Franchising. What every franchisor, franchisee and their advisers need to know. Presented by: Tom Meagher. Tom Meagher

Transcription

1 Franchising What every franchisor, franchisee and their advisers need to know Tom Meagher Who Murfett should Legal you trust? Presented by: Tom Meagher Director Commercial & Succession Law

2 Tom Meagher Director - Commercial Law Tom has over 25 years business experience including: working for major national and local law firms; being the national operations manager for a financial advisory IT platform provider; owning and managing an IT business; and being a director and in-house counsel for a public company. Tom s clients include an extensive range of local, national and international businesses as well as numerous organisations and individuals. He also has excellent communication, technology and personal skills with a proven ability to develop business relationships. He is also a regular publisher of articles, and one of Australia s leading presenters of legal seminars to and for various professional bodies, associations and government authorities on a wide range of business law topics including: WA Department of Commerce Institute of Chartered Accountants of Australia Law Society of WA Innovation Centre of WA. LegalWise The Tax Institute Institute of Public Accountants Governance Institute National Electrical & Communications Association Australian Hotels Association Small Business Development Corporation Australian Institute of Conveyancers CPA Australia Mortgage & Finance Association of Australia City Insolvency Discussion Group Stirling Business Centre Institute of Certified Bookkeepers Western Suburbs Business Association Business Foundations Inc. WA Business Assist WA Reckon Partners. Slide 3 Murfett Legal 2014 All rights Murfett reserved Legal 2017 Disclaimer The information presented in this seminar is intended only as a guide, as to the topic and the matters discussed. This seminar is not legal advice and must not be relied on as such. If you have a matter which relates to this seminar or you require legal advice, careful review and analysis of your matter s particular facts, information and documents is required before proper legal advice can be given or applied to your matter. Slide 4

3 Quick Overview New code s good faith dealings - since January 2015 The new statutory franchisee Information Sheet Lack proper, comprehensive advice before going to franchising Understanding the highly & prescriptive (and sometimes very short-term) nature of their franchise business Lack of training & failure to comply operations manual Territory splitting & an disclosure relating online sales by franchisors and franchisees Singular franchisee entity for multipole franchise Failure of mum & dad lender to secure their initial, primary loan to their franchisee Franchisor Advertising & Marketing Funds separate, audited fund Capital Expenditure- upgrade & refits/ Franchisors are prevented from imposing substantial capital expenditure except in limited circumstances. Termination & franchisor s selective w/down business asset (note: not goodwill) buybacks Slide 5 Quick overview (cont) Minimum Required Revenue Increases Contractual restrictions and requirements of Franchisees selling (i.e transferring or assigning) their franchise business e.g first right of refusal, not unreasonable consent of franchisor Post-exit Restraints of trade Leases direct or sub licence/lease/ expiry term and no new lease. Move and make good costs Securities residual risks for personal guarantors De-debadging done properly by formal surrender/settlement or badly by walk-off etc.. Dispute resolution mediation before court, unless genuine breach. ACCC s ability to now fine franchisors Damage to the entire Franchise brand & goodwill/reputation by one or individuals franchisees actions, or inactions (e.g. recent chicken treat, Nandos & the Lenards matters) Slide 6

4 (Relatively) Recent Amendments to the Franchise Code of Conduct On 1 January 2015, the old Franchising Code was repealed and replaced with a new Franchising Code of Conduct. The new Code applies to conduct on or after 1 January The new Code: introduces an obligation under the Code for parties to act in good faith in their dealings with one another. Introduces financial penalties and infringement notices for serious breaches of the Code. requires franchisors to provide prospective franchisees with a short information sheet outlining the risks and rewards of franchising. requires franchisors to provide greater transparency in the use of and accounting for money used for marketing and advertising and to set up a separate marketing fund for marketing and advertising fees. requires additional disclosure about the ability of the franchisor and a franchisee to sell online. prohibits franchisors from imposing significant capital expenditure except in limited circumstances. These are significant changes and it is important that franchisors, franchisees and potential franchises understand their rights and responsibilities under the Code. Slide 7 Franchise Documents Franchisor needs to issue the following documents: A disclosure documents (which complies with the Code), which must be regularly updated and will include amongst other things: general historical and business information about the Franchisor and its management, including details of other Franchisees and legal action taken against the Franchisor; financial details of the Franchisor; what rights will be granted to a Franchisee; a copy of the proposed Franchise agreement; Slide 8

5 any lease to be taken by the Franchisee; various fees and changes to be paid and the circumstances under which they become payable; a copy of the Code and Franchise Information Statement; a Franchise Agreement; a Franchisee advice statement; a guarantor statement (if applicable); and operations manual. Slide 9 Individual borrows money/loans money to their new Buyer/Franchisee entity to buy or establish franchise business. Example 1. Mum and Dad are directors of a new company and wish to buy a business. 2. They use their home as security to obtain a loan from a bank and they effectively on-lend this money to their new company to buy the business but the loan is not secured against their buyer company Slide 10 Murfett Legal 2016

6 Last thing you want to see is that the other secured parties e.g. overdraft financier, lessor, franchisor, suppliers have priority over Mum and Dad. 4. Therefore there needs to be a formal loan with GSA between Mum and Dad (Lenders) and the New Company (Borrower) asap! 5. What security will be provided? e.g. ALLPAP Who gets priority? 6. Make sure that all documents are signed and registered BEFORE the Franchise Business purchase! Slide 11 Murfett Legal 2016 Leases & Franchises Essentially, a Franchisor has to choose between either: Taking the head lease of sites, and then licensing or subleasing the sites to the Franchisees; or Requiring Franchisees to directly take the leases of the sites usually in this case, Franchisor has the right to approve the terms and conditions of the lease. Ensure that the lease (or by way of a separate deed) contains the right for Franchisor to assign the lease to itself or its nominee, if the Franchisee breaches the Franchise agreement or the Franchise agreement is terminated. Slide 12

7 Minimum Performance Criteria Embedded in Franchise agreement and Operation Manuals. Must be clear and specific. Should set realistic targets increasing each year. Understand what happens when the minimum performance indicators are not met. Slide 13 What can go wrong with Franchisees? ( 3 Ds - death, divorce & dementia) Competitors & market saturation, even franchisor predation! Minimum Operating Targets (annual increases) Rents vs. franchise fees, Single franchisee, multi-site owners Personal guarantees & securities, Expiry of Lease and/or Franchise term Lease relocation & Franchisor rebranding, Technology/ system upgrades Slide 14

8 Restraints on Franchisees Non-exclusivity and RoTs, First (and last) rights of refusal, Buy-back of assets only on written-down value No 'goodwill'! no ownership of customers, phone/fax/ /website, database, trading name and notional goodwill Insolvency of franchisees - who usually has the first claims: financiers, franchisors & lessors Walking away can be the worst negotiate a formal surrender and release of franchise (and possibly the lease) Debadging Slide 15 What can go wrong with Franchisors? untried or new franchise system lack documented systems and operations/ procedures manuals non-compliant franchising systems (e.g offering finance broking, mobile-liquor sales or real-estate-relate business but not notifying prospective franchisees they had to be appropriately licensed) Slide 16

9 What can go wrong with Franchisors? Brand damage by bad franchisees Bad, or change in proven, management, Poor site selection, Litigation/ group actions/ ACCC actions, termination/ expiry of head license, Lack of Marketing and Marketing Fund disputes IP and the PPSR vs. IP Australia Registry Buy-back of poor performing Franchisees IP Australia Franchise Council of Australia ACCC Slide 18

10 Don t rely on mates, agents, Google! or other non-qualified third parties for advice. They: a) do not act for you, b) do not owe you no fiduciary duty; and c) are not qualified (or insured!) to give you proper legal advice. Engage a lawyer at the right time e.g. you do the deal but before you accept a contract, be sure to obtain appropriate legal advice. Business lawyers can add value and can be better than warranty/insurance claims or litigation! If a dispute arises, be sure to clarify the issues in writing, keep all material information/documents and seek advice early (also, if applicable, promptly notify your relevant insurer rights of subrogation). Slide 19 Seek professional, friendly legal advice so you can make an informed decision. Business / Commercial Law Business Structures Business Succession Business Turnaround Contract Advice Debt Collection Employment Law Estate Planning Franchising Hospitality Law Insolvency Intellectual Property Leasing Liquor Licensing Litigation Property Law Advice Restructuring Settlements Sports and Entertainment Law Strategy and Negotiation Superannuation Taxation Trusts Wills Slide 20

11 +61 (8) View my LinkedIn Profile Level 2, 111 Wellington Street, East Perth WA 6004 PO Box 6314, East Perth WA 6892 Slide 21