Franchising systems - when they work and what to do when they don't!

Franchising -
When it works and what to do when it doesn’t.
Presented by:
Tom Meagher
Director – Commercial Law
© Murfett Legal 2014 – all rights reserved

Tom Meagher | Director | Commercial Law
Tom has over 25 years’ business experience; including working
for major national and local law firms, owning and managing IT
businesses, and being a director and in-house counsel for a
public company.
Tom’s clients include a broad range of local, national as well as
international businesses and organisations (including not-for-profit
entities), accounting firms, financiers, landlords, financial
advisers, franchisors and high net-wealth families.
Tom is also a regular publisher of articles and presenter of
seminars to various associations and professional bodies on a
wide range of business law topics including:
Law Society of WA; The Tax Institute; LegalWise; Australian Institute of
Conveyancers; Institute of Chartered Accountants of Australia; CPA Australia
Institute of Public Accountants; National Electrical & Communications Association;
Institute of Certified Bookkeepers, Small Business Development Corporation;
Mortgage & Finance Association of Australia; Stirling Business Enterprise Centre;
Subiaco Business Association, Business Foundations Inc.
© Murfett Legal 2014 – All rights reserved
.

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.
© Murfett Legal 2014

What is a Franchise?
• Not absolutely legally certain.
• Broadly described as an arrangement where:
– one party (the Franchisor) allows another party (the Franchisee)
to operate a business under:
• a brand (e.g. a trade mark); and
• a system (e.g. operations manual),
that provides goods and/or services (e.g. parts and labour) in
consideration for a fee or royalty.

Franchise Systems
 Franchise industry in Australia is strongly regulated and
well established.
 Regulated by the Competition and Consumer Act 2010
(Cth).
 Regulator is the Australian Competition and Consumer
Commission (ACCC).
 Franchising Code of Conduct applies.
 Must comply with the Trade Practices (Industry Codes
Franchising).
 Highly involved and requires appropriate consultation with
professional advisors (e.g. lawyers, accountants, franchise
consultants).

Benefits of a Franchise System
• Provides ongoing revenue stream from Franchise fees.
• Allows Franchisors control over the manner in which the
Franchisees operate the Franchised business:
– Ensures uniformity;
– Protects business brand and reputation;
• Assistances with a well established brand, reputation and
product or service.
• Access to established standard procedures, operating
manuals and stock control systems;
• Access to financing packages which may be more
attractive and easier to access than for non franchised
businesses.

Disadvantages of a Franchise
• Less autonomy in some business decisions. Franchisees generally
have to operate the business according to the Franchisor's operations
manual;
• Restricted territory in which you may operate and/or promote your
business;
• Ongoing payment of fees to the franchisor;
• Less control if you decide to sell your franchise business as there will
be a set of procedures for you to follow, including getting the
Franchisor's approval of the buyer;
• If you sell the business you will usually have to pay a fee to the
Franchisor as outlined in the Franchise agreement;

Disadvantages of a Franchise cont’d
• Restraint of trade provisions on the sale or termination of the franchise
that may be more onerous than required if a non franchised business
is sold; and
• At the end of the franchise term, the franchisor is not obliged to renew
the franchise, in which case the business and its goodwill revert to the
franchisor.

Intellectual Property
• Most valuable assets of a franchise system is its
Intellectual Property (e.g. copyright, trade marks, designs,
patents, trade secrets, recipes etc).
• Ensure all intellectual property, business name(s) and
other things affecting the “goodwill” of the business (e.g.
website, copyright on documentation, client/customer
data base) are properly identified, documented and
protected/registered where practical.

• Differences in Business names, Trade Marks and
Copyright
– Business name
 merely the right to carry on business under a name.
 required for compliance with Business Names Act.
 does not confer any proprietary right in the name.
– Trade Mark TM or ®
 Sign, logo, colour or sound used or intended to be
used to distinguish goods and services dealt with or
provided in the course of trade.
 Exertion ownership.

– Copyright ©
 IP that is not registered, such as copyright, essential
to exert copyright on such by place the © symbol on
each document followed by the owner and the date
(eg © Walker Wayland Pty Ltd- 2013).

Business Entities
• Before signing any form of contract relating to your
purchase of the business, despite whether it is an “offer
to purchase”, “heads of agreement”, “business sale
agreement” or “memorandum of understanding”, make
sure that you firstly obtain appropriate accounting and
legal advice.
• This is important to determine what is the correct buying
entity in which you should ultimately own your business
e.g.:
– Family trust using a company as its corporate trustee
(generally for family-owned businesses and not intended to
introduce third party part-owners at a later date); or

– Unit trusts, or a company, with the respective unit/shares held
by the ultimate buyer(s)’ family trusts. These types of business-owning
structures that are more flexible to the later
introduction/exit of third party equity owners in the business.
• Equity Owner and Management Agreement
• Also, if you are going to buy using a company, unit
trust or even a partnership it is our strongest
advice that a customised share/unit holder or
partnership agreement is produced. This is in
addition to the necessary prior creation of the
prospective trust deed, company constitution or
partnership arrangement.

Why use different business
entities?
• Using a corporate entity as the Franchisor:
– Provides protection for your personal assets; and
– Provide certain tax benefits.
• Using company to hold the Intellectual Property in which
the company acts as corporate trustee for a unit trust
– Protection of Intellectual Property against claims or
insolvency.
• Deed of Intellectual Property Assignment subject to the
relevant advice on the taxation and duty implications.

Personal Property Securities Act
• Personal Properties Securities Act 2009.
• Registration of security interest in the Intellectual Property
on the PPSR (Personal Property Securities Register).
• Under the Act Intellectual Property is a form of personal
property which can be used as a security interest/
collateral.

Premises Development and
Leasing
• 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.

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;

 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;
 a Franchise Agreement;
 a Franchisee advice statement;
 a guarantor statement (if applicable); and
 operations manual.

What to watch out for…
• Guarantees
– Is a contract of second liability that binds the guarantor to
perform upon the non-performance of the primary
contract.
– Personal Guarantee.
– Embedded in the Franchise Agreement or schedules.
– Continuing guarantee obligations after expiration/
termination of Franchise agreement.

• Territories
– Verify whether it is “exclusive territory” and what it
means!
– Does the Franchisor have the right to change the
territory?
– Exclusive territory
 Franchisor cannot grant other franchises within the
area.
 The Franchisor is also restricted from itself
conducting the franchise business in the specified
territory and the franchisee is restricted from
operating the business outside the territory.

 Usually depicted by a map.
 Franchisor can under certain circumstances (e.g. default,
failure to meet minimum performance requirements or at
its discretion) reduce that territory by adjusting the
boundaries and/or, granting a further franchise in the
area.
– Granted territory – restrictive sense
 It cannot operate the franchise business outside the
territory but the franchisor can grant other franchises
in the area or it can itself operate the franchise
business in the territory.
- Territory splitting

• First right of refusal
– Check carefully before selling the franchise business!!!
– Is there a provision for the first right of refusal for the
Franchisor to purchase the franchise?
– Embedded in the Franchise agreement.
– Gives existing Franchisee the option to take over the
new territory before it is offered to anyone else.
–

• Minimum Performance Criteria’s
– 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.

• Termination
– Termination without notice only in certain circumstances
pursuant to Franchising Code of Conduct e.g. the
Franchisee no longer
 Holds a licence to carry on the business;
 Becomes bankrupt or insolvent;
 Voluntarily abandons business;
 Is convicted of a serious offence;
 Operates the practice in a way that endangers public health or safety;
 Is fraudulent in connection with the franchised business; or
 Agrees to terminate the Franchise agreement.

• Termination
– If above not applicable, need to follow procedure in the
Franchising Code of Conduct before terminating
Franchise agreement.
– Give reasonable written notice of termination and
indicate what the Franchisee must do to remedy the
breach.
– If breach not remedied, Franchisor can terminate
Franchise agreement.
–

• Right to buy back
– Allows the Franchisor to buy back the Franchise at a rate
determined by them or to match any potential buyer's
offer.
– Right to buy back plant and equipment only and no
claim to goodwill.
– Embedded in the Franchise agreement.
– It is important that your clearly understand the terms of
your franchise agreement which affect the sale of your
franchised business before you enter into the Franchise
agreement.

• Restrictive Covenants
– Non-compte or restraint of trade provision on termination
or expiration of Franchise agreement.
– Restraint period – cascading.
– Restraint areas.

Useful Information and Contacts
• IP Australia
http://www.ipaustralia
• Franchise Council of Australia
http://www.franchise.org.au
• ACCC
http://www.accc.gov.au

How to avoid unnecessary legal risk,
cost and stress
• 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).

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

Thank you
www.murfett.com.au
(08) 9388 3100

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