Category Archives: franchising

Due Diligence – Franchising- Money Issues

1. What fees are payable? Consider royalties, promotion and advertising funds, initial fees, renewal and sale fees, legal fees, start -up costs – required equipment etc

2. How are fees calculated – are fees fixed or percentage?

3. When are fees Payable?

4. How are fees paid? Eg direct debit

5. What are fees paid for? Is the franchisor required to provide any identifiable level and quality of service in return for the payment?

6. How are fees reviewed and are there likely to be substantial increases?

7. What other start up costs will you incur? Uniforms, equipment, fit out, occupancy costs.

Many franchisors impose a sale fee which in some cases can be tens of thousands of dollars. It is important to know at the point of entering the franchise what it will cost to escape the arrangement when, in the future, that becomes necessary.

If you are required to contribute to a marketing or other cooperative fund the franchisor must prepare a financial statement of the fund=s receipts and expenses and the amount spent on administration, production, advertising. Unless 75% of the franchisees agree otherwise, this statement must be audited within three months of the end of the financial year. The franchisor must give you a copy of the statement within 30 days of your request.

If you require help checking your Franchise Agreement before you purchase or if you have a concern contact J J Riba & Co

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News about the Personal Property Securities Register

Personal Property Securities Register (PPSR) The Federal Government is working on a new national register which will be available later in the year (around October 2011) – originally this date was May 2011. The changes it will bring will affect businesses and individuals.
Anyone who borrows money may be asked to provide a registered interest in property (not real estate). Manufacturers will be able to register their interest in goods that have not yet been paid for. The registration will create a system of priority the same as is currently done with mortgages and interests in real estate. If interests are not registered then those interests may not be properly protected.

It will be essential for franchisors and business owners to understand how this new system will work so that they can search to see what interests have already been registered against an individual or company. It will also be necessary to know how to quickly register an interest so that it is protected in priority to interests that others may seek to register. Speed will be very important.

If you have questions please contact J J Riba & Co


ACCC News Release Franchising

ACCC URGES PROSPECTIVE FRANCHISEES TO DO THEIR HOMEWORK
If you’re thinking about a new franchise opportunity in 2011, the Australian Competition
and Consumer Commission suggests prospective franchisees make the most of
opportunities to learn about the business model.
“In the New Year, many people are thinking of ways to change their lifestyle and income
and may see buying a franchise as one way of doing this,” Acting ACCC chairman
Michael Schaper said today. “As part of the due diligence process, pre-entry education
programs offer significant benefits to anyone looking to enter the sector.”
Since its launch in July 2010, more than a thousand people have enrolled in a free
online franchise education program funded by the ACCC and administered by Griffith
University.
This ‘buying a franchise’ pre-entry program provides prospective franchisees with the
tools and resources to make better informed decisions about franchise business
opportunities.
A survey by Griffith University has shown that the vast majority of participants have
found the program to be useful and would recommend the program to other potential
franchisees.
“By understanding more about buying a franchise business, including some of the
practical issues they could face as a franchisee, prospective franchisees will be more
informed before making a decision.”
The program consists of five modules. Prospective franchisees learn about franchise
specific issues, including the Franchising Code, franchise fees, royalties, operations
manuals, marketing funds and site selection, as well as general business concepts such
as cash flow, working capital and business reporting.
Dr Schaper said the program helps provide would-be franchisees with detailed, realistic
information about running their own franchise operation.
“The program can help maximise the potential for future success and minimise the
chances of conflict or failure, by better understanding the system you are entering.”
For more information about the program, visit
http://www.franchise.edu.au/pre-entry-franchise-education.html
For information about the Franchising Code of Conduct, visit the ACCC’s franchising
webpage: http://www.accc.gov.au/content/index.phtml/itemId/6118
Media inquiries
Dr Michael Schaper, acting ACCC chairman, (02) 6243 1106
Mr Brent Rebecca, media, (02) 6243 1317 or 0408 995 408
We can assist you with enrolement if necessary – please contact J J Riba & Co


Three important things you should know before you franchise

1. Before you even think about it – You cannot franchise your business unless you have already achieved the following:
(a) You must have a business that is profitable. It must be profitable enough to produce a good profit to your franchisee even after you deduct franchise fees, not only those ongoing fees but, the initial fee also.
(b) Generally the business must have been in existence long enough to know that it can survive a range of economic environments.
(c) The business must be systemised and the systems must be recorded in a detailed and professionally drafted operations manual. It is better that you complete this job yourself, but you will need someone to proof the document. Let me repeat. Detail is critical.
(d) The business must be unique. The operations manual must reveal the uniqueness of the business. In a coffee franchise, for example, the operations manual does not only describe how to make a coffee. It describes how we, in this franchise system, make a coffee. If an operations manual is the text book description of how a coffee is made then the document is failing its purpose. There must be some uniqueness about the document. It may be what the waiter says, the way the cup is placed or the unique chocolate that accompanies each cup. The operations manual must focus attention on the differences from the standard processes that others may employ. The differences make the system, and they need not be mind blowing. It is often the little things that do the job.
(e) One operation is not enough! The business of franchising is about helping franchisees achieve success using your system. It is obviously essential to have the knowledge of how to run the franchised business. It should be just as obvious that you will need to develop the necessary skill to run head office. Operating a franchise system requires an entirely new skill set from the original business. This is a concept too many first time franchisors do not respect. Before franchising your business you must open at least two more operations, and run these successfully at a profit.

2. The set up of the structure. At this early stage it is essential to look at your goal and think big. There may be no second chance to change things once the franchise system is operating. There are some very simple, inexpensive things that can be done at the inception of the franchise system that can protect your assets, discourage would-be litigants from suing you and minimise tax. After operation commences the great ideas that come with experience will cost a lot more to implement.

If your franchise system requires premises should these sites be controlled by the franchisor or the franchisee? Careful thought needs to go into how this system should work. The companies that have the risk should not in most cases be the companies that hold the assets. This is a fundamental rule. We have set up many franchise structures, please contact JJ Riba & Co so that we can help you learn from the mistakes that others have made.

Even the decision in relation to who holds the leases is not a decision that can be made lightly. In this current economic environment many franchisors may find themselves wishing that they had not taken on the responsibility for the lease. If they had not, then the landlord would be chasing the franchisee for payment and may not be chasing them! Do I take the risk associated with the lease of the premises or don’t I? There is always a third option. Why not do both, take some leases and leave others to the franchisee? Which you may take the risk on, depends upon the importance of that site to your system.

3. The Franchise Agreement. Franchising is all about consistency. Consistency in process, in product or service, and consistency across a range of franchisees. The burger must be made the same way, every time, regardless of when or where.

This process of achieving uniformity starts with the franchise agreement. It is very difficult to properly operate a franchise system, if each franchisee within that system, operates using a different Franchise Agreement. Yet each franchisee is likely to request (or demand) changes to the agreement that you are offering. Even what may seem minor variations may create unnecessary work. Franchisors should not generally need to change their standard franchise agreement if it is properly drafted from the start.

Franchisees may draw negative conclusions about a franchisor who is willing to change the standard Agreement. Agreeing to amendments may show a lack of experience, and may even give the appearance of desperation. Disclosure documents operate on the premise that the agreement is the same (taking into account changes over time) across all franchisees in the system.

With these fixed terms however comes the responsibility to make sure that these standard terms are fair. The national unfair terms legislation (Trade Practices Amendment (Australian Consumer Law) Act 2009) does not apply to agreements between franchisees and franchisors. Nevertheless, the existence of this legislation shows that our law makers are focused on this issue. It is essential for franchisors and their lawyers to understand the purpose of each clause in the franchise agreement. Much of what may appear to be unfair at first glance, is necessary so that Franchisors can protect their own interests, and protect the system for the benefit of all franchisees. There is obviously a difference between a clause which may appear to be unfair but, is genuinely needed, and a clause designed to take an unfair advantage. If your system is to grow and prosper you will need to learn the difference.

It is not an easy process but with some discipline and dedication it is not beyond reach. If you need help contact J J Riba & Co


How to update your Franchise Disclosure Document

The Trade Practices (Industry Codes – Franchising) Regulations 1998 provides at section 6 that –
“A franchisor must, before entering into a franchise agreement, and within 4 months after the end of each financial year after entering into a franchise agreement create a document (a disclosure document) for the franchise in accordance with (the code)”
The effect of section 6 is that all franchisors must update their disclosure document no later than 31 October each year.
We strongly recommend that franchisors obtain advice from their lawyer or J J Riba & Company before issuing an updated disclosure document. It is however possible for franchisors to consider for themselves what amendments might be necessary. By going through this process before seeing a lawyer it should be possible to save legal costs.
Step 1 – Have there been any changes to the Franchising Code of Conduct? It is important to again realise that the content of the disclosure document is driven by the requirements of Annexure 1 of the Franchising Code of Conduct. Before you make any changes to the disclosure it is essential to check the current version of the code to ensure that changes have not been made to the requirements of the code. Most franchisors will know that in 2010 changes were made to the Franchising Code and the Annexure. These changes had the effect of requiring franchisors to amend their disclosure documents in July and October. If in any year the code requires additional information, then a careful note should be made of the required amendments.
Step 2 – Consider a list of the parts of the annexure that are most likely to have changed during the course of the year. When the task of considering these obvious sections is complete then the remaining parts of the code should also be considered. We have listed below the areas of the disclosure that are most likely to vary from year to year. These sections should be considered most carefully.
Sections of the Disclosure Document most likely to Change
1. Section 2 – Details of the Franchisor
a. Has the name and address for any franchisor or an associate changed?
b. Has the name position or qualification of any officer of the franchisor changed?

2. Section 3 – Business experience
Make any changes to the details of experience of the franchisor, if most things have remained constant then the franchisor may have one year more experience.

3. Section 4 – Litigation
Are there any current proceedings against the franchisor or a director of the kind referred to in the code?

4. Section 5 – Payments to Agents
Have you set up any agreements with suppliers agents where you make a payment for recruitment of franchisees.

5. Section 6 – Existing Franchisees
If any of the following have happened in relation to any franchise then the details must be noted:
a. Transfers.
b. Closures.
c. Terminations by franchisor.
d. Terminations by franchisee.
e. Expiration.
f. Purchase by Franchisor of a franchised business.
g. Franchise agreement was terminated and the franchised business was acquired by the franchisor.

6. Section 7 Intellectual Property
Any changes to intellectual property should be noted.

7. Section 11 – Sites
If you have changed your policies in relation to site selection you must provide notice.
If any territory or site has been subject to a franchised business operated by a previous franchisee, granted by the franchisor, then you must provide detail of the franchised business including the circumstances in which the previous franchisee ceased to operate. This is to be provided in a separate document.

8. Section 12 – Marketing or other cooperative fund
If there have been changes in relation to the fund then they may need to be mentioned for example, how much franchisees must contribute.

9. Section 13 – Payments
This is an area where there are frequently changes. If there have been changes in the amount the franchisor or others charge for services associated with the franchise system then these changes may need to be noted.

10. Section 15, 16 and 17 Franchisee and Franchisor obligations and other conditions
If you have made any changes to the terms and conditions of the franchise agreement during the course of the year then it is quite possible that these changes may need to be reflected in one or more of these parts of the disclosure document.

11. Section 17A Unilateral Variation
If a franchise agreement is entered into in a financial year commencing on 1 July 2011 or later, the circumstances in which the franchisor has unilaterally varied a franchise agreement since 1 July 2010 must be disclosed.
There are circumstances where this may happen! For instance when there is a sale of a franchise and the new franchise agreement is not on the same terms or when a change is introduced across the system.

12. Section 17C.2
Have you and will you consider any significant capital expenditure undertaken by a franchisee in determining what arrangements will be made at the end of the franchise agreement?

13. Section 20 Financial Information
Directors statement must be renewed.
Financial reports must be prepared and attached for the last 2 financial years or alternatively, an auditors report must be attached.

14. Section 21 Disclosure of materially relevant facts.
Check clause 18 of the code and disclose any matters that need to be disclosed under that section.

15. Section 22
Make sure that the franchise agreement attached to the disclosure is up to date.
Make sure that the copy of the code attached to the disclosure is up to date.
This is not intended to be an exhaustive list of every change that might need to be made to a disclosure document each year, however, it is hoped that it provides a good starting point. We suggest that you use this list to prepare for that yearly meeting with your lawyer to review the disclosure. If you have considered each of these matters you will be well advanced before the lawyer’s clock starts to tick.
J J Riba and Company can provide you with a fixed quote for the yearly review of your disclosure.
Step 3 – Keep a copy of each disclosure document going back at least 10 years. If a claim is made against the franchisor it may be necessary to identify what your franchise agreement looked like in each year of its operation. The old disclosure cannot be disgarded.

If you need help contact J J Riba & Company


How to prepare your first disclosure document

Firstly, let’s consider where this step fits in the overall process of establishing a franchise system.
If you are preparing a disclosure document for the first time, then you are not yet in the business of franchising. You can’t sign up your first franchisee to your system until you have prepared a franchise disclosure document.
In the scheme of things, the disclosure document is the third document that you will prepare. The operations manual is the first document to prepare. The next is the Franchise Agreement, then the disclosure.
How do you prepare your Franchise Agreement? Well, that is a job for a lawyer. You will need to use a lawyer who does this kind of work all the time. J J Riba & Company can help you with this job.
The industry is constantly changing, as is the code which governs the industry. You can buy template franchise agreements online. A search in Google will produce a number of results. Most of these websites will not produce documents that are current or relevant to Australia.
Of course everyone starts the task of drafting any document with a template. The most difficult and time consuming part is making sure that the template is modified to cover the correct issues in the way needed in your particular industry and, in your particular franchise model.
So let’s assume you have a franchise agreement that sets out the future agreement between you and your franchisees. You therefore also have your operations manual and you have a very good understanding of the way that the system is intended to operate. There are other agreements that you will need as well such as a prior representations deed and a deed of restraint of trade. You are happy with all of these.
The next step is to turn to the annexure at the back of the Franchising Code of Conduct. There are two annexures in the back of the code. You should use Annexure 1. Included here is a link to the franchising code that was current at the time of writing this article.
Clause 1 of the annexure sets out the way that the first page of the disclosure document must look. Be aware, this first page does change from time to time, so you need to keep checking to see that the first page includes the content and form required by the code.
Clause 2 is the beginning of a series of questions which must be answered. The preparation of the disclosure is a matter of answering each of these questions. You cannot change the order in which you answer the questions. Your disclosure document must stick to the order required by Annexure 1.
Many of the questions that need to be answered in order to prepare the disclosure document seem to be very simple and can be answered quickly and easily. Other questions raised by the annexure seem on the surface to require a simple answer, but can hide a sting if not answered with care. Remember that disgruntled franchisees will rely upon any inaccuracies in the disclosure document to try to avoid complying with the franchise agreement or to base a claim for misrepresentation and damages.
There is some good news! If your franchise system is new then there will be many sections of the franchise agreement that are indeed very easy to complete. As the years go by and your system grows, complexity will increase.


Remember that you or your lawyer will need to track changes throughout the year so that a new franchise agreement can be prepared in the following year.
We suggest that before you see a lawyer about drafting the disclosure document that you attempt to prepare it yourself. It is important that you understand how the disclosure works and you will be in a better position to provide instructions to your lawyer if you have looked at each question and considered the appropriate answer before you seek help. Your lawyer will be able to answer the more difficult questions, and point out where more detail may need to be included.

If you have any questions about drafting any franchise documents including your disclosure document please contact J J Riba & Company.

1.1.2.2 – The process of setting up a Franchise System

The most commonly asked question that we receive is – what are the steps in setting up a franchise? The short answer is that you will need a good team of people to help you with each of the steps set out below. The first step is deciding if you should move ahead with the idea at all.

Step 1 – Determine if your business is ready for franchising:
• Is the business well established?
• Is there potential for expansion?
• The business needs to be thoroughly market tested and proven to be successful.
• Is the business adequately differentiated from its competitors?
• Are systems in place to allow it to be duplicated? Each Franchised business can’t rely on you personally in order to operate successfully.
• Is your business profitable?
• Can the average Franchisee make a good return on their investment after paying Franchise fees
Step 2 – Determine if franchising is what you want. Does it help you achieve your goals? Are you the right person for the job?
Step 3 – Ensure that your intellectual property is adequately protected. Register trademarks if required. Establish the correct entities for proper protection in this regard including separate entities to hold trademarks, enter franchise agreements, enter leases etc.
Step 4 – Document your operating procedure (i.e. Write your operations manual). Use the process to continue to refine your procedures. Are you using best practice? What can be improved? You do not want your franchisees to repeat mistakes made by you as you built your own business?
Step 5 – Work with your advisers to prepare relevant documentation including Franchise Agreements, Disclosure Documents, Prior Representations Deeds and Security documentation, if applicable. You will need to consider how your system will operate. Consider, for example, the following:
The Franchise Fee:
• What fees will you charge (Initial fee? Ongoing Fees? Promotions Levy?)
• How will you calculate your royalty? Flat or percentage rate or a combination?
Territory and Term:
• How long will you offer the Franchise for?
• Will you give an option to renew? Remember people need sufficient time in the business to be able to make their money back
• Will you offer exclusive territory?
• Will you be permitted to operate in a similar business within the territory?
Training:
• What will you provide?
• Who will do the training?
• Where will the training take place?
• How much training is needed for your franchisee to be in a position to operate the business successfully?
• At whose cost will the training be provided?
• Stock control and Performance Criteria.
• What sort of control will you maintain over stock?
• Will you establish performance criteria?
Step 6 – Develop your marketing campaign. Who will you recruit? How do you determine the best franchisee? Ensure that you speak with other Franchisors in relation to recruitment of Franchisees and read available information. Don’t rush the recruitment process. Quality Franchisees are vital particularly in the early phase of the System Development.
Step 7 – Start operating your Franchise and keep operating your pilot business. Continually look for improvements in the way you operate your business and in the operations of the Franchise System.
Remember – it’s a process!


Selling a Franchise

The sale of a franchised business raises some issues which are additional to the usual business sale.
1. The franchise agreement may set out certain matters that need to be dealt with in the contract of sale. It would be a breach of the franchise agreement not to include required clauses. Don’t sign the business sale contract without first ensuring that you have included clauses dealing with all the matters as required by your Franchise Agreement.
2. The franchise agreement will normally specify what process needs to be undertaken to effect the sale. Make sure you comply with the process or seek legal advice.
3. The franchisor will invariably require you to obtain their consent before effecting the sale. This consent must be requested in writing and generally must be accompanied by certain information such as details of the proposed purchaser of the business and the proposed purchase price.
4. The Franchising code requires a franchisor to consent to the transfer of the franchise agreement unless the refusal of such consent is reasonable. Whether the refusal is reasonable is considered objectively. The code sets out a list of circumstances where it may be possible for a franchisor to refuse consent. JJ Riba & Company can provide you with a list of these matters and advise you in relation to how they may affect you.
5. If the Franchisor does not provide consent or does not provide a written notice setting out the reasons why consent is refused then the Franchisor will be said to have given consent.
6. If there is a lease involved, the Franchisor may have control of the lease which can complicate the process of assigning the lease.
7. At an early stage you must determine if the existing franchise agreement will be assigned or whether as an alternative the franchisor will sign a fresh agreement with the purchaser. Many franchise agreements provide that on assignment the franchisor can issue a franchise agreement which is different from your franchise agreement. This can cause concern for a purchaser and so that issue and the current form of franchise agreement needs to be dealt with early.
8. What will your obligations under the franchise be after the date of the sale? Try to obtain a full release of your obligations under your Franchise Agreement.
9. J J Riba and Company can assist you with all of your franchising requirements.