Third line forcing – a new relaxed approach

Changes to legislation usually tighten existing regulations. Recent changes to the provisions of the Competition and Consumer Act 2010 (Act) covering third line forcing are a pleasant departure from this norm.

Third line forcing is a form of exclusive dealing, where a business will only supply goods or services, or give a particular price or discount, on the condition that a person buys the goods or services from a nominated third party. If the person does not comply with the condition, then the business will refuse to supply the goods or services.

Franchisors often engage in third line forcing to ensure uniformity in the quality of the product or service offered to consumers by their franchise system. There are many benefits to this:

1. Consistency across a franchise system can benefit customers and increase the value of the franchise system.

2. Franchisees operating compatible equipment and purchasing the same goods creates a more efficient operation and management of the franchise system through, for example, increasing efficiency in training.

3. Cost and time savings for franchisees creates improved contractual relations and more efficient and effective bargaining between franchisors and suppliers.

Until 6 November 2017, third line forcing was a breach of the Act and a business was required to lodge a notification with the ACCC if they intended on engaging in this conduct without facing prosecution from the ACCC. The ACCC would allow a notification to stand where they were satisfied that competition in the marketplace had not been substantially lessened, and where the public benefit outweighed the detriment.

The recent changes to the Act essentially mean that third line forcing is no longer prohibited per se. Third line forcing will now only breach the Act if the conduct has the purpose, effect or likely effect of substantially lessening competition, in which case a notification must then be lodged with the ACCC.

This is a welcome change for the franchising industry and does away with burdensome administrative red tape for franchisors who place supply restrictions on their franchisees. Many arrangements which were previously notified to the ACCC no longer need to be notified.

Despite these changes, you should always carefully consider whether your conduct will affect competition in the market place or if it risks breaching other provisions of the Act and the Australian Consumer Law. At Rouse Lawyers we can assist with lodging notifications with the ACCC where appropriate, and advise on alternative ways to structure arrangements which will not breach anti-competition laws.

Need advice ?  Talk to the Franchising team at Rouse Lawyers. Contact us today!

 

How do I get value from a lawyer?

A lawyer can seem like an unnecessary expense when buying a franchise with so many other costs to consider. Remember that buying a business is one of the biggest decisions you’ll make in your life. Legal advice should be considered as an investment. Like any investment, there are a number of key ways to secure a good return.

1. Experience

Find a lawyer experienced in franchising who handles franchise-related issues on a daily basis. A specialist will know what to look for, identify red flags and point you towards what you should be looking at. They’ll also help you with the best way to structure your business.

At minimum, your lawyer should review your draft franchise agreement, disclosure document, lease and anything else you’ve been asked to sign before you sign anything. If you’ve already signed your franchise agreement, then your ability to negotiate changes will be limited. You’ll also be left with a costly problem if you have a change of mind and decide to not proceed, for instance if you cannot secure finance.

Franchise agreements are drafted by lawyers essentially so that only other lawyers can understand them. Your lawyer will be able to explain the key provisions in easy-to-understand terms and the reasons behind them. Understanding these reasons and the flow-on consequences is vital to ensure that you and the franchisor are both on the same page when it comes to your obligations.

2. Negotiation

Every franchise agreement and contract is up for negotiation. Your lawyer will identify the clauses in the franchise agreement which may not be in your favour and can assist with negotiating a more balanced agreement, but keep in mind that franchisors are generally hesitant to amend their documents unless you have good reasons. Your lawyer will also ensure that any promises made to you by the franchisor are recorded properly in the franchise agreement or ancillary agreement such as a prior representations deed. You should be fully transparent with what you tell your lawyer.

Engaging a lawyer to review your documents before you sign can save you money in the long-term. Knowing your legal rights from the outset will help you avoid breaching the franchise agreement, and will put you on notice about things you may not have considered or realised will affect your profit margin.

3. Compliance with the Franchising Code of Conduct

A specialist will advise you on your rights and obligations under the Code and the law in general. There are strict timeframes and other requirements under the Code governing franchises. Your lawyer can help you avoid landing in hot water with the franchisor or the ACCC.

4. Make the most out of your lawyer

Ensure your lawyer knows exactly what your expected scope of work is. They’ll tell you what is and isn’t included in their costs quote.

Come prepared. Read every document the franchisor has given you and every document you expect your lawyer to read. As you do this, highlight and make a list of questions about things you’d like clarified and covered off when you meet with your lawyer. Don’t dismiss these questions as “silly” – raising queries (however small) with a lawyer is often a prompt for your lawyer to dig deeper and ensure that your best interests are being protected. Taking the time to do this in the beginning will avoid a last-minute rush to sign your documents. Important things can be missed when you rush.

5. Your business partner

Finally, think of your lawyer as a business partner, not just someone who you’ll have a one-off meeting with. They’ll be happy to take your call and have a chat about anything which may arise during the course of your franchise. Whether you’re expanding, selling your business or involved in a dispute, a lawyer who knows your situation and history will be a valuable asset.

Need advice ?  Talk to the Franchising team at Rouse Lawyers. Contact us today!

On-selling your franchise – what you need to know

Like any business, once you establish your franchise the ideal goal is to build goodwill then on-sell it in the future for a profit. Whilst this may not be your short-term goal, it should nevertheless be kept in mind.

A franchise is an investment. So long as you have a franchise agreement in place you will have the right to sell your business and the franchisor cannot unreasonably withhold their consent to the sale. Like any business, the more profitable and successful your business is, the higher the price you can sell it for.

The process for selling a franchised business is different from a standard business and there are some important things to consider before selling:

Check the franchise agreement

The first step should be to carefully check the provisions of your franchise agreement covering transfer and assignment as there’ll be a process which must be followed. Every franchise system is different. Some will require you to obtain the franchisor’s prior consent to your advertisement before you list your business on the market or to the terms of your sale contract.

Some general conditions found in franchise agreements include:

1. The buyer meeting the franchisor’s selection criteria and completing the franchisor’s training program.

2. The payment of an assignment fee which will be a set amount or a percentage of your sale price.

3. Upgrade or refurbishment to your premises and/or equipment.

Right of first refusal

Many franchise agreements give the franchisor the right of first refusal. This means you must give the franchisor the opportunity to buy the business on the same terms and conditions as being offered to your buyer. If the franchisor does not take up the offer, only then can you proceed with your sale.

Contract

Your business broker/agent or lawyer will generally prepare the initial draft of your business sale contract. You will need a set of special conditions specifically drafted for the sale of a franchised business which should reflect any requirements under your franchise agreement and any conditions the franchisor has imposed on the sale. It’s very important that your contract is reviewed by a lawyer before you sign it.

The contract should specify who pays the franchisor’s fees. Generally, the seller will pay the assignment fee and the buyer will pay the training fee, however this is always up for negotiation.

Contracts are often subject to due diligence, meaning you’ll need to give the buyer copies of your financials for the business.

Franchisor consent

Once the contract is signed and you have provided all the information the franchisor reasonably requires to consider the sale, under the Franchising Code of Conduct (Code) the franchisor has 42 days to advise whether or not it consents to the sale. Once the franchisor grants consent they then have 14 days to withdraw it, but they must have a reasonable basis for doing so.

Signing the franchisor’s documents

The franchisor will generally require the buyer to sign a new franchise agreement for the balance of the term left on the seller’s franchise agreement. This is usually the franchisor’s then-current form franchise agreement on different terms and conditions to your agreement. Remember that the 7 day cooling off period under the Code doesn’t apply to the transfer of an existing business.

The seller should expect to sign a termination deed to formally end the existing franchise agreement. These generally include a release of claims, meaning once the sale is complete the seller cannot then bring legal action against the franchisor for any matter which occurred during the course of the franchise relationship. You’ll also be bound to any restraint under your franchise agreement.

The franchisor’s legal costs of preparing these documents will also need to be paid.

Lease

If you lease a premises then you will need to obtain the landlord’s consent to either assign your lease or grant a new lease to the buyer. Just like the franchise agreement, your lease will have a specific process to be followed. This will generally include the landlord approving the buyer as a tenant and the payment of the landlord’s costs.

Financed equipment

If you have a finance or rental agreement over any of your business’ equipment then you must either pay out the loan or organise for the agreement to be transferred to the buyer before settlement.

Conclusion

Finally, be patient and don’t lose sight of your goal of walking away with a profit. The sale process generally takes at least a couple of months and there are multiple parties involved with competing interests including you, the buyer, the franchisor, the landlord and banks for you and the buyer.

Need advice about On-selling your Franchise?  Talk to the Franchising team at Rouse Lawyers. Contact us today!