Latest franchising review likely to lead to more improvements

Last month the Australian Government publicly released a report detailing the independent review into the franchising sector in Australia.  The background that led to the commissioning of the report, and links to the report itself, can be found here.

 

The report makes 18 recommendations.  The aim being to recommend ways of simplifying and improving the clarity of regulations governing franchising.

 

So, what does the report recommend?  Some recommendations are:

• amending the Code so franchisors when informing a franchisee of its decision to renew or enter a new franchise agreement, the franchisor must also provide a disclosure document at the same time
• modifying parties’ obligations to act in good faith (this also includes during negotiations as well as during the term of the agreement).
• additional and tighter controls on marketing funds, including such funds be held in trust (many franchise agreements require franchisees to make regular financial contributions, additional to other franchise fees, to a central marketing fund controlled by the franchisor that’s meant to be applied for that purpose)
• the Code be amended to require franchisors to provide prospective franchisees with a short summary of the key risks and matters they should be aware of when going into franchising (generally, would seem to be a good idea, providing it doesn’t result in generic and convoluted overly technical disclaimers that is likely to discourage prospects from reading these, rather than to take the time to aware of and consider the usual business risks so an informed decision is made)
• amending the Code so franchisors are prohibited from imposing unreasonable significant unforeseen capital expenditure on franchisees (I’ve seen this happen far too often over the years, even cases where a prospect was “assured” there was no foreseen capital expenditure required, only to be hit with such requirement within weeks, or less, of entering a franchisee agreement)
• amending the Code so that franchisors are prohibited, in the absence of a court order, from making franchisees being responsible for certain legal costs in a dispute resolution process and, interestingly, requiring franchisees to conduct their court case outside the jurisdiction, or State, in which the franchisee’s business operates.
• amending the Code regarding the transfer, renewal or end of a franchise agreement so that a franchisee must provide all information reasonably required by the franchisor when making the request for consent to transfer/sell or renew, but franchisors will not be deemed to have consented until 6 weeks after receiving all such information to enable it to properly evaluate the request (without more clarification I’m unsure here; this could enable a franchisor , intentionally or not, to delay or frustrate a franchisee’s request using the excuse the franchisee hasn’t yet provided all the required info).

The Franchising Code of Conduct and Australian franchising has been reviewed several times since the Code first came into existence in 1998.  Overall, it appears to have resulted in a highly regulated framework in the Australian business format franchising system relative to comparable other counties.

Then again, it’s probably fair to say too, that it’s likely why we have a world leading regulatory but successful and balanced framework for such.  If you’re interested in reading more about previous comments I’ve made on this subject, click here.

 

Meanwhile, let’s see what recommendations from this latest review will be implemented by this or the next Australian government.

No funds? Don’t buy. Simple.

You know how that saying goes... “I’ve said it once, I’ve said it a thousand times...”

 

Buying and selling real estate is serious.  It’s seriously legal stuff.  It’s one area where contract law issues can cause big problems for ordinary folk.  Not unlike when one hears of businesses having a legal fight over breaches of contract.

 

In simple terms, if two parties validly enter a contract and one party breaks the contract, that party is liable to the innocent party for the loss the innocent party suffers as a result.

 

Like most lawyers, when acting for a property buyer, one the first questions I ask is whether they have the funds, either cash or an unconditional loan approval, to pay for it.  If they don’t, either don’t buy, or at least don’t commit to the contract before funds are secured.

 

It’s not uncommon for buyers intending to finance, at least in part, their property purchase from the proceeds from their sale.

 

The premise is, always ensure you have binding sale contract with your buyer (eg. where your buyer’s cooling-off rights have expired) before you’re committed to your purchase.  Otherwise, if you commit buy in the expectation your sale is about to happen and it doesn’t, you could be left with a financial disaster on your hands.

 

Sounds logical, doesn’t it.  Yet it happens far too often reported in this high profile case involving actor Toni Collette and her husband.  Their breach is reported to have cost them $800,000.  They reneged on their purchase contract when they couldn’t sell their own home.  The seller suffered huge loss when they couldn’t re-sell their property for the amount Collette had originally contracted to buy it

The numbers in that case were big.  Even so, even when we’re talking of more typical average Sydney outer suburban home prices, a $10,000, $20,000 or $50,000 liability can cause financial pain.

As the reporter states:

“...get your finances approved before you buy, and if you’re selling and buying in the same market have a contingency plan.”

There’s often much pressure when trying to get the timing right when dealing with simultaneous sale and purchases.  More reason, I say, to ensure you have your solicitor on board to help you though these minefields.

Is your franchised business falling behind? You CAN fight back!

Business format franchising in Australia has proven to be a reliable pathway for many, especially those with little or no experience in running a business, to own and successfully run their own small business.

 

Australia has a world leading regulatory framework, policed by the ACCC.  Unscrupulous and unprincipled franchisors do get caught and prosecuted by the ACCC - I’ve written about some such cases from time to time in this blog.

 

Most successful small businesses are such because of hard work.  Running a reputable franchise system business doesn’t guarantee success, however, but it does reduce the chance of failure.



Even in a successful franchised business, sometimes things go astray, or aren’t working as well as they should.  If this sounds like you, here’s a Sydney Morning Herald article by David Wilson with some useful tips that may be just what you need to help you.  Together with help from your willing franchisor, your accountant and your solicitor, you still can get back your mojo!

Buying into a franchise? Here's one bit of essential, and free advice!

According to the Franchising Australia 2012 report, published by Griffith University, in Australia there are currently about 1,180 business format franchisors, and about 73,000 operators of business format franchises.  These are big numbers.
 

For many years I have advised and continue to advise franchisee clients, both long time operators and first timers.
 

With new intending franchisees, there’s much to discuss, advise, explain, check, re-check, and so on.  Particularly for newcomers, usually advice ought to be sought from their solicitor, accountant and business advisor.
 

Are you thinking about, or have decided to buy a franchise business?
 

Here’s what I think is probably the best early advice, and easiest to follow and understand by newcomers:

Before committing, talk to and ask as many questions as you can to as many current franchisee operators and owners in the system as possible.

That’s how you often get a real-world sense of how the system actually works with real franchisees, how much real or worthwhile support is provided by franchisors, and if the rewards are actually there to be earned. 
 

Unfortunately, sometimes this can reveal that the reality doesn’t quite match the claims in the glossy brochures.  The time to find this out is before committing to buying into a system.
 

A compulsory document that must be provided by franchisors to prospective franchisees before franchise documents are signed, is a Disclosure Document.  One of the may types of information it contains is the names and contact details of other franchisees, at least in your state, if not nationally.

Use it!

Friends in business, should be friends "in deed"...

Mark Bouris, executive chairman of a wealth-management company and small business adviser, but probably more recently widely known as the host of last year's TV’s Celebrity Apprentice Australia also writes articles in the small business section of the Sydney Morning Herald (well, I don’t really know if he actually writes it or whether he instructs another writer to do it for him, but that’s besides the point!).  Today he gives some advice to someone looking at starting a business together with a friend.

Mark gives sound advice about starting or running a business with a friend.  These include the need to (this list isn’t exhaustive):

• separate business from pleasure;
• create a plan and sticking to it;
• not letting personal relationships get in the way of professional goals.

He also makes another important point that I particularly emphasise when I’m advising friends who consult me when they’re starting a business venture: 

 

      put it in writing!

 

As Mark says, Contracts and agreements made between friends can be awkward but they are vital.  It may be awkward but the best time to negotiate and agree on the required documents, normally a deed, is right at the beginning while you’re still friends!  It could apply to partnership agreements, shareholder agreements, and  trust deeds.

People and friends don’t start business on the basis they expect to have a falling out.  If something should go wrong, even if the friendship is stretched or falters, at least there’s a roadmap, or a set of pre-agreed rules on how to best deal with the issue, or even end the business relationship.

A quick example.  If two people enter into a business partnership, if there’s no express agreement stating otherwise, in NSW that business relationship is governed by the Partnership Act.

Under that Act, in the absence of a prior agreement, a partner can dissolve the partnership by just giving formal Notice to the other partner(s) and the dissolution of the partnership is effective from the date that Notice is communicated. 

This is quite serious; think about it.  You’re in a partnership business, you’re handed a Notice and it’s over.  No lead in time, no time to work-out any buyout or secure finance, maybe no time to secure the firm’s bank accounts.  There’s great potential for arguments as who’s to get what plant and equipment, or who gets to “keep” which customers or clients.

I’ve seen this happen far too often.  It creates havoc, stress and ultimately costs that could’ve otherwise been avoided.

A typical formal partnership agreement, on the other hand provides a for minimum notice period, be it 3, 6 or even 12 months.  In other words, there’s a sound exit strategy already in place.

Of course friends can go into business together; they should however treat it as such and remember that business is business.

Business franchising can be good, but is it all good?

As a method of getting a foothold into starting, owning and running a business, business format franchising is a well regarded and popular method.  Indeed, on a per capita basis, Australia is said to be the “franchise capital of the world”, even more so than the USA.

There are plenty of good-news stories and guides about the advantages of business format franchising.  A timely article in today’s Sydney Morning Herald, however, highlights what many consider an often neglected downside, for franchisees, in many franchising systems.  Even after allowing for any rights to renew for additional terms, most franchise agreements have a final end date, be it 5, 10 years or even 20 years from the start date, for example.

 

Once the franchise term is at an end, typically there is no right for the franchisee to obtain a new agreement from the franchisor.  Or as the article puts it, if you’re at the end of your franchising contract, the franchisor can do whatever it wants.

Unlike typical non-franchise businesses, towards the end of the franchise contract, the franchisee can find themselves with no rights, no asset... you have nothing at all; there’s no goodwill, there’s nothing.  You pick up your kit bag and go home. 

Metaphorically, and possibly quite literally, once you lock the doors for the last time, the keys are just simply handed back to the franchisor.  No reward, no payment and no return for the goodwill that was probably built up over years of hard work.

On the other hand, if one has an independant, non-connected and successful small business enterprise, the owner usually has a valuable asset to sell; the years’ worth of built up goodwill adding value and hopefully providing a decent return when the business is sold.

It’s not all bad.  If you’re thinking about starting or buying a franchise business, it's vitally important you just need to be aware of these sort of issues.  As always, make an informed decision after obtaining professional advice, particularly from your accountant and your solicitor.

Franchisor in trouble again! Or, why you should speak to as many franchisees as you can before buying into one!

Why are they still at it?  Last Tuesday, the Federal Court fined Australian franchisor Allfones $45,000 after finding it guilty of contempt of court by reason of its breach of an undertaking given to the Court in 2008.  Here's the Court's judgment.  Here's the ACCC's press release.

I've previously noted aspects of this saga here and here.

Eventually, and as a consequence, the company's chief executive's contract was terminated and he was escorted out of the company's headquarters, as reported here, earlier this year.

What does it take to send the message once and for all?  If fines totaling $3 million hasn't done it, will a $45,000 fine do?

Back to to the present case, the judge said 3 contempts were serious, and that the conduct engaged in by Allfones' senior personnel, contrary to the undertakings, was deliberate!

With this history, I wonder why would one want to be their franchisee?

I almost always advise prospective new franchisees, as part of their assessment of an intended purchase, to speak to as many as possible of current and past franchisees of the franchise system they're contemplating - the feedback they get is often more telling about the system and support, than the documents and sales spin.

Big retailer franchisees should've known better - fines are a reminder to small businesses too - be aware of your consumer laws obligations

Like many suburban law practices, I have my fair share of small to medium sized business clients.  A subject that regularly comes up are many of the obligations of business owners under various competition and consumer laws.  The ones most referred to are under the Commonwealth's Competition and Consumer Act (previously called the Trade Practices Act).

Many are aware of the extent of these laws.  Take wholesale for instance.  Generally, a supplier of goods to a retailer can't tell a retailer the price the retailer must sell the item for - it's anti-competitive.  That's why on many goods or catalouges you often a phrase "recommended retail price".  Then there are laws about false and misleading advertising, collusion, exclusive dealing, and the list goes on.

Part of a lawyer's role in certain cases is, I feel, not only to provide advice, but also to educate.  Many clients appreciate it and hopefully I've done my bit to help them avoid potential trouble!  

What does surprise me is when bigger players should've known better - usually because they're far more experienced and have the resources to keep their operators and franchisees informed and in line.  This week we learn from a ACCC report that 6 West Australian Harvey Norman franchisees were fined for engaging in a bait-and-switch practice.  It's where one advertises a great deal on a product, you get there, and because they originally held only a very small number of the items, you're told something like "sorry, we've sold out" and then they try to sell you another, often higher priced, item.  In this WA case, it's reported these particular franchisees didn't even stock the advertised products (cameras) in the first place!

Competition laws apply to big AND small businesses.  The penalties are substantial.  If you're unsure how certain practices in your business stack up, I suggest you play it safe and get advice sooner rather than later. 

Damages awarded for breach of exclusive territory provision in franchise agreement

Franchise business systems are popular for many reasons. Many retail based franchise systems provide a degree of security, a form of limited "monopoly" or exclusivity, if you like, by granting exclusive territory rights to the franchisee for the duration of the franchise relationship. There are varied forms of such rights, but if that right is breached by the franchisor, what exactly can a franchisee recover from such a breach?

A decision of a single judge of the Federal Court (Haviv Holdings v Howards Storage World) handed down just a few days ago provides some answers.

This court decision also shows that:

• The court will grant relief, even where the breach appears to be relatively minor on its face. A breach is a breach!
• If loss is suffered caused by a breach of contract, difficulties calculating that loss will not of itself defeat a claim.
• The court will, when assessing damages that are said to flow from future losses, apply certain discounts to the calculated gross loss.
• Importantly, the court found that in calculating the damages, it would look at losses suffered up to the end of the last option period, even though those options may have not been exercised by the franchisee.
• Breach by franchisors of exclusive contract territory rights granted to franchisees is something that is take lightly - check the wording of the exclusive territory provisions in your franchise agreement!

Howards Storage World (HCW) is a specialty retailer of household storage items. In 2002 HCW entered a franchise agreement with Haviv allowing Haviv to operate a HCW store at Burwood (a Sydney suburb). That agreement granted to Haviv an exclusive franchise territory, being the area within a 5 km (or 5,000 metres) radius of the Burwood store.

In 2004 HCW granted a HCW franchise to someone else to operate a HCW store in the Rhodes shopping centre. The Rhodes store, indeed the whole Rhodes shopping centre, was between 4,837 and 4,843 metres from the HCW Burwood store; in round figures, only about 160 metres inside the exclusive territory granted to Haviv.

HCW admitted it breached the territory provision. Haviv claimed, and could show, to have suffered loss and damage by reason of HSW's breach. Haviv eventually ceased operating the Burwood store. HCW claimed it terminated the franchise agreement due to alleged breaches by Haviv, whereas Haviv denied this and claimed otherwise.

The court found that Haviv was entitled to claim damages. It considered different scenarios, or methodologies, of how those damages are to be calculated.

Importantly for the franchisee, the court found that the damages should take into account Haviv's loss of net profits for the period until the expiry of the last option for renewal period, in the year 2022.

In further assessing the damages, the court found that various discounts were to be applied to allow for various factors were to be taken into account, such as future refurbishment costs during the terms of the leases, rent increases and other "vicissitudes of life" - these are the unknown factors and risks that affect people during their lifetime generally.

This decision applied a principle that where there has been an actual loss, the law does not permit difficulties in calculating the loss to defeat the only remedy it provided for breach of contract, an award of damages.

The court adjourned the matter for the parties' experts to calculate Haviv's loss, or damages, based on the court's findings on how that loss is to be calculated.

Updates on some recent Australian franchising cases

Much of the background information concerning these cases and parties are on my News page. There's really not that much to add other than just provide an update on the present status of the cases below.

ACCC -v- Allphones: matter was heard before the Federal Court on 18 December 2008. Judgment is reserved, meaning that judgment will be delivered on a later date.

Allphones -v- Hoy (this is the appeal by Allphones from the decision in Hoy -v- Allphones): The matter is set down for hearing before the full court of the Federal Court for 2 days, on 2 and 3 March 2009.

ACCC -v- Seal-A-Fridge: matter is listed in the Federal Court on 6 February 2009 for further directions