Category Archives: For Franchisees

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

Advertisements

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


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.


How to buy a Franchise – the process and some legal issues

Seek legal advice before you go too far! JJ Riba and Company can undertake a thorough review of the Franchise Agreement you are considering. They have read hundreds of different Franchise Agreements and can tell you what is normal and reasonable. Small firm legal fees and big firm knowledge.

START BY UNDERTAKING SOME RESEARCH

Ask yourself:

 What are my strengths and weaknesses and how do these suit the requirements of the business?
 What are the demographics of the area in which the business would operate?
 Why does that demographic suit this kind of business?
 What do I expect a Franchisor to do for me that I could not do for myself?
 What is the real cost of entering into the franchise system and does the benefit weigh up?

Remember

Going into a franchise means setting up a business and, as with any business, there needs to be the demand for what the business sells in the territory in which the business is located in order for the business to succeed. Just because a business is successful in one area does not mean that it will succeed in another.

The idea is to make a return on your investment and receive income from your labour. You should first write down all of the Business’ sources of income, all its costs and expenses and everything else which could impact on profits. What volume of business will be required to pay your wage and make a return? Can you achieve the necessary volume of work?

Is there direct competition? Is your Business’ product or service superior to the competition? Is it highly sought after?

Try comparing your Franchise system with Franchise systems for similar types of businesses e.g Donut King v Fantasy Donuts

Once you’ve made some initial decisions you should look more closely at the Franchise system you’ve selected as your primary goal. At this stage you should:

• Sit down and talk with your Franchisor – What’s their vision? What are their requirements? Do you meet their criteria for a franchisee?

• Go and speak with existing franchisees – Ask if they are happy? What do they like about the system? What don’t they like? Make sure you read between the lines. People don’t like to criticise their franchisor.

The Code

Franchising in Australia is governed by the Franchising Code of Conduct. The Code provides:

• certain restrictions on Franchise Agreements;
• sets minimum standards; and
• provides you with certain rights.

A Franchisor must, at least fourteen (14) days prior to you entering into a franchise agreement and paying a non-refundable deposit, give you:
• a Disclosure Document;
• a copy of the Franchising Code of Conduct; and
• a draft copy of the Franchise Agreement.

You should use the fourteen (14) days provided under the code to complete your investigation of the Franchisor and the Franchise system. The Disclosure Document will provide you with information in relation to the Franchise System and the Franchisor. Make sure you get a Disclosure Document. These documents often contain a lot of information. Please contact us if you want assistance to understand the documents.

Some things you need to know before signing a Franchise Agreement:

Costs

What costs will you incur when entering into the Franchise Agreement and what on-going costs will you incur?
These costs may include:

• Initial Franchise Fee.
• Royalty or Administration Fee.
• Marketing or Promotion Levies.
• Other advertising requirements contained in the Franchise Agreement.
• Other ongoing fees payable to the Franchisor or a third party.
• Training Fees.
• Renewal Fees on any option.
• Sale fees to transfer the business should you decide to sell.
• Costs relating to the premises from which the Franchise will operate.
• Legal costs of the Franchisor/documentation drafting costs etc.
• Duties and search fees.

Territory

Will you be provided with an exclusive territory?
Can your territory be changed? If so, how?
Can the Franchisor operate a similar business within your territory?

Existing litigation

Is there any actual or threatened litigation?
The threat of litigation could turn into legal proceedings in the future, hopefully not after you have taken control of the business.

Exit Strategies

Sometimes even the best plans fail. How can you get out of the Franchise Agreement? What will it cost you to get out of the Franchise Agreement?

Term of the Franchise and any options

How long is the initial term? The term should be long enough for you to recover your initial and set up costs.

Are there any options? How do you exercise your option? Will any new agreement be on the same terms? What costs are involved in the exercise of an option? How long is the option period?

Minimum Performance Criteria

Is there any? Is it reasonable? Will you be able to meet it?

Stock

Where does it come from and what restrictions exist? Do you have a right to sell the whole of the range?

Transfer of your franchise

A request for a franchisor’s consent to transfer a franchise must be in writing. A franchisor cannot unreasonably withhold consent. The reasons for which the franchisor may withhold consent are set out in Item 20(3) of the Code.

If the franchisor does not respond in writing stating that consent is withheld, and given reasons for withholding consent within 42 days, then consent is taken to have been given.

Speak with your Financier about:

1. The availability of finance.
2. The financier’s requirements for the provision of your finance.
3. Any necessity to provide security/mortgage.
4. The estimated date that funds will be available.

Some financiers have arrangements with certain franchise systems.

Speak with your lawyer about:

1. The terms of the Franchise agreements, any associated contracts and documentation, and any special conditions you may require.
2. Any representations which may have been made to you by the franchisor upon which you are relying.
3. Most Franchisors will require you to obtain a certificate to say that you have received legal advice.
4. Restraint against trade i.e. whether you may operate a similar business outside your territory.

Get advice from your consultants

If you cannot afford to get advice then you cannot afford to go into business!

Get advice from your accountant
1. The correct entity to buy the business. (Would it be best to set up a company or a trust?).
2. Reviewing any projected figures provided by the franchisor.
3. How does GST affect the transaction?
4. Cashflow, business plan and a budget for the purchase and operation of the business, incorporating the establishment costs and ongoing franchise costs.

How can you protect yourself?

1. Seek legal advice before you go too far. We undertake a thorough process to review your franchise agreements. We have read hundreds of different franchise agreements and we can tell you what is normal and reasonable and what is not.
2. As with any business, prospective franchisees should carefully consider whether or not the type of business meets their requirements and financial circumstances. Important things to consider include the upfront cost, duration of the agreements, and the exit options available.
3. Carefully read the Disclosure Documents and Franchising Code of Conduct.
4. Write everything down. By writing down all the franchisor’s pre-contractual verbal representations and sending them for confirmation to the franchisor before entering into the contract, you are covering yourself against potential misunderstanding later on. This may also be done by email

Before you get any advice, make sure you read all the documents thoroughly. Even if you do not fully understand the documents you will be in a better position to ask good questions of your lawyer, your accountant, and the franchisor. This may also help you to save some costs.


-10 Important things a franchisee should know before buying a Franchise.

1. A Franchise Agreement is defined in the Franchising Code of Conduct. The definition is very broad. Be cautious of anyone who tells you that they issue Licence Agreements and not Franchise Agreements. Some Franchisors believe that by calling an Agreement a Licence rather than a Franchise they can avoid compliance with the Franchising Code of Conduct. This is incorrect. See section 4 of the Franchise Code of Conduct.
2. At least 14 days before you enter into a franchise agreement the franchisor must give you:
• A copy of the code;
• A Disclosure Document; and
• The Franchise Agreement.
3. A franchisor must not enter into a franchise agreement with you unless you have provided a written statement that you have read and had a reasonable opportunity to understand the disclosure document and the code.
4. After you sign you are allowed a cooling off period. You can terminate the Franchise Agreement for 7 days after:
• entering into the agreement; or
• making a payment.
5. If you lease premises from a franchisor then the franchisor must provide you with a copy of the lease within one month after the lease is signed. Any failure to do so is a serious breach of the Code. See section 14.
6. A franchisor is not obliged to give you any further term after the Franchise Agreement expires. Courts have said that it is not unconscionable, nor unfair for the Franchisor to refuse to renew your franchise agreement. If your franchise agreement ends and is not renewed you will lose your business. You must make sure that your franchise agreement contains an option. If an option to renew is not given in the franchise agreement then you should make sure that you can pay off the purchase cost of the franchise and make a sufficient profit in the time allowed i.e. the term of the franchise agreement.
7. Many Franchise Agreements contain a sale fee. This means that the franchisor requires you to pay a fee, sometimes in the amount of tens of thousands of dollars, before you will receive consent to sell the franchise. Make sure you know what the sale fee is before you sign the Franchise Agreement.
8. A franchisor is not entitled to include a clause in a franchise agreement that says no matter what they do they are released from any liability or responsibility to you the franchisee.
9. If a franchise agreement requires you to pay money to a marketing fund then the franchisor must provide you with a copy of a statement, showing all receipts and expenses with 5 months of the end of the last financial year. Be careful however to read the franchise agreement or obtain a promise from the franchisor about the use of the funds. Courts have ruled that franchisors do not have to use the funds to help you in your business unless the franchise agreement requires this. Often the franchise agreement does not have this requirement.
10. A franchisor is not entitled to unreasonably refuse a request for the assignment of a franchise agreement. In fact if the franchisor has not given reasons why consent is refused within 42 days after a request, then the Franchisor is taken to have given consent.
Contact J J Riba & Company if you have any questions about franchising.


How to Read a Franchise Disclosure Document?

All Franchisors prepare Disclosure Documents because the Federal Government requires every Franchisor to prepare this document. Franchisees can insist that the Franchisor provide a Disclosure Document each year.

The first thing to realise is that the Franchisor cannot choose what information they will include in their Disclosure Document. Each Franchisor has to answer some very specific and probing questions about their business. Disclosure Documents can be difficult to read because of the volume of information contained in the Document. But if you know how to read it, then you can tell a lot about what the Franchisor is like.

Would you like to know for instance, if the Franchisor has been involved in any legal proceedings with any Franchisees in the last 10 years? If so, do you want the court number so that you can see what the court decided? This is the kind of information that must be provided by a Franchisor.

Is the Franchisor in the habit of terminating or not renewing franchise agreements? The Franchisor must say how many times this has happened.

These are the kinds of important questions that Franchisors are required to answer. If you are a buyer of a franchised business then you need to know how to find these answers in a document that can sometimes be longer than the Franchise Agreement itself.

The solution is simple! Don’t go to the Disclosure Document first. Firstly you must look at the Franchising Code of Conduct. There is an annexure at the back. Each question has a number assigned to that question. The answer to each question must be numbered in the same way.

As you come across a question of interest in the annexure to the code then you should go to the same number in the Disclosure Document. There, you will find the answer.

Please follow this link to the Franchising Code of Conduct.
If you need help understanding a Disclosure Document please contact J J Riba & Company