Legal issues for mobile franchise businesses

It would be hard to find anyone that would argue that it has not become easier in recent years to undertake business ‘on the go’. Technology has certainly been our friend in this regard. Because of this, people contemplating purchasing a mobile franchise often think that because of the communication tools they have access to and the support that they will get from a franchise system, by and large business will take care of itself.

However, when looking a little deeper, the following issues are ones that should be taken seriously before a buyer takes the plunge into the purchase of a mobile franchise:

1. The Territory

The biggest issues faced by franchisees in mobile franchise systems are being satisfied with both the territory in which they will carry out work and the way they will attract new business from customers. Different systems will have different ways of working this out. Many systems will either have a detailed description of a territory in the franchise agreement or alternatively they may annex a map to the agreement. That territory will then be the primary source of a franchisee’s customer base. That sounds fine in theory, but certain scenarios have caused vexing problems in some franchise systems that have not given sufficient thought to issues that can arise. Given that many mobile franchise systems are service based, where franchisees build strong relationships with customers, it is important to be able to deal with the following scenarios:

(a) What happens if an existing client of the franchisee recommends a new client to them from outside of the territory?
(b) What happens if an existing client moves outside of the territory, but wants to continue dealing with the franchisee they have built up a relationship with?
(c) If a franchisee has advertising obligations, how do they limit their advertising so that it only occurs inside their territory and so that the franchisee of an adjoining territory does not feel that they are being imposed upon?
(d) If another franchisee is imposing on a neighbouring territory what can be done do to ensure that this is stopped as soon as possible?

Some franchise systems make clever use of phone exchanges or postal codes to divide business amongst franchisees, but they do need to be mindful of issues like those listed above and have mechanisms for dealing with them in ways that are fair to their franchisees. The best systems recognise these as potential issues and have protocols for dealing with them so that disputes can be avoided.

2. Vehicles and Equipment

By its very nature the expression ‘mobile franchise’ tends to suggest that some form of transport will be involved. Most mobile franchise systems have requirements for the vehicles used to be relatively modern and appropriately sign written, but once they reach a certain age they must be upgraded. This has the effect of making sure that the franchisees look professional and up to date, but it does also involve a franchisee incurring a significant and relatively regular cost. A potential franchisee must find out at the outset what a franchisor’s requirements are with regards vehicle types and age.

It may be that a franchisee is obliged to purchase a vehicle from a particular supplier. If that is the case then it may be that the franchisor has negotiated a bulk deal that might improve the price point of what needs to be purchased. As a vehicle is effectively seen in many
respects as an office, there will normally be a requirement in the Franchise Agreement to keep it cleaned and in good repair at all times. From a practical perspective that may involve requiring a franchisee to have any minor dents and scrapes repaired as they incur. Therefore
it is important to have the ability to access another suitable vehicle to ensure business continuity when a vehicle is off the road.

3. Insurance/Risk

Mobile businesses are, in many cases, small owner operated businesses and if the owner is incapacitated for any reason then the business will not earn income. Therefore, it is important for a franchisee to speak to an appropriate insurance professional to ensure that they have proper cover in place. This is often a requirement of a franchise agreement in any event. Such cover should also extend to provide a franchisee with appropriate public liability cover in case they are responsible for any adverse event that happens whilst they are either working or driving between jobs. An insurance broker should also assist a franchisee in obtaining appropriate cover so that if their vehicle is off the road they will have access to another vehicle in the short term.

4. Employees

Some mobile franchise systems require the franchise to be ‘owner operated’ and therefore, employees can only be taken on if they are working directly with the owner of the franchise. Other mobile franchises may allow a franchise owner to employ staff and provide them with
their own vehicles so that a busy territory can be covered appropriately by that franchisee’s business. The ability to employ staff is particularly important in systems that can potentially offer services for prolonged periods, such as shuttle businesses, that in busy periods or
locations can operate 24 hours a day. In such cases, a franchisee is able to reap a much greater return if they employ staff and share shifts with them so that the vehicle is on the road for much longer periods.

It is important to note that if a franchise territory warrants more than one operator within it as demand grows, but the franchise system requires its workers to be ‘owner operated’ franchisees, then the franchisor will often have the right to reduce territory sizes so that they
can then sell another franchise territory and maximise output. When looking to purchase a mobile franchise, it is therefore important to check whether franchisees have the right to employ extra staff and put another vehicle on the road if they believe the territory has significant growth potential. Franchisees also need to be aware of the rights that a franchisor has to reduce territory boundaries if they believe that there is demand for services that are not being properly met by the franchisee.

5. Licensing Issues

By definition, a mobile franchise will require the operator to have a driver’s licence. If a franchisee loses their driver’s licence for any reason, including careless or reckless driving or driving with excess breath alcohol, then the loss of that licence can be catastrophic to the
business. In some circumstances where this happens it is possible to obtain what is called a Limited Licence. This enables a person to use their vehicle for specific purposes only during specific hours and normally on specific routes. It may be possible to obtain such a licence to enable a franchisee to travel to and from their territory and around that territory during specific hours, but the Court will need to be assured that this is reasonably necessary and that the licence will not be abused. Further, the granting of such licences is at the Court’s discretion and if someone has had such a licence in the past and then reoffends, they may be less likely to be granted such a licence in the future. Many franchise agreements for mobile businesses would make the loss of a licence a default event and that could
lead to termination of the franchise.

Many of the issues above are practical in nature and the way they are to be dealt with should be set out clearly in a franchise agreement and associated disclosure documents. The most important thing is for a potential franchisee to take proper advice and ask all appropriate questions and receive satisfactory answers to them prior to entering into a franchise agreement. That way unpleasant surprises should be eliminated.

Mark Sherry, LLB (Hons), BCom, is a Partner with Harmans Lawyers New Zealand. He leads the commercial and property team, specialising in franchising, hospitality, rural law, property matters and asset protection.

Harmans is a full service legal firm providing excellent service and advice, allowing Harmans to develop long-term, solid relationships with their clients.

For more information please contact Mark Sherry at:
Phone: 03 352 2293
Mobile: 021 524 890
Email: mark.sherry@harmans.co.nz
Web: www.harmans.co.nz