Have you considered your legal obligations for your mobile business?
Many franchisees believe that, in buying a mobile franchise, their business will be simpler to operate and will involve less complex legal considerations merely because the franchise system is conducted as a mobile model. However, franchisees of a mobile
system will still be affected by most of the issues which are relevant to ‘fixed site’ franchises, and may also be required to contend with additional matters that are specific to mobile businesses.
The following are some of the legal issues that franchisees of a mobile system may be faced with:
Is the business truly mobile?
Although the business may be modelled on a predominantly mobile concept, some ‘mobile’ franchises still require the franchisees to have the use of certain premises – for example an office, a showroom, or a warehouse or other storage facility for the products and any necessary equipment.
Franchisees cannot simply assume, because the franchise is marketed as a portable business, that they will automatically and entirely avoid the obligations that are ordinarily associated with occupying retail premises. Franchisees may discover that, despite the business not being operated from a fixed site, it is still necessary for them to obtain occupancy rights, enter into a lease or occupancy licence, deal with landlords and possibly even fitout or equip a site.
Even if the business is truly mobile and does not require the use of any premises, any vehicle used by the franchisee in conducting the business, such as a car, delivery van or trailer, is likely to require fitting out with signage and/or equipment in accordance with the franchisor’s image and specifications.
Territory and exclusivity issues
Some mobile franchise systems pursue a business model pursuant to which franchisees are granted certain rights within a particular area or territory, whilst others operate on the basis that all franchisees can conduct their businesses in all areas without restriction.
Franchisees must ensure that they know at the outset whether they will be granted a territory and if so, whether or not it will be exclusive and what rights and obligations they will have within the territory.
This will enable franchisees to plan where their customers are likely to come from and what actions they can take to target those potential customers and to generate demand for their products or services. Unlike fixed site franchisees, who can rely to some degree on local customers and passing foot traffic and who can undertake marketing activities in the local area surrounding their premises, mobile franchisees may need to consider different techniques to advertise and grow their businesses and attract customers.
Certain mobile businesses rely heavily on the value in having a distinct territory. For example, couriers or delivery drivers who have exclusive rights to a particular route, or mobile pet groomers or other service providers who have exclusive access to all residences and businesses in a specific area, have a readily definable and instantly protected customer base.
However, these franchisees could also be limited in the sense that they may be prevented from operating or even marketing their business outside of the specified territory.
Franchisees in these types of businesses must be prepared to ‘work the territory’, taking pains to make their presence known within the territory and making efforts to develop relationships, to ensure they secure the maximum number of customers and jobs available within the confines of their territory.
Where a mobile franchise promises to provide an exclusive territory, prospective franchisees must ascertain whether there will be any exclusions or limits imposed on their exclusivity. For example, a franchisor may undertake not to establish any other franchisees within a particular territory, but may retain the rights to itself service certain types of clients or operate a temporary business within the territory.
Alternately, the franchisor may claim to grant complete exclusivity, but the exclusive rights may be compromised or lost if the franchisee fails to achieve certain performance benchmarks or breaches the franchise agreement.
Other mobile franchise systems do not seem to place any emphasis on the use of territories and instead thrive on an ‘open slather’ approach, whereby all franchisees can service any customers and operate freely in all areas.
Franchisees of such businesses should be prepared to compete for market share with the other franchisees of the system, actively defend their customers and pursue aggressive marketing practices, if necessary.
Generation and allocation of job leads
In a mobile business which may operate without an office or any physical presence to alert potential customers to its existence, it is imperative for the franchisees to be aware of how customers and jobs are procured.
Commonly in mobile franchise systems, there is a central facility established for receiving customer leads and enquiries, such as an online system or a 1300 or 1800 telephone line. Where this occurs, franchisees must ensure they understand how the system is to operate, including who maintains and controls the facility, what amount (if any) each franchisee must contribute towards the costs of maintaining the facility and how the enquiries are allocated amongst the franchisees.
If the franchise system does not grant territories, then franchisees should ask what criteria determines which franchisee should receive any particular job lead.
If there is no central customer enquiry facility and it is left up to each franchisee to generate and receive its own enquiries individually, this can sometimes cause unnecessary competition among the franchisees, whereby franchisees are incentivised to keep all leads for their own benefit rather than referring a lead to another franchisee, even where it may be appropriate for another franchisee to undertake the work.
In such circumstances, franchisors may have developed a system for the payment of referral fees or the sharing of profits to encourage franchisees to refer jobs to the most appropriate member of the franchise network.
Franchisees should familiarise themselves with the rules of any such scheme, and if none exists, franchisees should consider establishing such a scheme amongst themselves, to promote fair and suitable allocation of job leads.
Interaction with fixed site franchises
Some mobile franchisees may be part of a dual franchise system which operates both fixed site and portable businesses. Consider a fast food franchise which may have both a
chain of retail premises and also have mobile vans to service public events.
In these circumstances, any mobile franchisee of the system may find themselves in close proximity to, or within the exclusive territory of, a fixed site franchisee of the same system. If this is likely to occur, both franchisees should be well versed as to their respective rights and obligations.
In some cases, the mobile franchisee may be required to rely on the support and resources of a local fixed site franchisee for assistance. For example, in the case of a mobile fast food business, the mobile franchisee may require the use of the fixed site franchisee’s facilities to assist in any food preparation (including cooking, refrigeration, storage and delivery).
Again, franchisees should ensure they are aware of any guidelines the franchisor may have developed for such situations, and should consider establishing mutually agreed arrangements in relation to profit sharing or payments for such involvement and assistance.
Mobile franchisees may find that they are required to obtain various additional permissions or qualifications to properly operate their business. Some examples include:
• a special licence required to operate a particular vehicle such as a truck, trailer, boat or other specialised machinery
• permits from the city council or other relevant authority enabling the franchisee to park vehicles and/or set up stalls in a public area such as a park or garden Franchisees must ensure they are aware of any such requirements, including any applicable fees and the nature and duration of any application process or separate training obligations.
Personal effort and financial rewards
It is worthwhile to draw a distinction between mobile businesses with a ‘regular’ customer base or which operate on an established route (for instance mobile café businesses or couriers), and those which focus on operating at sporadic or one-off events (such as food stands at music festivals, conferences, sporting or community events).
Those businesses in the latter category will require very different time commitments and
will possibly also generate different cash flow and income streams in comparison to the regularly operated mobile franchises.
Mobile franchises which operate predominantly at irregular events are not akin to a usual ‘Monday to Friday’ job or business. Franchisees of these businesses should expect that they will be required to make themselves available outside of ordinary business hours, often working mostly on weekends, public holidays, late at night and during the course of major events and festivals.
These businesses may also generate uneven income, such that the majority of sales and profits may be derived in a particular season, or at certain key times of the year.
All franchised businesses, including fixed site operators, should undertake marketing activity to grow their business. However, the marketing needs of a mobile business may
Promotional materials used by mobile franchisees may vary substantially and often, for instance if they must comply with the regulations of any particular local authority or co-ordinate with the promotion of each relevant event. Since franchisees are usually obliged to obtain the franchisor’s consent before using any marketing materials, this could be a source of additional cost and delay.
Franchisees of mobile businesses must ensure they are aware of any other documents and agreements which they may be required to enter into in addition to the usual franchise documents, such as delivery/driver contracts.
Franchisees should read such agreements carefully and seek independent legal advice if required.
There are several common and obvious advantages to purchasing a mobile franchised business instead of a fixed site franchise, including lower establishment costs, lower ongoing overhead expenses and usually a lesser need for employees, thereby reducing employment regulation compliance and costs.
However, franchisees should not fall into the trap of believing that mobile businesses are necessarily cheaper, less complex and simpler to operate.
There are many other considerations affecting mobile franchises which this article has not gone into, including strict legal obligations under the new Australian Consumer Law and various other pieces of legislation.
Franchisees should always undertake proper due diligence, ensure they know what they are getting into, and seek appropriate advice before committing themselves.
Esther is an Associate at Mason Sier Turnbull, a law firm renowned for its franchising expertise.
Located in Melbourne’s industry heartland, Mason Sier Turnbull has strong commercial law skills and provides clients with sensible solutions.
For more information contact Esther at:
Phone: 03 8540 0200