When buying a business from an existing franchisee, there are some things you can do to minimise the risk of a dispute arising with the seller:

Homework

Do your homework on the franchise system and your ability to finance the purchase. If you believe that the business is overvalued, then negotiate. You'll often lose your ability to change the price once the business sale contract is signed. Sometimes it's difficult to work out what you want to pay for the business if the seller won’t give you all the financial information. Sellers can be reluctant to give out too much information until you sign the contract. If you're not comfortable to proceed until you receive this information, then offer to sign a confidentiality and non-disclosure agreement. This will give the seller the comfort that you won't misuse their information.

Read everything

The seller or their business broker will generally prepare the contract. Read the contract thoroughly and have it reviewed by your lawyer before you sign it. Contracts are legally binding and cover the entire agreement between you and the seller. It's critical to ensure that the contract clearly sets out your respective rights and obligations, along with everything you're expecting as part of the purchase. Disputes can arise if the contract is silent or ambiguous about something.

Remember that contracts are always up for negotiation. You should ensure the following things are addressed:

• Is stock-in-trade included within the purchase price, or do you need to pay extra for it?
• Who's liable to pay the franchisor's costs (such as the transfer/assignment fee, training fee and their legal costs)? If there's a lease involved, who's liable to pay the landlord's costs?
• Ensure the contract is subject to you being satisfied with your due diligence enquiries into the business, ...

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Franchising is a system of doing business. As a franchisor, you have achieved a proven system for success through your brand and product consistency, and you have opted to duplicate that system by franchising.

An inherent element of franchising is that customers expect to receive identical goods and service-levels across all franchises within a franchise system. For example, an expectation that the same burger at any store in a chain will taste the same.
Successful systems often have established arrangements for the supply of products, ingredients or services to all franchisees within a network. Most franchisors will require their franchisees to only source products from a nominated or approved supplier.
Franchisors will often secure special wholesale rates with their suppliers, resulting in cost savings to franchisees. Using a single or select few suppliers ensures consistency.
Just like any business owner, franchisors must ensure that supply arrangements continue to remain beneficial to the system. Changes in the marketplace or the introduction of new suppliers offering competitive rates may prompt franchisors to consider changing their nominated supplier.
If you're considering changing your supply chain, then there are a few key things you should consider:

9 tips for changing your supply chain
1. Due diligence
Due diligence enquiries into the prospective new supplier. Do they have the capacity to fulfil the needs of your entire franchise network and deliver a standard of consistency in both product and service comparable or better than your current supplier? Can you leverage the existence of this new supplier to negotiate a better deal with your current supplier?
2. Exit rights
Do you have a formal supply agreement with your existing supplier? If so, what rights do you have to exit the agreement? You don't want to place yourself in breach of your contractual ...

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The Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (the Act)took effect on 15 September 2017. The Act was triggered in response to the highly publicised 7-Eleven employee underpayment scandal which has engulfed the franchise sector since late 2015, along with several recent systemic underpayment scandals by Domino’s Pizza and Caltex franchisees.

The key changes brought by the Act include:

1- new offences and increased financial penalties (details below) for breaches of workplace laws, including those who underpay employees, fail to keep correct time and wage records, fail to issue compliant pay slips and/or who force employees to repay wages (the 'cash-back' scheme that 7-Eleven was recently embroiled in);

2- increased investigative powers of the Fair Work Ombudsman, including increased powers to inspect and require employers to provide employment records and attend interviews under oath;

3- new offences and liability provisions for franchisors and parent companies making them liable in some circumstances for the actions of their franchisees and subsidiaries; and

4- a new onus of proof that effectively means someone is presumed guilty of an alleged underpayment if they cannot show, to the satisfaction of a court (e.g. through adequate employment records or other means) that they have paid their employees correctly. This means keeping the required employment records will become critical moving forward.

What the new laws mean for franchisors

The Act holds franchisors and holding companies responsible for underpayments and workplace law breaches by their franchisees or subsidiaries if the franchisor or holding company knew, or reasonably should have known, about the contravention and failed to take reasonable steps to prevent it. This greatly expands on the existing laws and has massive ramifications on ...

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This article was previously published on the Inside Franchise Business website.

The Franchising Code of Conduct is a mandatory industry code. It contains a process to determine what constitutes a franchise agreement, and regulates the conduct of franchisors and franchisees towards each other.

The Code has been in force since 1 October 1998 and it sits within the Competition and Consumer Act 2010. A revised version was introduced on 1 January 2015 which governs all franchise agreements entered into, renewed, extended or varied on or after that date. Some conduct under franchise agreements entered into before 1 January 2015 will continue to be governed by the former Code.

The Code can be found on the website of the Australian Competition and Consumer Commission (ACCC).

How the Code affects you as a franchisee

The Code sets out obligations and procedures which must be followed and cannot be waived. Some of these include:

1. The franchisor must maintain a disclosure document in a prescribed format containing information about the franchise system. It must be updated annually and must include details about current and former franchisees, all costs you can expect to incur during the course of the franchise and any litigation that the franchisor is involved in.

2. A current disclosure document must be given to you along with a copy of the proposed franchise agreement and a copy of the Code at least 14 days before a franchise agreement is entered into.

3. You are granted a seven day cooling off period after entering into a franchise agreement, except on renewals, variations or transfers of existing franchise agreements.

4. Before entering a franchise agreement, you must give the franchisor a statement about whether or not ...

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By Luke McKavanagh, Peter Rouse and Jashan Singh.
A franchise agreement is a legally binding commitment for the term of the franchise with restrictions on exiting early. Franchisors and franchisees must follow different steps if they believe they have grounds to unilaterally terminate the agreement. This will always depend on the circumstances.
What can franchisees do to end the franchise agreement?
Franchisees may wish to end a franchise agreement early for a variety of reasons. The business may not be as successful as hoped, or the franchise system may have failed to meet expectations. There are multiple options for getting out of the franchise agreement. Each come with their own risks and consequences and should be assessed on personal circumstances. Few are straightforward.
(a)   Cooling-off
Under the Franchising Code of Conduct (Code), franchisees have a 7 day cooling-off period to terminate a franchise agreement without giving a reason. The right must be exercised within 7 days of entering into the agreement or making a payment under the agreement, whichever the earlier. This doesn't apply to the renewal, extension, variation or transfer of an existing agreement. For example, somebody buying an existing franchised business won’t have the right to cool-off.
If a franchisee terminates during cooling-off then the franchisor must refund any money paid by the franchisee within 14 days, less the franchisor's reasonable expenses.
(b)   Sale of business
If a franchisee wishes to sell their business, a franchisor cannot unreasonably withhold consent to the sale. The franchise agreement will set out the conditions for a transfer. If these are followed and the franchisee establishes that the buyer can perform the obligations under ...

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Changes to legislation usually tighten existing regulations. Recent changes to the provisions of the Competition and Consumer Act 2010 (Act) covering third line forcing are a pleasant departure from this norm.

Third line forcing is a form of exclusive dealing, where a business will only supply goods or services, or give a particular price or discount, on the condition that a person buys the goods or services from a nominated third party. If the person does not comply with the condition, then the business will refuse to supply the goods or services.

Franchisors often engage in third line forcing to ensure uniformity in the quality of the product or service offered to consumers by their franchise system. There are many benefits to this:

1. Consistency across a franchise system can benefit customers and increase the value of the franchise system.

2. Franchisees operating compatible equipment and purchasing the same goods creates a more efficient operation and management of the franchise system through, for example, increasing efficiency in training.

3. Cost and time savings for franchisees creates improved contractual relations and more efficient and effective bargaining between franchisors and suppliers.

Until 6 November 2017, third line forcing was a breach of the Act and a business was required to lodge a notification with the ACCC if they intended on engaging in this conduct without facing prosecution from the ACCC. The ACCC would allow a notification to stand where they were satisfied that competition in the marketplace had not been substantially lessened, and where the public benefit outweighed the detriment.

The recent changes to the Act essentially mean that third line forcing is no longer prohibited per se. Third line forcing will now only breach the Act if the conduct has the purpose, effect or likely effect of substantially lessening ...

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A lawyer can seem like an unnecessary expense when buying a franchise with so many other costs to consider. Remember that buying a business is one of the biggest decisions you’ll make in your life. Legal advice should be considered as an investment. Like any investment, there are a number of key ways to secure a good return.

1. Experience

Find a lawyer experienced in franchising who handles franchise-related issues on a daily basis. A specialist will know what to look for, identify red flags and point you towards what you should be looking at. They’ll also help you with the best way to structure your business.

At minimum, your lawyer should review your draft franchise agreement, disclosure document, lease and anything else you’ve been asked to sign before you sign anything. If you've already signed your franchise agreement, then your ability to negotiate changes will be limited. You’ll also be left with a costly problem if you have a change of mind and decide to not proceed, for instance if you cannot secure finance.

Franchise agreements are drafted by lawyers essentially so that only other lawyers can understand them. Your lawyer will be able to explain the key provisions in easy-to-understand terms and the reasons behind them. Understanding these reasons and the flow-on consequences is vital to ensure that you and the franchisor are both on the same page when it comes to your obligations.

2. Negotiation

Every franchise agreement and contract is up for negotiation. Your lawyer will identify the clauses in the franchise agreement which may not be in your favour and can assist with negotiating a more balanced agreement, but keep in mind that franchisors are generally hesitant to amend their documents unless you have good reasons. Your lawyer will also ensure that any promises made to you by the franchisor are recorded properly in the franchise agreement or ancillary agreement such as a prior representations deed. ...

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Like any business, once you establish your franchise the ideal goal is to build goodwill then on-sell it in the future for a profit. Whilst this may not be your short-term goal, it should nevertheless be kept in mind.

A franchise is an investment. So long as you have a franchise agreement in place you will have the right to sell your business and the franchisor cannot unreasonably withhold their consent to the sale. Like any business, the more profitable and successful your business is, the higher the price you can sell it for.

The process for selling a franchised business is different from a standard business and there are some important things to consider before selling:

Check the franchise agreement

The first step should be to carefully check the provisions of your franchise agreement covering transfer and assignment as there’ll be a process which must be followed. Every franchise system is different. Some will require you to obtain the franchisor’s prior consent to your advertisement before you list your business on the market or to the terms of your sale contract.

Some general conditions found in franchise agreements include:

1. The buyer meeting the franchisor’s selection criteria and completing the franchisor’s training program.

2. The payment of an assignment fee which will be a set amount or a percentage of your sale price.

3. Upgrade or refurbishment to your premises and/or equipment.

Right of first refusal

Many franchise agreements give the franchisor the right of first refusal. This means you must give the franchisor the opportunity to buy the business on the same terms and conditions as being offered to your buyer. If the franchisor does not take up the offer, only then can you proceed with your sale.

Contract

Your business broker/agent or lawyer will generally prepare the initial draft of your ...

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This Article was previously published on the Inside Franchise Business website.

How to handle renewals with a difficult franchisee

Entering a Franchise Agreement (Agreement) with a franchisee is a commitment for the term of the franchise. Dealing with a difficult franchisee can be problematic when locked into a contract and trying to maintain a business relationship. Whether it’s a clash of personalities or contrasting business values, a franchise relationship can easily become strained.

A “difficult” franchisee can range from someone who frequently questions your business motives, to someone who pushes every boundary under the Agreement. They may or may not be a well performing franchisee.

Many Agreements grant the franchisee an option to renew the Agreement for a further term. Renewal is not an automatic right. The franchisee will only be entitled to exercise the option if certain criteria under the Agreement are satisfied within a certain time. Every Agreement is different. Some common criteria include there being no un-remedied breach, substantial compliance with the Agreement throughout the term, executing the franchisor’s then-current Franchise Agreement, paying a renewal fee and refurbishing or upgrading the premises/equipment/vehicle to the franchisor’s then-current standards.

Timeframes are important. The franchisee must generally exercise the option within a certain time before the end of the Agreement. The Franchising Code of Conduct (Code) also requires franchisors to tell the franchisee whether you intend to renew the Agreement at least 6 months before it expires.

If a franchisee is entitled to an option, has satisfied all the criteria set out in the Agreement and validly exercises the option, you must honour the option. It is not sufficient to simply decide you no longer wish to continue with the franchise.

Franchisee ...

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This Article was previously published on the Inside Franchise Business website.
There are six simple steps to follow if you’re planning to buy a franchise:
Step 1 - Research
There are many franchise systems to choose from.  A franchise is a long-term commitment. Ensure you do thorough research and due diligence before you decide on a system. Get as much information and as many figures as you can. You don’t need a business degree to run a franchise, but it is recommended that you do some online courses to understand the basics of business management.
Step 2 - Structure
Getting your business structure correct from the beginning is essential. Find a commercial lawyer and an experienced accountant. They will assess your situation and advise on the best entity structure to use to operate your business. Your accountant will carefully examine the figures you’ve been given by the franchisor.
There are many different types and combinations of structures:

1. Sole Trader
2. Partnership
3. Company
4. Trust (discretionary, unit or hybrid)

The best structure for you will depend on who will be actively involved in the business and how you wish to protect your personal assets. Each structure has its own taxation consequences. What is right for one person is not necessarily right for another. Don’t assume that because a family member had a company that you need one too.
If you choose a trust and a company, your advisors will register your company and set up your trust. If you have business partners then having a partnership, shareholders or other governance agreement is good practice to outline the relationship of the stakeholders involved, including (without limitation) what happens if you wish to buy out a partner or sell your share or interest in the ...

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