Independent Advice: Take Advantage of It
Much recent legal commentary relating to franchising is focused on changes to the mandatory Franchising Code of Conduct (Code), which came into effect in 2015, and other new or amended legislation which will affect franchising. However, many prospective franchisees are not aware or do not take advantage of the rights which were included in the original Code in 1998 including those related to independent advice.
The Code requires that franchisors allow and in fact recommend that franchisees obtain independent legal, financial and business advice. Further, franchisees must provide signed certificates from those independent advisers or waive their right to seek such advice having acknowledged the franchisor’s recommendation to do so.
In addition, a franchise agreement cannot be signed until a minimum of fourteen (14) clear days has passed from the date on which the franchisor issues the disclosure document along with the proposed franchise agreement and a copy of the Code. This period cannot be waived so that prospective franchisees have time to obtain independent advice and properly consider whether they wish to proceed with the purchase of the proposed franchised business.
Furthermore, the mandatory fourteen (14) day period between disclosure and the signing of a franchise agreement is a minimum time period, not the prescribed time period. Accordingly, prospective franchisees should not feel pressured to sign the franchise agreement on the fourteenth (14th) day which may be before they have had an opportunity to seek the appropriate independent advice. Unfortunately, many prospective franchisees choose not to seek independent advice prior to entering into a franchise agreement, which we believe is one of the main causes of disputes in franchising. This is because franchisees who choose not to seek independent advice are often unaware of what their franchise agreement requires of themselves or the franchisor and also what their franchise agreement prohibits or allows in terms of their conduct or that of the franchisor.
Therefore, franchisees often become aware of elements of their franchise agreement which they do not like after they have been operating the franchised business for some time, which leads to them becoming disillusioned with the franchise system and seeking to “get out”.
One of the most common reasons for prospective franchisees choosing not to seek independent advice is costs. There is no doubt that professional advice is expensive, and the time prior to a franchisee purchasing a franchised business is when they are incurring numerous other costs all at once. However, especially in respect of legal costs, the costs involved with “getting out” of a franchise agreement will be far greater than those involved with understanding that contract before it is entered into which will hopefully prevent a situation where a franchisee is seeking to “get out”.
Another common reason for prospective franchisees choosing not to seek independent advice, particularly from a legal perspective, is a misconception of the benefits of doing so. As many franchisors are not willing to negotiate the terms of their franchise agreement – hence why the new unfair contract terms legislation will most certainly apply to franchising – prospective franchisees often think there is no point in obtaining legal advice on the franchise agreement if there will be no negotiation on the terms of the franchise agreement. This is an unfortunate misconception.
While some franchisors engage in conduct which breaches either the franchise agreement or some relevant legislation which leads to a dispute, most disputes in franchising are actually due to a franchisee being displeased with the actions of the franchisor which are permitted by both the franchise agreement and relevant legislation. This can lead to franchisees being “stuck” in a franchise relationship which they are not happy with due to the fact that they were not aware of the contractual relationship they were entering into.
In addition to prospective franchisees being aware of the content of their franchise agreement, good legal advice can enhance the advice obtained from an accountant and a business adviser.
Franchisees, quite understandably are often very excited about the prospect of purchasing a franchised business, having discussed it with the franchisor who will have advised the various benefits of the opportunity. While this excitement is a good thing, it can often lead to prospective franchisees making emotional decisions, and it is important therefore for them to seek the advice of independent advisers to provide an objective assessment of the opportunity.
This objective assessment of the opportunity is especially important in relation to representations the franchisor may have made to the prospective franchisee, particularly financial representations. It is common for franchisees to be provided with projections of potential income by franchisors and it is easy to focus on the possibly attractive bottom line figures presented. It is important however for an independent accountant or business adviser to assess the figures provided objectively and take into account the assumptions the franchisor has based the projections on – which assumptions they must disclose under the Code – and assess if the projections are reasonable and realistic.
Further, accountants and business advisers can develop a financial strategy for the finite period of time that the franchisee will own the franchised business. Such a financial strategy should include, but not be limited to: determining how the franchisee will fund the purchase of the franchised business; determining the appropriate working capital required to operate the franchised business in the early stages and then moving forward; assessment of the potential return on investment; and determining break-even thresholds.
Further, being mindful of the provisions of the franchise agreement which apply after expiry or termination, an appropriate exit strategy can be determined. Prospective franchisees very rarely contemplate what will happen at the end of their time owning the franchise business, despite the fact that all franchise agreements will eventually come to an end. Instead, prospective franchisees should take advantage of the protections in the Code regarding independent advice to seek expert, objective assistance in developing a proactive strategy for their exit from the business to prevent them acting reactively at a later time.
For example, most franchise agreements do not allow franchisees to sell the franchised business at the end of the contracted term and, even if the contracted term has not expired, usually at the time of a sale a purchaser will only receive the unexpired contract term and any attached options to renew the agreement. Therefore, if a franchisee intends to operate the business for a period of time before selling it, they should understand the relevant provisions of the franchise agreement and also develop a plan for the timing of a sale to maximise the possible sale price.
Ultimately, a prospective franchisee may choose not to proceed with the purchase of the proposed franchised business following the independent advice they have received. If this is the case, it is important for franchisees to understand their rights under the Code in such circumstances.
The Code provides that all monies paid by the franchisee to the franchisor are fully refundable until the franchisee has entered into the franchise agreement. Therefore, all deposits paid are fully refundable if the prospective franchisee elects not to proceed prior to signing the franchise agreement. In addition, the Code provides all franchisees with the right to “cool off” for a period of seven (7) days after the signing of a franchise agreement. However, if a franchisee relies on the right to “cool off” the franchisor can retain its reasonable expenses from monies paid providing those reasonable expenses have been properly disclosed.
Peter Thelwell – LLB (Hons) & Acc. Spec. (Bus.) Qld was admitted as a solicitor in Queensland in 2009, and has specialised in franchising and intellectual property since that time. He is a Partner at IP Partnership, a boutique franchising and intellectual property firm on the Gold Coast.
Peter is a Queensland Law Society (QLS) Accredited Specialist in Business Law and a member of the QLS Franchising Committee.
Contact Peter via:
07 5591 2522