees to be provided with “short-form, easy-to-understand information regarding the risks and rewards of franchising at an early stage before they become emotionally and financially committed”.
The Motor Trade Association of South Australia was among the groups which welcomed the changes.
MTA SA chief executive Paul Unerkov said the changes provided a more level playing field between franchisors and franchisees.
“Through our national body, Australian Motor Industry Federation (AMIF), we have actively participated in the concentrated period of review and consultation,” he said.
“We think the changes will make things a bit fairer. “From 1 January, 2015 . . . there is now a statutory obligation for franchisors and franchisees to act in good faith and, importantly, penalties can apply if this obligation is breached.”
Duncan Basheer Hannon senior associate Chris Bruce, who specialised in franchising, said the sector could only flourish in an environment of goodwill.
“The alterations make the industry more transparent and accountable,” he said.