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HomemibusinessFranchising for the Long Term

Franchising for the Long Term

The opportunity to operate a franchised business can be appealing. For optometrists and optical dispensers, the noise about franchising – particularly with some of the different and scalable models being offered by Specsavers and Luxottica (OPSM and Laubman and Pank) – can appear loud and confusing. Before you rush in for the long term, what do you need to consider?

Despite the many success stories about franchises in general, for a variety of reasons there are inevitably plenty of unsuccessful or disgruntled franchisees and franchisors around. Many of these may be attributed to misaligned expectations between a franchisor and its franchisees.

In some cases, these relate to financial matters, such as the accuracy of forecasted earnings, the calculation and amount of royalties, marketing and advertising fees, and unforseen expenditure. In these cases, it’s often suggested that responsibility should rest largely with the franchisors, and with further regulation prescribing more stringent disclosure obligations and consequences for franchisors who do not comply.

That being said, there is a more important issue to be considered – namely the need for greater responsibility and due diligence on the part of franchisees, prior to entering into franchise agreements. This important step is often avoided by franchisees from the point of view of reducing costs, or perhaps simply forgotten in the excitement of becoming a franchisee. Regardless, failing to seek legal and financial advice is short-sighted; and relying on no advice (or worse still, bad advice) is one of the more costly mistakes that can be made in business.

…failing to seek legal and financial advice is short-sighted; and relying on no advice (or worse still, bad advice) is one of the more costly mistakes that can be made in business…

For the Long Term

Entering into a franchise is a long-term commitment and the relationship between a franchisor and a franchisee is more likely to prosper in the long-term when both parties are properly informed and prepared from the beginning. A key issue to this is to appreciate that the needs and expectations of franchisors and franchisees change throughout the lifecycle of a franchised business. Initially, franchisees may be very reliant on the franchisor to establish their business, and later, after a franchisee’s customer base has developed, the franchisee may become less reliant. In some cases, franchisees may see no further value in the franchise system.

Franchisors have become more attuned to dealing with this, and many now offer scalable franchise models with varying levels of autonomy and opportunity, ranging from the opportunity to manage a company owned store, through to shared ownership, full ownership and ultimately multi-store ownership. Regardless of what the franchise model may be, it is important that franchisees see the model for what it is, and take the opportunity to carefully consider whether their long term objectives are achievable within the franchise.

Each of these models are now available in the optometric profession and many integrate the optometric and retail sides of the business.

Negotiations

Apart from increasing the regulation of franchisor disclosure, steps have been taken in recent years to help restore balance to the franchisor and franchisee relationship, particularly during negotiations.

For example, Sections 21 and 22 of the Australian Consumer Law (“ACL”) prohibit conduct which is unconscionable. These provisions have very broad effect, although it may not be immediately clear as to what conduct is or is not, unconscionable in a particular circumstance.

The ACL does however provide some guidance, including whether as a result of the conduct, one party was required to comply with conditions which were not reasonably necessary to protect the legitimate interests of the other party. Examples of this include clauses in a franchise agreement which permit a franchisor to unilaterally amend the agreement without consent from the franchisee. The provisions may also have some application where a franchisor refuses to renew a franchise agreement, depending on the circumstances.

Further, a review of the Franchising Code commissioned in 2013 recommended that the Franchising Code be amended to include an express obligation to act in good faith in all dealings between franchisors and franchisees. The government has accepted this recommendation in part, but is yet to implement any changes or provide clarification of what conduct is or is not, in good faith in this context. What such an obligation means is also open to conjecture.

Although the ACL and the Franchising Code provide some level of protection to franchisees, there can be no substitute for obtaining legal advice, which should always be sought prior to entering into, or renewing a franchise agreement. If advice is sought in this way, franchisees may identify and if necessary, negotiate any unsatisfactory parts of the franchise agreement from a position of greater strength when compared to seeking advice after a dispute has already occurred.

Exiting the Franchise

Although entering into a franchise is a long term commitment, franchisees need to appreciate the different restrictions a franchise system may have when the franchisee wants to exit the business.

Franchise agreements are entered into for specific durations (terms), which range in length and may or may not include an option for the franchisee to renew the franchise agreement at the end of the term.

In a sale of business scenario, a franchised business with several years of the term remaining, or a recently renewed term, is generally more desirable to a prospective purchaser. Many franchisees expect that they will also achieve a sale price for their business which includes a premium over and above what a new comparable franchise would cost, largely due to value added by the franchisee in developing its own customer base. Irrespective of this, if the length of the term of the franchise agreement is not desirable, or if there is no option to renew, the franchisee may not be able to sell the business for a price which is acceptable to it.

Having said this, often franchisors take the opportunity to impose a new agreement (with a full new term) as part of the sale. Often the options are not discussed or understood.

In any event, a sale of a franchisee’s business will in almost every case require the consent of the franchisor, the approval of the purchaser as a suitable franchisee by the franchisor and payment of a transfer fee. The transfer fee can be a percentage of the sale price, which may be significant. In other cases, a franchisor may have a right of first refusal to purchase the franchisee’s business. Regardless, the procedure will be set out in the franchise agreement, and must be read and understood carefully.

Upon completion of the sale of a franchised business, or even in the case of a franchisee not renewing its franchise agreement, the franchisee is not necessarily free to do what it likes and may be subject to non-compete and restraint of trade obligations for several months or even years afterwards, depending on the terms of the franchise agreement. These obligations may prevent the franchisee from operating a business similar to, or competitive with, the franchise. This is not necessarily an unreasonable requirement of a franchisor, as it may be the only practical way for a franchisor to protect its business model.

Again, franchisees will be better placed to understand these restrictions, and when and how they may be negotiated with the franchisor, if advice is sought at the appropriate time.

Conclusion

A franchised business may in many cases present an excellent opportunity for the franchisee and the franchisor alike, particularly given the diverse franchise models available in optical retail and optometry. It’s important that before signing on agreement, prospective franchisees should take the time to conduct the appropriate due diligence and seek advice to ensure that it is the right opportunity for them.

Robert Shepley is a commercial lawyer at M+K Lawyers. He focuses on assisting health professionals and optical retailers throughout Australia with commercial agreements and transactions. Contact: (AUS) 03 9794 2600 or email: robert.shepley@mk.com.au