Help & FAQs

A.

A restraint of trade clause is a clause which is included in an agreement typically to stop someone from competing or using confidential information.

When is a Restraint of Trade clause used?

Restraint of trade clauses are used in various situations:

• in the case of a franchise relationship, the exiting franchisee may be restrained from

• competing with the franchisor for the purpose of protecting the franchisor’s goodwill,

• using the confidential information, trade secrets and trade connections of the franchisor.

• in the case of the sale of a business, the vendor may be restrained from competing with the purchaser for the purpose of protecting the goodwill acquired by the purchaser.

• in the case of an employment relationship, an employee may be restrained from using the confidential information, trade secrets and trade connections of the employer.

When will a Restraint of Trade clause be enforced by a Court?

A Court will consider

• how reasonable the restraint is (does it protect only what it is attempting to protect). If a restraint of trade clause is drafted too widely, or if there is another way to protect the interests of the party seeking to enforce the restraint of trade clause, the clause may not be enforceable.

• the interest of the parties to the agreement, and

• the interest of the public.

Given the factors set out above a restraint of trade clause must be carefully drafted taking into account the specific circumstances of the case.

Read a case study about an unenforceable restraint of trade clause.

Haarsma Lawyers have experience in both drafting and enforcing restraint of trade clauses. Contact us if you wish to have a restraint of trade clause drafted, reviewed  or enforced.

A.

You can end the franchise agreement early or terminate a franchise agreement in a number of circumstances.

Breach by franchisee

You can terminate a franchise agreement if the franchisee has not followed the franchise agreement (called a "breach" of the franchise agreement) and does not start to follow the franchise agreement when requested, or do what you request that the franchisee do to fix (called "remedy") the breach.

In this circumstance you must provide the franchisee with the following:

• specific details of the breach and how it can be remedied,

• reasonable time to remedy the breach (normally 30 days),

• reasonable notice that you intend to terminate the franchise agreement if the breach is not remedied.

If the franchisee does not remedy the breach within the time frame allowed (normally 30 days) you can then terminate the franchise agreement by notice.

No breach by franchisee

A franchise agreement usually contains terms which allow you in certain circumstances to terminate the franchise agreement without a breach by the franchisee.

The types of things covered by this are

• if the franchisee does not satisfactorily complete training within a certain period,

• if the franchisee is required to enter a lease and the franchisee has not done so within a certain period,

• if the franchisee is required to fit out a retail premises and the franchisee has not done so within a certain period ,

• if the franchisee has not obtained the required insurances or licenses to operate within a certain period.

You must give the franchisee reasonable notice of the termination and the reasons for it. What is reasonable notice will depend on the circumstances.

Special Circumstances

The Franchising Code of Conduct sets out specific circumstances in which you are not required to provide the franchisee with reasonable notice before terminating the franchise agreement.

You may immediately terminate the franchise agreement for any of the following reasons:

• the franchisee no longer holds a licence or lease that is required to maintain the franchise business,

• the franchisee become bankrupt or insolvent,

• the franchisee voluntarily abandons the franchise agreement or business,

• the franchisee is convicted with a seirous offence,

• the franchisee operates the business in a manner which endangers public health and safety,

• the franchisee is fraudulent in connection with the operation of the franchise business.

Contact us if want some advice about terminating a franchise agreement early.

A.

The Franchising Code of Conduct is a mandatory set of rules all Australian franchised businesses must abide by.

There are 3 main areas which are covered by the Franchising Code of Conduct (the Code)

• Disclosure
• Franchise Agreements; and
• Dispute Resolution.

Disclosure

The disclosure document arguably forms the foundation to compliance with the Code by franchisors. The disclosure document includes information such as

• details of all the current franchisees in the franchise system,
• details of the frachisees that have left the system in the last three years,
• details of any relevant legal action that is being taken against the franchisor, and
• the financial and business details of the franchisor.

At least 14 days before a franchisee enters into, renews or extends a franchise agreement or pays a non-refundable deposit in relation to a franchise agreement, a franchisor must give the franchisee:

• a copy of the Code,
• a disclosure document in the form set out in the Code,
• a franchise agreement in the exact form in which it is to be executed.

Read more about Disclosure Documents.

Franchise Agreements

The Code requires that franchisors provide their franchisees with certain rights in relation to franchise agreements, in particular:

• the franchisee and the franchisor have a 7 day cooling off period after the franchise agreement is signed, or after a franchisee has paid non refundable money to the franchisor. If the franchisee decides to exercise their cooling off rights the franchisor must give a refund of any payment the franchisee has made within 14 days. The franchisor does have the ability to deduct a reasonable amount incurred by the franchisor.
• the Franchisor is prohibited from preventing franchisees or prospective franchisees from forming an association or from associating with other franchisees or prospective franchisees for a lawful purpose.
• the franchise agreement must not contain, or require a franchisee to sign a statement that releases the franchisor from general liability towards the franchisor.
• a franchisee agreement must not contain, or require a franchisee to sign, a waiver of any verbal or written representation made by the franchisor.
• a franchise agreement must contain a dispute resolution clause which complies with the Code.

Read more about Franchise Agreements.

Dispute resolution

The Code sets out a detailed procedure for resolving disputes between franchisors and franchisees.

Step 1- Written Notice of Dispute

The complainant, whether they are the franchisee or the franchisor, must write to the other party with details of the complaint. The code stipulates that the letter must include the following information:

• The nature of the dispute,
• The outcome the complainant wants, or the desired outcome, and
• What action the complainant believes will settle the dispute.

Step 2- Direct negotiation between the parties

The code mandates that before any other action is taken the parties to the complaint must endeavour to resolve the dispute between them.

Step 3- Appointment of a mediator

If the parties have tried to resolve the dispute between them and have failed, after 21 days of the written notice of dispute being given, either party may refer the matter to a mediator.

Step 4- Mediation

When mediation is required by a party, the code stipulates that before any other action is taken the parties must engage in mediation.

Read more about mediation.

Summary

This is just a brief overview of the Code and does not cover all of the Code's provisions. Should you require any advice about the Code or the effect of the Code on your business we can assist you.

Read more about the franchise law and consulting services we offer.

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On 4 June 2010 the Federal Government announced the introduction of the latest changes to the Franchising Code of Conduct. Below is a summary of the significant Franchising Code changes.

When do the changes start?

The Franchising Code changes apply to franchise agreements entered into on or after 1 July 2010.

This means that all franchisors must amend their documentation and in particular their disclosure document to give effect to these changes for franchise agreements to be entered into after 1 July 2010. For franchise agreements to be entered into prior to 1 July 2010, documentation based on the current Franchising Code should be used.

Consequently all documentation provided to prospective franchisees for franchise agreements to be entered into after 1 July 2010 must incorporate the latest changes to the Franchising Code.

Audit of marketing funds

Currently under the Franchising Code a franchisor must either have the Marketing Fund audited or have the agreement of 75 per cent of franchisees not to audit. Currently an agreement not to audit must be given within 5 months of the end of the relevant financial year and will last 2 years.

Under the latest changes, any agreement not to audit needs to occur within 3 months of the end of the relevant financial year and will last 3 years.

Renewal

If the term of a franchise agreement is 6 months or longer a franchisor must notify the franchisee of whether it intends to renew, not renew or enter into a new franchise agreement. This notice must be provided at least 6 months before the term expires.

In the case of franchise agreement for a term of less than 6 months the notice period is 1 month.

Good Faith

While the Franchising Code does not introduce a separate obligation to act in good faith it will, from 1 July 2010, include a provision that nothing in the Code limits any obligation imposed by any other law or statute to act in good faith.

Dispute Resolution and Mediation

The Franchising Code currently includes an obligation on a franchisor and a franchisee to mediate a dispute if either of them request mediation. Additionally there is currently an obligation to try to resolve the dispute.

The latest amendments include a list of actions which are taken to be “trying to resolve the dispute”. These include attending and participating at reasonable times, making clear what a party intends to achieve from mediation, observing confidentiality and not taking action during the dispute which would have the effect of damaging the franchise system, for example stopping supply of goods or services or supplying inferior goods or services.

Additionally the Franchising Code currently provides that the parties are equally liable for the costs of mediation unless they otherwise agree.

Under the latest amendments, costs of mediation are now specifically defined to include the costs of the mediator, the costs of room hire and the costs of any additional input needed at the mediation for example input from experts.

Also under the latest changes, a franchisor must state whether they will require a franchisee to pay the franchisor’s costs of dispute resolution.

Risk Statement

Under the latest changes to the Franchising Code, the following additional statement must be included on the first page of the disclosure document

“Franchising is a business and, like any business, the franchise (or franchisor) could fail during the franchise term. This could have consequences for the franchisee.”

Payments to third parties after start up

Currently a franchisor must disclose various details about payments to the franchisor and its associates both on start up and throughout the course of the franchise. Additionally under the current provisions a franchisor must disclose any payments to third parties to start operating.

The latest amendments to the Franchising Code mean, that in addition, a franchisor must disclose the required details about any payments to third parties throughout the course of the franchise as long as they are within the knowledge or control of the franchisor or are reasonably foreseeable.

Capital Expenditure

Under the Franchising Code changes a franchisor must now disclose whether they will require the franchisee to undertake any unforseen significant capital expenditure (whether under the franchise agreement, an operations manual or by any other means).

Unilateral Variation of Franchise Agreement

The latest Franchising Code amendments require a franchisor to disclose

●    for franchise agreements entered into in the 2011-2012, 2012-2013 and 2013-2014 financial years, the circumstances in which the franchisor has unilaterally varied a franchise agreement since 1 July 2010 - from the 2014-2015 financial year onwards this disclosure requirement will require details for the last 3 financial years,

●    the circumstances in which a franchise agreement may be unilaterally varied by the franchisor in the future.

Confidentiality Obligations

A franchisor will be required under the Franchising Code changes, to disclose the details of any confidentiality obligation that will be imposed on the franchisee including confidentiality requirements relating to outcomes of mediation, settlements, intellectual property and trade secrets.

End of Term Arrangements

Under the latest amendments, a franchisor will be required to detail the process to apply at the end of a franchise agreement including

●    details of any option to renew,

●    whether the franchisee will be entitled to an exit payment,

●    details of arrangements in relation to unsold stock, materials, equipment and other assets including whether the franchisor will buy these items and how the price will be determined,

●    whether the franchisee will have the right to sell the business at the end of the term and if so will the franchisor have a right of first refusal,

●    whether the franchisor will consider any significant capital expenditure by the franchisee during the course of the franchise in determining the arrangements that will apply at the end of the term.

Additionally under the latest amendments, a franchisor must disclose for franchise agreements entered into in 2011-2012, 2012-2013 and 2013-2014 financial years details of whether a franchisor has since 1 July 2010 considered any significant capital expenditure by the franchisee during the course of the franchise in determining end of term arrangements - again from the 2014-2015 financial year onwards this disclosure requirement will require details for the last 3 financial years.

Amendment on Transfer of a Franchise

Finally the latest Franchising Code changes require a franchisor to disclose whether it will amend the franchise agreement (or require the franchise agreement to be amended) before a transfer of the franchise.

Contact us if you require advice about the changes to the Franchising Code of Conduct and its affect on your franchise system, or if you need assistance to update your franchise documents to ensure compliance with the updated Franchising Code of Conduct.

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A Franchise Agreement is a document which sets out what is required by the Franchisor and Franchisee in any situation which may arise during the course of the franchise relationship.

Some of the main terms that are commonly found in a Franchise Agreement include:

Rights granted to the Franchisee

The franchisee is normally granted the right to use the Franchisor's

• name,
• trademark, and
• system.

Franchisor's Obligations

These terms set out what is required by the Franchisor, for example

• what training is to be provided,
• what advertising and promotion is to be undertaken,
• what support is to be provided.

Franchisee's Obligations

These terms set out what is required by the Franchisee, for example

• the services to be provided,
• the methods to be used,
• the manuals to be followed, 
• the standards to be maintained, and 
• the way that the business is to be promoted.

Payment provisions

These set out initial and ongoing fees, such as

• licence fees royalties,
• communication fees, and
• advertising contributions.

Term and Termination

These terms deal with

• how long the franchise relationship will last,
• how it will come to an end,
• whether the agreement can be renewed by the franchisee, and
• what happens on termination.

Restrictions

These restrictions include things such as

• restrictions on suppliers, 
• prohibitions against operating a competing business, and
• restrictions on the recruitment of employees after termination.

Dispute Resolution

A franchise agreement must set out a procedure for resolving disputes which complies with the dispute resolution procedure set out in the Franchising Code of Conduct (the Code). Read more about the dispute resolution procedure set out in the Code.

Resale Rights

These terms set out the method by which a Franchisee may sell the franchise business. Some franchise systems allow their franchisees to sell the franchise business, while other franchise systems write in buy back or right of first refusal clauses.

If you need a franchise agreement drafted or if you already have a franchise agreement which you want reviewed we can assist you to ensure that your franchise agreement is a usable and enforceable document which reflects your franchise system.

Read more about our franchise experience.

A.

Under the Franchising Code of Conduct (the Code) all Australian franchisors must issue a disclosure document to a prospective franchisee, or when proposing to renew or extend the scope or term of a franchise agreement.

Disclosure Document Requirements

The disclosure document must be:

• signed by a director or other officer of the franchisor,
• updated annually within 4 months of the end of the financial year.
• given to a new potential franchisee or to an existing franchisee looking to renew or extend their franchise agreement at least 14 days before the franchisee signs the new franchise agreement.

The disclosure document must be accompanied by a copy of the proposed franchise agreement and a copy of the Code of Conduct itself.

Disclosure Document Contents

A disclosure document will need to contain the following information to comply with code:

Franchisors details and business experiences

Franchisors must provide details of the business including:

• business experience,
• business names,
• its associates, and
• a statement that the business is solvent.

Litigation

Franchisors must provide all details, if there are any, of any present litigation. The relevant litigation is generally for matters including:

• fraud,
• dishonesty,
• unconscionability,
• any breach of the Trade Practices Act, and
• any breach of franchise.

Existing franchisees 

The disclosure document must contain details of all existing franchisees. This allows a potential franchisee to contact an existing franchisee with any questions they may have regarding the franchise business.

Intellectual Property

Franchisors must

• describe and list their intellectual property, and
• outline the conditions which restrict the use of the intellectual property by Franchisees.

Franchisors must also provide any details of a licence agreement regarding the intellectual property.

Territory 

Franchisors must provide details of any statements relating to the exclusivity of any territorial boundaries.

Territory History

Franchisors must provide Franchisees with a history of the territory or site in which it is proposed that the franchisee will operate the franchise business. This is a separate document to be included with the disclosure document.

Goods and Services

The disclosure document must contain information regarding the conditions which will be imposed on a franchisee regarding information about the supply of goods and services.

Fees and Payments

The disclosure document will provide details to Franchisees regarding the requirement and specifics of any franchisee payments to the franchisor. This information must include items such as

• marketing fees,
• advertising fees, or
• other financial obligations requiring contributions.

Franchisor Obligations

These include the franchisors obligations, contained in the franchise agreement, before and after the franchisee opens their business. Any obligation contained in the franchise agreement which relates to the nature of training to be provided by the Franchisor must also be outlined.

Franchisee Obligations

The expected obligations on Franchisees, which are contained in the franchise agreement, must also be disclosed. These obligations must include

• site selection,
• acquisition,
• training before and during the operation of the business,
• expected standards,
• warranties,
• customer service,
• insurance,
• marketing,
• required indemnities,
• records and reports, and
• inspections and audits.

Other Documents

The disclosure document must contain all details of documents related to the franchise agreement, such as

• a lease for premises of the franchised business,
• a hire purchase agreement,
• a security agreement, or
• a confidentiality agreement which the franchisee will be obligated to sign.

The ACCC keeps a close watch to ensure that franchisors comply with their disclosure requirements. The ACCC has power to take legal action against any party not complying with the disclosure documents. 

Read more about the Code. 

If you need a disclosure document prepared or if you want your current disclosure document reviewed we can help you to ensure that your documentation complies with the Code.

Read more about the franchise law and consulting services we offer.

A.

Exclusive dealing involves one business imposing restrictions on another’s freedom to choose with whom, in what or where they deal. Sometimes this conduct is prohibited outright; at other times it is subjected to a test on whether it has substantially lessened competition in a market.

Full line forcing

Full line forcing involves a supplier refusing to supply goods or a service unless the intending purchaser agrees not to:

• buy goods of a particular kind or description from a competitor.

• resupply goods of a particular kind or description acquired from a competitor.

• resupply goods of a particular kind acquired from the company to a particular place or classes of places.

However, for a full line forcing arrangement to contravene the Competition and Consumer Act 2010 (the Act) it must have the effect of substantially lessening competition in the relevant market.

Third line forcing

Third line forcing involves the supply of goods or services on the condition that the purchaser buys goods or services from a particular third party, or a refusal to supply because the purchaser will not agree to that condition.

Section 47 of the Competition and Consumer Act 2010

Section 47 of the Act prohibits different forms of exclusive dealing conduct. These include the supply of goods or services, or the supply of goods or services at a discount, on condition that -

The buyer

• will not acquire, or will limit the acquisition of, goods or services from a competitor of the supplier.

• will not resupply, or will resupply only to a limited extent, good or services acquired from a competitor of the supplier.

• will not resupply the goods or services to others, or will resupply only to a limited extent, the goods or services to particular persons, classes of persons or in particular places.

The supplier

• will not refuse to supply goods or services because the intending buyer will not comply with these conditions.

Conditions placed on the acquisition of goods or services also amount to exclusive dealing conduct.

An exclusive dealing is restricted under Section 47 if it can be demonstrated that the dealings substantially lessen competition. However, the third line forcing is captured regardless of its anti-competitive effect.

Immunity for exclusive dealing conduct

The Australian Competition and Consumer Commission (ACCC) may “authorize” businesses to engage in anti-competitive arrangements or conduct including exclusive dealing conduct.

Prerequisites for authorizations for exclusive dealing conduct:

• The ACCC has to be satisfied that the public interest shall outweigh any anti-competitive detriment.

• The ACCC has to conduct a full public consultation process before granting or denying authorization.

• ACCC must issue a draft determination stating whether or not it proposes to grant authorization and stating the reasons for its proposed decision.

• The applicant and the interested parties are asked to respond to the draft determination, by written submissions within a specified timeframe or by requesting that the ACCC hold a pre-decision conference.

• A pre-decision conference provides the applicant and all the interested parties an opportunity to discuss the draft decision and to put their views directly to the ACCC commissioner.

• The ACCC then issues a final determination which may:

Grant authorization

Grant authorization subject to conditions

Deny authorization.

Exclusive dealing notification

Immunity from the Act can also be gained by lodging an exclusive dealing notification for obtaining immunity to engage in:

• third line forcing conduct

• exclusive dealing conduct other than third line forcing.

The ACCC will assess the notifications by applying the public interest test outlined in Section 93(3A) of the Act. This test states that the ACCC may revoke a notification if it is satisfied that the likely public benefit will not outweigh the likely public detriment from the conduct.

What is the substantial lessening competition test?

Under the substantial lessening of competition test, it is not enough to show that an individual business has been damaged.

To determine whether a substantial lessening of competition occurs one must analyze the following factors –

• the overall market for the particular product;

• substitutes of the product; and

• whether or not the refusal would substantially restrict availability of that type of product to consumers

Further, when territorial restrictions have been imposed as a condition of supply, it must be determined whether consumers are severely restricted in their ability to buy a product or its substitutes within the territory.

When franchising, careful consideration must be given to whether the franchisor is engaging in any form of exclusive dealing. Contact us so that we can assist with the assessment of supply arrangements and any notification process.

A.

The Franchising Code of Conduct uses 4 criteria to decide whether a business is a franchise.

The existence of a system or marketing plan which the Franchisor creates and controls.

It is likely that there is a system or marketing plan if some or all of the following apply:

• there are suggestions for retail prices to be charged for products or services,
• there are products that must be produced,
• there are receipes that must be followed,
• there are specific methods for providing services,
• there are detailed advertising programs,
• there are restrictions on the sale of products.

The existence of a brand image or trademark associated with the goods or services being provided.

One of the main rights that a franchisee is given by the franchisor is the right to use the Franchisor's brand, name and logo.

The existence of an agreement between the parties which sets out each parties obligations.

The agreement does not have to be in writing - it may be a verbal or parly verbal agreement or it may be implied.

The payment of a fee by the franchisee to the franchisor.

Fees include:

• royalty payments,
• up front licence fees,
• advertising payments,
• commisions,
• training fees and
• payment for goods.

If a business system or structure has these four criteria it is likely to be a franchise arrangement.

Compliance with the Franchising Code of Conduct cannot be avoided by referring to a franchise agreement as a distribution or licence agreement. The ACCC is taking a much tougher stance towards franchisors who breach the Code and the Trade Practices Act.

Case Study - ACCC v Kyloe

Kyloe was involved in the distribution of ice-drink machines as well as the re-sale of various items used in conjunction with the machines including cups, straws and frozen drink concentrate. These were all branded goods originating from the one company.

The ACCC claimed that the agreement between Kyloe and their sub distributors was

• a franchise agreement, and
• Kyloe had contravened the Franchising Code of Conduct by failing to provide disclosure documents to the sub-distributors prior to the signing of the franchise agreement.

In this case the Federal Court said that a ‘franchise agreement’ may be defined by four elements.

• an agreement that is written, oral or implied in whole or in part,
• a grant by the franchisor to the franchisee of a right to carry on a business of offering, supplying or distributing goods or services in Australia, under a system or marketing plan substantially determined, controlled or suggested by the franchisor,
• the franchisee’s business operation is substantially or materially associated with a trade mark, advertising or commercial symbol that is either owned, used, specified or licensed by the franchisor,
• the franchisee makes particular payments to the franchisor.

How the business chooses to describe their model is immaterial. The court held that if all four criteria are satisfied and there are no exceptions to the criteria, then the arrangement, contract or agreement is considered by the courts to be a franchise agreement and the Code applies.

During the trial the court looked at the Capital Networks case for what the court called “helpful indicators” as to the presence of a franchise agreement:

• the provision by the franchisor of a detailed compensation and bonus structure for distributors selling its products,
• a centralised bookkeeping and record keeping computer operation provided by the franchisor for distributors,
• a scheme prescribed by the franchisor under which a person could become a distributor, direct distributor, district director, regional director, or zone director,
• the reservation by the alleged franchisor of the right to screen and approve all promotional materials used by distributors,
• the prohibition on re-packaging of products by distributors,
• the provision of assistance by the alleged franchisor to its distributors in conducting ‘opportunity meetings’,
• suggestion by the franchisor of the retail prices to be charged for products,
• a comprehensive advertising and promotional program developed by the alleged franchisor.

There were also several other issues considered that came from the Master Abrasives case:

• the division of a state into marketing areas,
• the establishment of sales quotas,
• the franchisor having approval rights of any sales personnel whom the franchisee might seek to employ,
• a mandatory sales training regime,
• the provision of quotation sheets to the franchisee’s employees,
• provision by the franchisor of prescribed invoices and other sales forms,
• a requirement that franchisees elicit certain information from their customers and provide that information to the franchisor,
• a restriction on the franchisee selling any of the franchisor’s products without first consulting the franchisor.

The court stressed that this list is not complete and none of the factors by themselves would lead the court to assume the presence of a franchise agreement.

The court did not find that Kyloe was a franchise, as

• there didn’t appear to be enough control exercised by the distributor, and
• there was a lack of any system or marketing plan.

Case Study – Australian Loans Management Pty Ltd

In early 2009 Australian Loans Management Pty Ltd (ALM) published a “Licence Agreement” that contained the terms upon which ALM granted and proposed to grant licences to operate the systems, facilities and branding of ALM in designated areas.

The “Licence Agreement” contained a specific clause which stated “This is not a franchise agreement. You hold an exclusive license to operate the systems, facilities and branding of Active Money in your designated area which is renewable each five years”.

Following a letter by the ACCC expressing concern that the Licence Agreement may constitute a franchise agreement ALM sought legal advice and later acknowledged that the Licence Agreement was a franchise agreement.

If you are concerned that you may be running a franchise and you are not complying with the provisions of the Code we can help by

• looking at your business structure and advising you whether it is a franchise,
• helping you with compliance issues if you are operating a franchise system.

Read more about the franchising law & consulting services we offer.

A.

If you are considering franchising your business here are some important considerations.

Build a strong brand

A successful franchise system needs a strong brand to attract and retain customers and franchisees. A brand is made up of many parts, for example, your name, your logo and your product/service. But the point to remember is to consider what you need to build and protect your brand—and what effect franchising will have on your brand.

Plan for franchising success

Will the business work as a franchise system in practice? To answer this and other important questions you will need a business plan. Put simply, you are going to make too many critical decisions to wing it without one.

Central to the success of a franchise is the success of the franchisees. You will need to ensure that there is sufficient profit for franchisees after deducting business costs, royalties and other franchise costs. A business plan provides the necessary information to develop a financial model that spells this out.

Create a competitive advantage

What aspect of your system, product, service or business plan makes your franchise system better than established businesses or systems? Work this out and the world is your oyster!

Duplicate what makes your business successful

For franchisees to realise the same success you currently enjoy in your business, they will have to replicate those parts of the business that make it successful. You should consider if these parts are replicable and, if so, how to replicate them. Finally, consider the level of difficulty for franchisees and if specialised training or qualifications are required.

Know the pros and cons of franchising

There are two main advantages associated with franchising. One, less capital is required to establish a franchise network because it is the franchisee that foots the bill to open an outlet. Two, the franchisee is responsible for managing staff and the day-to-day operations, while the franchisor retains control over the manner in which the franchisee carries on the business.

At the same time however the franchisor is obliged to provide the franchisee with training in the operation of the franchise system, continuing support including staff training, advertising and the development and improvement of the franchise system to keep it profitable. Further poorly performing franchisees can be difficult to deal with and resolving problems created by them can take considerable amounts of your time and energy.

Be smart with advertising

There is no denying that smart advertising and marketing has a positive impact on sales and growth. What is more, potential franchisees use it to gauge the success and attractiveness of a franchise. Economies of scale associated with advertising and marketing are a significant advantage that franchise networks have over stand-alone businesses. So it pays to be smart about how you promote and market your business if it is franchised.

Select the right franchisees

Franchisees are the lifeblood of a franchise system, and having the right franchisees to manage staff and the day-to-day operations of the franchise system is paramount. This makes the procedure for selecting franchisees too important to be left to chance.

A franchisee that lacks skills, capital or commitment can cause a franchise to fail and damage a franchise system’s reputation. Furthermore, replacing a franchisee is time consuming. So it’s clear that well-designed procedures for franchisee recruitment are the best option.

Make sure all franchisees succeed

Bringing in new franchisees is important, but so is ensuring that existing franchisees are successful. Steady well-planned and considered growth is less risky and ultimately more profitable than over-ambitious expansion leading to franchisee failures or declining quality.

Ensure franchisees are compliant

A franchisee is not an employee, but like the franchisor, an owner of a business. This point makes compliance an important consideration. Effective procedures that are consistent across a franchise system are a must have.

A franchise system with a strong culture of compliance benefits from the experience, knowledge and investment of the franchisor and it improves the value and growth potential of your system. Another benefit is consistency in customer service, which leads to greater customer trust and repeat business. Furthermore, potential franchisees will also be attracted because of these benefits.

Set up open lines of communication

Good communication with franchisees helps to ensure compliance, support for franchisees and to obtain feedback from franchisees that ultimately improves a franchise system.

Know your legal obligations

As part of developing a franchise system you will need to consider all applicable laws—and an important piece of legislation is the Franchising Code of Conduct. It’s prudent to obtain detailed advice about how these laws affect the various aspects of your franchise system.

At the very centre of the legal considerations are the franchise agreement and disclosure document. Both documents are necessary and will need to be prepared for your franchise system. Another important consideration is the structure of your business or, more precisely, how the various assets associated with your franchise system are owned.

Summary

These are the important considerations, but by no means are they exhaustive.

If you are thinking of franchising your business structure we can help you to get started. Read more ...

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The regulatory and legal environment for franchising in China is complex, and you need to take the time to understand and market your franchise model to the Chinese environment.

The Franchise Model in China

Franchising as a specific business model was first initiated in China in the early 1990s but was not formally codified until 1997.

The first franchise system to make an appearance in China was the Kentucky Fried Chicken fast food chain. This was a joint-venture between Kentucky Fried Chicken and 2 state-owned enterprises and it took over three years of negotiation to begin trading. McDonald's followed suit in 1990, also a joint-venture with a state-owned enterprise. Both of these systems are now firmly entrenched in China with 1,500 and 700 outlets respectively.

In addition there are now approximately 2,000 types of franchise systems established in China, encompassing over 60 industries from

• hotels,
• car rental,
• fast food chains,
• clothing retail,
• bookshops,
• accounting, and
• photographic stores.

However, you cannot simply copy your business model and transfer it to China.

An understanding of

• the country,
• the culture,
• the people and
• the history of China

must be gained before any foreign franchise model can be successful inside China.

The Chinese legal system

In 2005 Measures for the Administration of Commercial Franchise Operations (the 2005 Measures) replaced the 1997 Measures.

The 2005 Measures focused largely on franchisor disclosure but also included the requirement that franchisors operate at least two company owned stores in China for more than one year before commencing operation.

In 2007, the 2005 Measures were replaced with the Regulations on the Administration of Commercial Franchises (2007 Franchise Regulations). Under the 2007 Franchise Regulations Franchisors must own a well-developed business model and be capable of providing continued operational management, technical support, business training and other services to the franchisee.

Franchisors must also operate at least two company owned stores for more than one year before commencing operation. There is no longer a requirement that these company owned stores be operated in China, which means that foreign entrants can immediately commence franchising activities.

However in China (apart from Hong Kong) the entitlement to use a trade mark is based on the first person to register the trade mark. Given that it may take several years for the registration process to be complete you must apply to register your trade mark as soon as practicable as a failure to do so may have devastating consequences.

While there are many opportunities for franchisors in China, the legal system in China is still developing and does not always fit Western ideas.

If you are thinking of expanding your franchise system internationally contact us and we can assist you with the different challenges that international expansion brings.

A.

In South Australia (SA) retail shop leases are governed by the ‘Retail and Commercial Leases Act, 1995’ (the Act).

Definition of a lessor and lessee

Under the Act -

A lessee is the person who has the right to occupy a retail shop under a retail shop lease.

A lessor is the person who grants the right to occupy a retail shop under a retail shop lease.

What is a retail premise?

Retail premises mean either

• business premises at which

goods are sold to the public by retail or,

at which services are provided to the public, or

to which the public is invited to negotiate for the supply of services

• business premises is classified by regulation as premises to which the Act applies.

What is a disclosure statement?

A disclosure statement is a written document setting out essential details related to the lease proposed to be entered into or renewed. It states among other things, the following:

• the address of the shop;
• the lettable area of the shop;
• the permitted uses of the shop;
• the term of the lease;
• the hours during which the lessee will have access to the shop outside trading hours;
• the date on which the shop will be available for occupation;
• the amount of base rent and other rents payable under the lease, and the basis of their calculation;
• whether any right to renew or extend the term of the lease is given by the lease and, if so, the nature of the right;
• the legal consequences of breach of a term of the lease

What are the rights and obligations of lessor and lessee under the Act?

Documents to be provided to the lessee

The Act requires a number of documents to be provided by the lessor to the lessee. These include, but are not limited to-

Lease negotiation

• The prospective lessee must be provided with a copy of the proposed lease as soon as the negotiations begin.
• A disclosure statement must be provided by the lessor before a lease is entered into or renewed;
• No disclosure statement is required if a lease is assigned.
• The Lessor of a retail shopping center having a casual mall license policy must provide a copy of the policy and the licensing code to the new lessee, along with the disclosure statement.
• The lessee is not required to serve a disclosure statement upon the lessor at the time of entering in to the lease.

Lease Documentation

• If the lease is not registered then the lessee must be given an executed copy of the stamped lease within 1 month of the lease being returned to the lessor or his lawyer after stamping.
• However if the lease is registered, the lessee must receive a copy of the registered lease within 1 month of its registration.

Adjustment of rent

In case of over-payment or under-payment of rent, it shall be adjusted within 1 month after-

• the lessee requests such adjustment from the lessor, in writing;
• the lessee provides information required by the lessor to make the said adjustment;

The lessee may request adjustment of the rent only once in the first 12 months of the lease.

Payment of premium prohibited

The Lessor cannot seek or accept payment of a ‘premium’ in relation with the grant of a retail shop lease. Any provision of a lease which requires payment of such ‘premium’ shall be void.

Liability for costs related to lease

The Lessee can be liable to pay-

• half of the preparatory costs borne by the lessor
• the full amount of any stamp duty or Government fees

Estimate and statement of outgoings

• The lessor must be given a written estimate of his liability for outgoings before the lease is entered into and 1 month prior to the accounting period.
• The lessee must also be given an auditor’s report within 3 months after each accounting period.

Liability for outgoings

Where the lessee is liable for the outgoings, the lease must specify-

• Outgoings payable by lessee
• The calculation of the share of outgoings payable by the lessee
• How the lessee’s share will be recovered

In case of a shopping centre, the lessee shall not be liable to pay for non-specific outgoings.

Adjustment of contribution to outgoings

The adjustment between the actual and estimated expenditure must be made within 3 months after the end of each accounting period.

Assignment and sub-letting

• The lessor is entitled to withhold consent to an assignment.
• The lessor must deal with the request expeditiously and is deemed to have consented after 42 days
• The lessor shall not seek or accept premium for an assignment.

Land tax

The lessee is not liable to pay land tax.

Fit out obligation

The lessee is not liable to pay rent where the lessor has defaulted in his fit-out obligation.

Turnover rent confidentiality

If the terms of the lease do not oblige the lessee to pay a turn-over rent, then the lessee cannot be required to disclose the turnover figures.

Early termination for failure to achieve turnover

The lessor shall not provide for an early termination of the lease on the ground that the lessee has failed to achieve the specified turnover performance.

Termination rights

If the disclosure statement is not provided or if it is materially false / misleading then the lessee may apply to the Magistrates’ Court for an Order:

• Avoiding the lease wholly or in part; or
• Varying the lease; or
• Requiring the lessor to pay monies; or
• Requiring the lessor to pay compensations; and/or
• Dealing with ancillary or incidental matters

[Note: Such orders cannot be made if the lessor has acted honestly or reasonably]

Minimum term and notice of term end

• The term of a lease must be at least 5 years.
• Between 6-12 months before the term of the lease ends, the lessor must by a written notice to the lessee-

offer renewal of the lease on the terms laid down in the notice; or

inform the lessee that a renewal of the lease is not being intended by the lessor

• The lessor need not give such notice of renewal where either the lessee has right of renewal of the lease or has preferential rights.
• If the lessor does not give a renewal notice then the lessee may serve a notice on the lessor requesting extension of the lease. In such a case the existing lease is extended until the end of 6 months after the lessor gives the requisite notice.

Warranty of fitness for purpose

If the lessor was aware of the nature of business for which the premise was being taken, prior to the lease, then the lease is deemed to include a warranty of fitness for the purpose of the business.

Notice of works

Where the lessor intends to undertake any alteration or refurbishment of any building or center, he must provide 1 month written notice to any lessee whose business is likely to be affected by it.

Damaged premises

• The lessee is not liable to pay rent or other outgoings for the period during which he cannot use the leased premises on account of damage caused to the building or shop, unless the damage was caused by him.
• If the leased premises are partially usable then the lessee shall be entitled to pay the proportionate amount of rent.
• Where the lessor notifies the lessee that repairing the damaged premises is impracticable or undesirable, the lease may be terminated by either party upon a 7 days’ notice.
• If the lessor is unable to repair the damage within reasonable time, the Lease may be terminated by the lessee by 7 days’ notice.
• Either party may recover damages for destruction caused to the leased property on the principles of Common Law and contractual entitlements.

Demolition

Where a lease provides for termination on the ground of a proposed demolition, then the following terms are implicit from such lease-

• The lease cannot be terminated until the lessor provides the lessee with details of the proposed demolition, indicating a genuine proposal to demolish within reasonable time after termination of the lease;
• At least 6 months’ notice of termination must be given to the lessee;
• Where notice has been given to the lessee, the latter may terminate the lease by giving a 7 days’ notice to the lessor.

Lessees’ employees

The terms of the lease cannot be framed in a manner as to limit the lessee’s right to employ persons of his own choosing.

Refurbishment

The lessee may be liable for refurbishments if the disclosure statement discloses such obligations.

Compensation for disturbance

If the lessor -

• inhibits the lessee’s access; or
• alters or inhibits the flow of customers to the shop; or
• takes action that disrupts trading; or
• fails to take adequate steps to prevent disruption of trading; or
• fails to rectify breakdown of plant and equipment; or
• fails to clean, maintain or repair a retail shopping area

then compensation may be payable by the lessor.

Security deposit

A lessor must not-

• Require more than 1 security bond for a lease; or
• Require payment of a security bond which is greater than 4 weeks’ rent.

Merchants’ associations

The terms of the lease cannot restrict or prevent the lessee from forming, joining or participating in the activities of a merchants’ association.

Vexatious conduct

A party to the lease must not engage in conduct that is vexatious by nature.

Dispute resolution

• Either of the parties have the right to refer a dispute arising out of the lease to the Commissioner for Consumer affairs, for mediation.
• In a matter where the claim exceeds $40,000 the same may be referred to the District court.

A.

Franchises, like any relationship, require open, honest communication.

A good franchise relationship is a valuable business asset to be worked at to provide a solid foundation for success into the future.

Field Support

• a face to face meeting makes any message clear and unambiguous.
• franchisees are given a direct line to your head office.
• you gain valuable insight into the challenges facing the people on the ground.

Communication

• communication with franchisees should be clear and consistent.
• if you are unable to visit the franchisee then contact through telephone and e-mail are a good idea.
• regular company newsletters with hints, tips and franchise milestones are a good way to make the franchisee feel part of a group.

Listen

• franchisees need to have someone to listen to their problems and make them feel a part of the organisation.
• franchisees should feel comfortable picking up the phone with any concerns.

Get Together

By getting together

• a greater sense of community is created.
• franchisees are given the chance to share issues and successes with their fellow franchisees.
• new products, services, programs and initiatives can be introduced.

Innovation

• Email, blogs, Facebook, Twitter can make your communication extremely powerful.
• Home pages can be used to gather information and statistics. Forms and templates can be available for the franchisee to use along with answers to frequently-asked questions.

Encourage your franchisees

• recognize what the franchisee does well, even if there is room for improvement. Franchisees want to see that the franchise organization sees the entire picture, nor just the negative.

Make sure your franchise is a team

• the success of the franchise depends on the success of you and your franchisees one depends on the success of the other.

A.

Mediation is a process by which the parties to a dispute with the assistance of a mediator (a neutral third party)

• identify the issues in dispute,
• develop options around those issues,
• consider alternatives and
• endeavour to reach an agreement.

The mediator will usually contact each party and arrange a separate preliminary conference.

The purpose of the preliminary conference is to:

• answer questions,
• explain the mediation process and the underlying principles,
• explore whether mediation is the most appropriate process for the dispute,
• discuss the mediator’s role,
• confirm who will be attending the mediation and in what capacity,
• discuss the role of any advisers who will be attending the mediation,
• exchange documentation and if required set a timetable for the exchange of documentation,
• confirm the date time and place for the mediation.

The mediation

There are a number of stages in the mediation process.

Stage 1 - the mediator’s opening statement

The mediator’s statement will normally cover the following issues:

• the role of the mediator in the mediation. The mediator’s role is facilitary. The mediator does not impose decisions upon the parties, but is there to assist the parties to reach an agreement,
• the procedure that the parties will follow,
• the confidentiality of the mediation process. Generally the matters discussed in mediation and the documents prepared for mediation are confidential. However there are many exceptions to this rule. Often a mediator will use the expression “mediation is confidential unless otherwise require by law”,
• the authority of the parties present at the mediation. The parties present at the mediation must have authority to settle the dispute,
• the time constraints of the partes present at the mediation. mediations often continue into the evening. Consequently a mediator must know at the outset whether any of the parties have time constraints,
• the proposed rules of courtesy to be followed by the parties.

Step 2 - the parties’ opening statements

• each party will explain its position without interruption from the other party.
• at the end of each of the party’s opening statements the mediator will normally summarise the key issues raised by the party.

Step 3 - identifying the issues and setting the agenda

The mediator will list an agenda of issues for discussion and prioritise those issues in the order that the parties wish to deal with them.

Step 4 - exploring the issues –joint sessions

• keep communication open between the parties
• stick to the agenda and
• find common ground between the parties.

Step 5 - private sessions if necessary

The mediator may spend time privately with each party exploring the issues and reality testing each party’s position. The mediator will not discuss the matters raised in a private session with the other party unless he is specifically authorised to do so.

Step 6 - negotiation – exploring the options for settlement

The mediator and the parties will identify and explore options for settlement.

Step 7 - agreement

The mediator will ensure that any oral agreement reached between the parties is accurately reflected in a written agreement or heads of agreement.

Mediation is fast becoming a genuine alternative to litigation because

• mediation is generally quick,
• mediation is relatively inexpensive,
• mediation is private and confidential,
• mediation allows parties to have control over the outcome of the dispute,
• mediation allows for settlements that have commercial flexibility,
• mediation is less likely to destroy a business relationship.

If you have a dispute with a franchisee contact us so that we can help you to prepare a dispute notice and can advise you about, or attend a mediation with you.