What is in a Disclosure Document?

If you are considering buying a franchise, the disclosure document is a key part of the process that aims to ensure prospective franchisees can make an informed business decision.

Under the Franchising Code of Conduct, all franchise systems in Australia must maintain a disclosure document, which must be provided to prospective franchisees at least 14 days before entering into a franchise agreement.

The purpose of a disclosure document is to supply key information about the nature of the franchise system and to help the franchisee make an informed business decision about entering the franchise.

Despite being tailored to each franchise system, disclosure documents must comply with the code’s prescribed format. Key elements in a disclosure include:

1. A WARNING

The warning statement on the first page cautions prospective franchisees that franchising is a serious undertaking. It recommends they obtain independent legal, accounting and business advice, but also highlights their cooling-off rights.

2. SPECIFIC DATES

Disclosure documents must specify their preparation date and be signed by an officer of the franchisor. Franchisees can reference this date to ensure currency.

Franchisors must update their disclosure document annually within four months of the end of their financial year (with some exceptions). Therefore, franchisors working on a standard July-to-June financial year must complete their update by the end of each October.

3. FRANCHISOR’S DETAILS

The business experience of the franchisor’s officers and the duration the franchise system has been active in Australia provides an insight to the stature of the system. Prospective franchisees can judge whether the franchisor has a satisfactory level of knowledge and experience in the industry, which is especially important for the new systems.

4. FRANCHISEE DETAILS

Contact details for all current franchisees within the system and those who have left during the previous three years (and the reason for doing so) are an essential element of a prospective franchisee’s due diligence. Current and former franchisees should be contacted to assess satisfaction with the franchisor’s training, support and systems.

If large numbers of franchisees have had their agreements terminated or have left the system, it may indicate unhappiness with the system.

5. INTELLECTUAL PROPERTY

Franchise agreements give franchisees the right to use the franchisor’s intellectual property. This can include copyright (trade secrets), trademarks (business names and logos) and patents (inventions), which will be detailed in the disclosure document.

The ownership structure of the intellectual property must also be disclosed. In many systems, a separate holding company owns the intellectual property and licences as part of an asset-protection strategy.

6. SITE AND TERRITORY

Franchisors must disclose whether a franchisee is granted an exclusive territory or if their rights are limited to a particular location. Some systems give franchisees the exclusive right to work in a set geographical area, while others can grant the right to work only from a specified store. Franchisees can use this to determine the risk of competition from within the franchise system itself.

If the franchisor has site-selection criteria, then details must be disclosed. Regardless of whether the franchisor nominated the site, it is crucial that franchisees do their won independent investigations as to whether the demographics of the site or territory can support the business.

Details of previous franchisees who have worked in the site or territory within the past 10 years must also be provided. A high turnover of franchisees in the one location could indicate a problem.

7. GOODS AND SERVICES

In most franchise systems, franchisees must obtain good and services from the franchisor or an approved supplier to ensure uniformity across the system. The disclosure document should detail how these arrangements will work, along with the franchisee’s right (if any) to do business online.

Franchisors must also provide details of any rebate arrangements in place with suppliers.

8. PAYMENTS

The franchisee’s establishment costs and all the expected payments during the course of the franchise must be disclosed. Franchisors will often provide large ranges, so the franchisees should undertake a careful analysis. The cost of establishing a store within a shopping centre will be much higher compared to a quiet street corner.

Unforeseen capital expenditure is also important to note. This could be the franchisee’s costs to refurbish their store, or upgrade and replace equipment and signs.

Franchisees should be able to use these figures to estimate what the total costs will be to set up and run the business, and whether the business model can reach and sustain profitability. A franchisee’s accountant will play a key part in this analysis.

9. MARKETING FUNDS

If the franchisee has to contribute to a marketing fund controlled or administered by the franchisor, then details of the payments and how the fund will be used must be disclosed.

10. END-OF-TERM ARANGEMENTS

Franchisors must clearly disclose whether the franchisee has an option to renew or extend the franchise agreement at the end of its term. This includes whether franchisees are entitled to compensation if they do not renew, and arrangements for unsold stock and equipment.

It is important for franchisees to understand that once the term of the franchise agreement ends, and if they walk away from the business, they generally lose the right to receive compensation for goodwill.

11. FINANCIAL DETAILS

Finally, a disclosure document must contain a statement confirming the franchisor’s solvency, along with their financial statements for the previous two financial years or an independent audit report.

It is imperative the financial figures are up to date. If the figures indicate the franchisor is struggling financially, then this is a rea flag.

TAKEAWAYS

While disclosure documents can seem a lengthy and burdensome read, they contain a wealth of information invaluable to a prospective franchisee trying to choose the right franchise system. Reading the document from cover to cover is essential.

After considering the disclosure document and making proper inquiries, franchisees will better understand the risks involved in the franchise and how their future relationship with the franchisor will work.

 

LUKE MCKAVANAGH

Rouse Lawyers

Luke McKavanagh is a commercial lawyer specialising in franchising and business law.

Read the official release of the article HERE from the Franchise Business Magazine website!

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What should I do if I receive a breach notice from my franchisor?

Breach notices must be taken seriously because failure to act can put your business at risk.

Formal breach notices are generally issued once a dispute escalates and a conciliatory resolution cannot be achieved. However, this is not always the case because some franchisors may resort to issuing a breach notice straight away.

What is a breach notice?

Under the Franchising Code of Conduct (Code), a franchisor is permitted to terminate a franchise agreement if they provide you a breach notice and you fail to remedy your breach in accordance with the requirements of the notice. It is essentially Step 1 in the termination process and used as a formal warning that your business is non-compliant.

A breach notice must:

1. specify the provision of the franchise agreement which has been breached;
2. set out what you are required to do to remedy the breach; and
3. provide a reasonable time for you to remedy the breach.

If the franchisor wishes to rely on the breach notice to terminate the franchise agreement, the notice must also state that the franchisor proposes to terminate the franchise agreement if the breach is not remedied.

If you fully remedy your breach in accordance with the requirements of the breach notice, then the franchisor cannot rely on that breach to terminate your franchise agreement. Otherwise, if you fail to comply with all conditions of the breach notice, the franchisor is entitled to terminate your franchise agreement.

Remember that there are certain circumstances under the Code which entitle a franchisor to immediately terminate a franchise agreement without following the breach notice process, such as fraudulent behaviour.

What should I do? 

Receiving a breach notice can be distressing, but don’t panic. 

You should read the breach notice carefully together with your franchise agreement, and diarise the deadline that has been given to remedy the breach.

The breach notice should clearly specify what you have allegedly done wrong and how that constitutes a breach of the franchise agreement. Ensure you fully understand exactly what the franchisor requires you to do – if they require you to do 2 things but you only do 1 of those things within the deadline, that’s still grounds for the franchisor to terminate your franchise agreement because a breach must be remedied in full.

Sometimes remedying a breach is simple – overdue payments can be remedied by paying the arrears, whereas failing to stock approved products can be remedied by stocking those products.

If the breach is an ‘easy fix’ then you should fix it immediately. As the saying goes, pick your battles, because refusing to remedy a breach on principle because you are trying to prove a point will place your business in jeopardy.

Once you remedy the breach then you should provide the franchisor with evidence of your actions.

If you dispute the alleged breach, or don’t believe the action required or the time given to remedy is achievable, then that’s when you should try to negotiate a resolution with your franchisor, and/or seek legal advice.

What is a ‘reasonable’ time to remedy a breach will depend on the circumstances. 7 days may be reasonable to pay an overdue account, but 1 day may be reasonable to clean a dirty store. In any case, the franchisor does not need to give you more than 30 days to remedy a breach (which can be problematic if the breach relates to failure to achieve ongoing KPIs or meet minimum performance criteria).

If you don’t think the franchisor has provided enough information in the breach notice to substantiate their allegations, then you should immediately ask them to provide more information.

If you are unable to resolve the issue with the franchisor, then you are entitled to invoke the dispute resolution procedure under your franchise agreement or under the Code. This procedure means that you and the franchisor must endeavour to resolve the dispute, failing which, either of you can call for a mediation. Be mindful that invoking this procedure does not prevent a franchisor from terminating a franchise agreement in the interim if the breach notice isn’t complied with.

No matter what you decide to do, communicating with the franchisor in a conciliatory manner is key. Sometimes breach notices are the result of simple misunderstandings, but sometimes they can be intended to trigger an aggressive response. Remain reasonable and professional.

Is the franchisor acting in good faith?

The Code requires both franchisors and franchisees to act in good faith towards each other. Importantly, ‘good faith’ does not prevent a party from acting in their legitimate business interests. Just because the franchisor has issued a breach notice does not necessarily mean they are failing to act in good faith.

Remember that when you signed the franchise agreement you agreed to comply with the terms of the agreement and the franchisor’s policies, systems and procedures, and the franchisor is entitled to enforce this.

What are the consequences?

Failing to remedy a breach in accordance with a valid breach notice will entitle the franchisor to terminate your franchise agreement. This will normally mean you lose your right to operate (or sell) the franchised business. The franchisor may have grounds against you for damages. It also puts your personal assets at risk if you’ve provided a personal guarantee to the franchisor.

Be mindful that a breach notice can impair your future ability to renew the franchise agreement. It’s a condition under many franchise agreements that the franchisee ‘substantially complies’ with the franchise agreement to be entitled to renew the agreement. Even if you remedy your breach, the fact that you breached the franchise agreement in the past could entitle the franchisor to refuse to renew it in the future.

Takeaways

Unless you genuinely dispute the validity of the breach notice, maintaining your ongoing working relationship with the franchisor should be prioritised. A breach notice will often be a wakeup call that your business values are not aligned with those of the franchisor.

Showing your franchisor that you are taking the issue seriously and that you are actively taking steps to rectify performance issues will not only assist in salvaging this business relationship, but will also help your position should a dispute arise from the situation.

This is not to say that you should necessarily submit to a franchisor’s demands if you believe they are acting unreasonably, in bad faith or outside the parameters of the franchise agreement. Again, seeking legal advice from a specialist franchise lawyer is key if you don’t believe a breach notice is warranted. Time is of the essence, so don’t wait until the day the deadline under the breach notice expires to obtain professional advice. Act early.

Sometimes the damage to the business relationship may already be done once a breach notice is issued, but often the relationship can be salvaged if you and the franchisor are both genuinely committed to resolving the issue.

 

By Luke McKavanagh, Rouse Lawyers

The post What should I do if I receive a breach notice from my franchisor? appeared first on Rouse Lawyers.

The ACCC & Negative Online Reviews

A representative of the Australian Competition and Consumer Commission (ACCC) recently noted that consumers engage with online reviews to make decisions on whether to purchase a product or use a service (‘Wisdom to remove unfair contract terms’, ACCC Media Release 104/18, (located at: https://www.accc.gov.au/media-release/wisdom-to-remove-unfair-contract-terms)).

Two recent ACCC actions indicate that attempts by businesses to control online reviews may not go unnoticed.

Attempting to Control the Opportunity to Provide Online Reviews

In ACCC v Meriton Property Services Pty Ltd, Meriton Property Pty Ltd (Meriton) was held by the Federal Court of Australia to have engaged in misleading conduct and misleading conduct in relation to the nature or suitability for purpose of services due to the practices undertaken by Meriton in relation to TripAdvisor online reviews through its use of TripAdvisor’s Review Express.

The Review Express service enabled Meriton to send the email address of guests who stayed at Meriton properties to TripAdvisor. TripAdvisor would then send invitations to the Meriton’s guests to complete a TripAdvisor review. The conduct Meriton engaged in to inhibit the completion of negative online reviews were as follows:

• the withholding of guest emails from TripAdvisor if there was a major disruption at a property; and
• putting the letters ‘msa’ in the email address of guests who made a complaint or were considered to be unlikely to give a positive review so that the email sent by TripAdvisor to that guest would not be delivered.

This conduct prevented guests likely to provide a negative review from making that review. The Court considered that the practices engaged in by Meriton had the result of generating the impression that the quality of Meriton properties was more complimentary and positive than it would otherwise have been had conduct not been engaged in.

The Court also noted that the wording of the Australian Consumer Law sections relevant to this case were drafted “in simple language capable of potential application to new circumstances that arise through developments in technology”. Which is an important indicator from the Court that compliance with these, and other, Australian Consumer Law sections, is essential regardless of new technology being available.

Preventing Negative Online Reviews by Contract

The standard home building agreement of Wisdom properties Group Pty Ltd (Wisdom) imposed non-disparagement obligations on its customers to restrict and preclude negative public statements, including online reviews. The ACCC considers that a standard form contracts attempting to ‘prevent or limit a customer form making public comments about goods or services are likely to be unfair under the Australian Consumer Law’.

Additionally, if customers made disparaging public statements the contract also allowed Wisdom to defer the building of a customer’s home and to hold that customer liable for loss connected with the public statement.

Wisdom has agreed not to enforce these clauses and has accepted court enforceable undertakings, including ‘publishing a corrective notice on its website, contacting affected customers, and establishing an Australian Consumer Law compliance program.’.

Each of these examples demonstrate that using methods to prevent negative online reviews is likely to contravene Australian Consumer Law.

How to Protect the Value of your Registered Trade Mark

 

You’ve developed your trade mark, thought about the design, considered how your trade mark can promote your business and finally received confirmation that your trade mark is registered. It’s a great feeling!

Your trade mark is valuable to your business. Customers recognise and connect your business with your trade mark. For this reason, protecting your trademark after it is registered is vital in preventing its value from diminishing.

 

Similar Trade Marks
The value of your trade mark may diminish if a competitor’s trade mark is substantially identical or deceptively similar to your trade mark. The use of similar trade marks by competitors may result in your trade mark not being as easily distinguishable in the industry, or in customers becoming confused about which company is associated with which trade mark. If this occurs you may lose your market edge and the promotion of your brand and business may not be as effective.

What can be done?

If a competitor applies to register a trade mark that is substantially identical or deceptively similar to your trade mark there is a limited window in which you can oppose the registration of the trade mark. The window commences on the advertisement of the trade mark in the Australian Official Journal of Trade Marks and ends two months later. To oppose the registration of the trade mark you will need to file a notice of opposition during this window. As this window is small it is important to check the Australian Official Journal of Trade Marks regularly.

If your trade mark right is being infringed by the use of an unregistered trade mark that is substantially identical or deceptively similar to your registered trade mark you may be able to commence an action for infringement. Note though that there are exceptions to commencing an action, including, if the user of the similar trade mark used the trade mark prior to the registration of your trade mark. You may also have an action for passing off under the Competition and Consumer Law 2010 (Cth), which can also be used to protect unregistered trade marks in contrast to the Trade Marks Act 1995 (Cth).

Assert & Protect your Trade Mark
Once your trade mark is registered it is prudent to use it in conjunction with the ® symbol. Using ® with your trade mark is a declaration that your trade mark is registered and alerts others that it is protected.   Your use of the ® symbol may also benefit you by strengthening your position in a trade mark dispute, on the basis that you have alerted others to the registration of your trade mark by using the ® symbol.

Caution though, it is illegal to use the ® symbol for unregistered trade marks. Consequently, you may only use the ® symbol once your trade mark is registered and not from the commencement of your application to register your trade mark. However, using the ™ symbol is not an offence and you can use this with your trade mark during the trade mark registration application process.

Another way to protect your trade mark is to only use your trade mark as registered and avoid varying it. For example, if you have only registered your trade mark has a main word with two small words directly underneath it, avoid moving those two small words to sit beside or above the large word. As this is not the trade mark you registered and being inconsistent with the registered trade mark may weaken your assertion that use of your trade mark is protected.

Avoid becoming Generic
Trade marks can become the word used by consumers as the generally accepted name for a product or service. This may diminish the value of your brand and, if also used this way by others in your industry, may result in an application to have your trade mark deregistered. Under the Trade Marks Act 1995 (Cth) if, within an industry, a trade mark becomes generally accepted as the name of a product or service a court may determine that the trade mark owner no longer has the exclusive right to use that trade mark.

If you notice your trade mark being used as a generic word assert the protection afforded to your trade mark by using the ® symbol. You can also consider using the actual generally accepted name of the product together with your trade mark. This may assist the public to realise or note that your trade mark is not the generally accepted name of the product and discourage such use.

Don’t Lose your Trade Mark, Use it!
You’ve registered your trade mark but you haven’t used it yet. If you don’t use your trade mark in connection with trade in goods or services after the trade mark is registered a person may apply to have the trade mark removed. Timing is an important consideration in registering trade mark, not only to prevent removal for non-use but also to support a trade mark application in the event a trade mark examiner requests examples of trade mark use to support your trade mark application. Balancing these considerations with commercial strategies for launching products or services is vital.

Administration – Simple and Necessary
It may seem simple but remember to update your address for service if it changes so that you receive notice of renewal fees and any other notices provided to you by IP Australia. You have built the value of the trade mark, you don’t want the value to diminish by missing the opportunity to maintain registration of your trade mark for a further 10 years.

Takeaway
Registering your trade mark is only the first step. After registration it is crucial to maintain the value of the trade mark associated with your business by being vigilant to the use of similar trade marks, being consistent in your use of the trade mark and asserting the protection afforded to your trade mark, and don’t forget to update your address for service!