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Seeking the right advice

The Right Legal Advice

Franchising is a distribution model and it is important to note that this model requires a uniq ue system created for the particular business to be franchised, and is distinguishable from a form of marketing.

  • Often businesses do themselves harm by choosing to franchise a successful small operation. In Australia for example the large geographi cal size drives a lot of small businesses to consider franchising as a method to ensure growth, because it is hard to manage multi – site company owned operation over all the states and territories. Franchising can risk the existence of the very business its elf and it is not uncommon to see entire businesses fail on account of choosing to franchise.
  • The planning and analysis undertaken at the commencement of the exercise will play a crucial part in the success or failure of the franchise network.
  • As legal advisors, we see our role is to ensure that the client understands the risks involved and provide the client with a risk – appraisal and risk – management strategy. A good legal advisor will possess a solid commercial understanding of the business and be able to appreciate how market forces can affect the business.

 

Is the Business Franchiseable?

  • The first stage of preparation is to assess whether the existing business is, in fact, able to be franchised. This is largely determined by eva luating the market in which the business operates and assessing the ability to establish successful “ clone ” operations in other locations. In making such an assessment, it is necessary to understand the reasons for the success of the existing business so t hat the same criteria can be sought for each franchised location. It cannot be underestimated that even with the best intentions by everyone involved, a small business can perform very well in one location, but fail in another.
  • It is in the prospec tive franchisor ’ s interest to conduct a sufficiently detailed analysis of the existing business in order to understand the “ ingredients ” which are responsible for the success of the business and make a knowledgeable forecast of the potential for franchisin g. The lawyer ’ s role includes the analysis of the client ’ s intellectual property and the Introduction for Prospective Franchisor – Franchise Legal Page 5 of 6 ability to protect it throughout the region(s) in which the franchisor wishes to operate the proposed system. A worldwide or country – targeted searches may be appropria te if international franchising is, in fact, considered.

 

Developing the Franchise

  • Once the above steps have been completed, the franchisor should then work on the operational model of the system. This process involves the creation of workflow a nd the separation of duties between the franchisor and franchisees.

 

Financial modelling

  • If the business is one which has the potential of being franchised, it is essential to create a financial model, having regard to both parties which will make up the whole of the business: the franchisor and the franchisee.
  • Even if the business can be successful in another location, it is necessary to establish that the franchisee, after paying the franchisor all fees pursuant to the franchise, will still receive an acceptable return on investment. Similarly, t he franchisor must establish that the f ranchisor ’ s business (quite separately from the operation of the existing business) will become profitable after the introduction into the system of a certain number of franchisees.
  • It is important to ensure that the break – even number of franchisee s is realistic as the franchisor will continue to be bound by its obligations to develop the network and provide services to franchisees for the duration of the agreement regardless of the number of franchisees in the system.

 

Operations Manual

  • The Operations Manual is a crucial part of the offering to franchisees. It is the operational bible of the business and must be so comprehensive that it should cover all aspects of running the franchisee ’ s business.
  • The Operations Manual should inc lude references and guides relating to any relevant legislative requirements of the business, such as occupational health and safety, employment laws, any licences or permits required to operate and the franchisor ’ s recommended manner of dealing with such matters.

 

Territory/Site

  • Depending on whether the franchise is in respect of a mobile or retail business, the franchisor must determine whether the franchise is being granted for a territory or a specific site.
  • It is important that in d etermining potential franchise locations and/or mapping territories, the Franchisor rely on sound demographic evidence which is not only consistent with the franchise model but also provides a large enough market for each franchisee.
  • For some franc hises, particularly mobile, it may be appropriate to provide that the franchisor may sub – divide a territory in the event that the franchisee ’ s revenue exceeds an agreed amount and the franchisee is unable or unwilling to further service the demand in his o r her territory.

 

Supply arrangements

  • It is tempting for a franchisor to create additional income streams from the franchisee group of businesses. However, such arrangements may be in breach of the exclusive dealing or other provisions of the Co mpetition and Consumer Act 2010. Commercially, one of the benefits of becoming part of a franchise group is the buying power which the system offers to each participant. This does not mean that the franchisor may not benefit at all from negotiating group p rices. What is essential is that the franchisor does not benefit at the franchisee ’ s expense. Introduction for Prospective Franchisor – Franchise Legal Page 6 of 6
  • Some arrangements, like third line forcing are forbidden outright by the Act, others breach the Act only if they substantially lessen competition. It may be prudent to submit a notification to the ACCC in respect of a proposed supply arrangement.

 

Franchise Agreement

  • It is, of course, the lawyer ’ s role to correctly record commercial terms and the parties ’ obligations in the franchise agreement wh ich is, ultimately, the single most important document and the result of the initial set – up project.
  • The agreement should also incorporate the terms of the Manual and allow the franchisor to amend the Manual from time to time.

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