Expert Advice

We are pleased to be able to bring you some articles from members of our Advice Centre:

- How many pizzas can one country eat?!
- So you think you want to be a Franchisee?
- New Developments - Government Report on Franchise Industry

For general tips on Franchising, please visit our Troy's Tips page, where Troy Hazard, our resident Franchising Expert has articles on:
Help - I need somebody!
The Disclosure Document
Guarantees
Can't Beat Communication
Culture
Franchisee Leprosy
Meaningful marketing
The Common Bond – The Customer
One stop shop
So you want to be a Franchisor
How to go about buying a franchise - The Checklist
Franchising - How to choose the right franchise for you

How many pizzas can one country eat?!
(Or The Market in Franchising)

Franchising continues to grow as an industry at a rapid rate, but looking at the growth and saturation in some segments made me wonder, for example, how many pizzas can one country eat!

When looking at this segment of the Franchise industry and the proliferation of Franchised pizza store outlets over the past three or four years it would appear that surely as far as this particular industry is concerned, the market couldn’t possible grow any further or there can only be limited room to grow for the existing chains.

A close look at this market highlights the fact that competition stimulates growth and can also generate new ideas and opportunities within a sector as companies push themselves against their competitors and therefore benchmarks for success increase.  Companies become innovative and look to ways to market and promote their business.  Those that invest in their own research and development survive and remain successful and ahead of their competition.

Dominos have successfully operated predominantly in N.S.W and Queensland and has now entered the Victorian market and after some initial pain in adapting to the Victorian market has now established itself as a key player in the market and are increasing their market share and presence. 

At the same time we have been acting for a new Franchisor “Encore Pizza” which is currently based in regional towns and growth corridors in Melbourne. They are looking to expand regionally and in metropolitan areas promoting a substantially different business model to Domino’s.  They still sell pizzas though!

It’s interesting to see how over time Pizza Hut has moved away from the traditional US style pizza restaurant and now focus on take away/home delivery from small suburban stores with minimum space Franchises have reduced operating costs and overheads such as staff levels and costs.

Eagle Boys has over 150 stores and is also containing its expansion throughout Australia.  Other pizza brands such as “Hells Pizza” from New Zealand are looking to enter the Australian market

When you add this to the myriad of individual owner/operated pizza stores in every suburban shopping strip around town the mind simply boggles as to the extent of the market. 

These brands all seek to differentiate their business model and their products against their competitors.  Dominos promote their quick 8 minute turnaround in delivery time, Encore promote traditional style pizzas, others promote themselves on low cost. 

The Eagle Boys are looking to expand into a drive through model, micro store models in small country towns, and also models that suit large sporting venues and at Airports. 

Common themes from interviewing successful Franchisors are that they have passionate head office staff and a committed support structure for Franchisees’ in the areas of IT operations, marketing and Franchise development.  These are critical to a Franchise model’s success.  They are costly to implement and need constant review to ensure that the systems and support for Franchisees are being properly implemented.

Successful Franchisors select Franchisee’s who are open to change, are prepared to take responsibility for their own actions, they are open to business development, and willing to react swiftly to marketing and promotional activities and market trends. Franchisors need franchise operators who adopt and believe in the system rather than work against it. 

Franchisors need to fund research and development and maintain brand awareness.

It seems clear that in relation to the market in pizzas all the main players believe there is room for growth, and opportunities in their market and just one more pizza. 

Wisewoulds Lawyers
You should always ensure whether you are looking to establish a Franchise system, purchase an existing franchise, acquire master franchise rights or deal with disputes that you obtain specialist advice.

We have available a complimentary information package to those considering establishing a Franchise system (Franchisors) and a guide for Franchisees.
We also have a brochure we have developed for Franchisees entitled “So you think you want to be a Franchisee” which helps you to consider and assess your suitability as a Franchisee .

Our firm has presented numerous papers on Franchising and are active members of the Franchise Council of Australia (FCA) and members of the International Franchise Lawyers Association (IFLA) a network of specialist Franchise lawyers around the world.
We aim to provide

1. A fresh and enthusiastic approach to franchising
2. Legal documentation in clear commercial terms.
3. Lawyers with real retail business experience and accredited Business Law Specialisation.
4. Dispute resolution strategies acting for both Franchisors/Franchisees
5. Fixed price estimates of fees for services based on the scope of works client’s require.

For further information, advice or support from Wisewoulds Lawyers please our Advice Centre for details.

SO YOU THINK YOU WANT TO BE A FRANCHISEE?

ASSESSING FRANCHISING

As advisors in the industry we want to ensure our clients success!

There are many issues to consider and the following we hope will assist you to assess whether franchising, and the Franchise you have identified is right for you.

Will it be financially viable?

• Plan in advance, make sure you can get a return from your effort i.e. draw a wage and a return on your investment not just one or the other!
• Ask for financials from the Franchisor.  If you can’t get financials from the Franchisor prepare your own, financial projections, have the Franchisor review it
• Use the services of your accountant to test your financials and assumptions. 
• The money you spend doing this up front will save you thousands down the track and some despair!
• Don’t just buy yourself as a low paid job

Is it what you want to do longer term?

• Picture yourself dong it in 12 months time – can you see yourself with the same level of enthusiasm?
• What impact will the business have on you and your family financially, emotionally and in terms of demands on your time?

Understand

• What you may be launching into and request an in store introduction or a come and try training day if you can – “try before you buy”
• Talk to other Franchisees
• Are you suitable to being a Franchisee and to be accountable to someone else – the Franchisor and meet operational standards and procedures
• If you have run your own business successfully in the past is franchising for you?  It may be, but its not for everyone

Review all aspects of the business

• Check out the good, bad and ugly – Do your Due Diligence on the Franchisor and their team, just like they do with you
• Ask to meet the operational and support manager who would be supporting your as a Franchisee

Read all of the documents, including the fine print and between the lines

•    Talk to a specialist Franchise Lawyer and an experienced Franchise Accountant – not your local solicitor.
•    An experienced lawyer will know what’s material, what’s not, what to fight for and what to leave alone. 
•    Some lawyers will destroy the Franchise relationship before you have a chance to begin!
•    Pay for and get good advice, don’t cut costs and get the wrong or inadequate advice

Research the Business

• How does it compare to others?
• Look at the competitors – who does it better?
• Compare systems and fees
• Is there an opportunity to grow the business itself or grow in the system?

Accept

That you may only get a return on your effort and investment over the term of your franchise

There may not be an opportunity to reap a capital gain or return at the end of the Franchise

You have no right to a lump sum on expiry of your franchise

If there is no return (financially) along the way there may not be any at the end so there has to be returns along the way

Plan your business

• Prepare a detailed business plan – use your advisors
• Plan for the expected and unexpected
• Make sure you have the finance before you being negotiations
• Make sure you have sufficient working capital if a newer franchise

Talk to

• Your family, friends and advisors.  They will all give you feedback and help you make an informed decision

Think again – Is this right for me

• Financially, emotionally
• It’s a long term commitment
• Get it right from the start, as a wrong decision can be costly.

Further Information

Contact our firm for a

• Guide to Establishing and Franchised System;
• Guide for Franchisees;

2.         QUICK THINK NOTES

A good franchise should have

• Quality products and services with longevity (no passing fads)
• Strong well-known public image – growing in the market
• Professional management
• Ability to duplicate success
• Ability to create profits
• Opportunity to grow and create financial strength
• The ingredients to make it successful for you

A good franchisor should be

• Well established and financially secure
• Experienced in business and management
• Effective in communication
• Willing to train, assist and be there
• Entrepreneurial and future orientated – research and development
• Undertaking strategic planning
• Member of FCA (preferable)

A good franchisee should be

• Willing to accept the franchisor as controller
• Able to manage and accept responsibility
• Motivated and dedicated to hard work
• Have sufficient financial standing and back-up
• Be team orientated and not an individual or loner
• Going in for the ‘right’ reasons
• People orientated and communicative

Is the Business FRANCHISABLE?

• Operating in the market as company owned stores for at least 2 to 3 years
• Operating profitably, after realistic management salaries
• Provide ‘good’ products and services
• Long term market - longevity,  not a “fad”
• Unique business and difficult to imitate
• Standardised operations and systems in place
• Duplicated by teaching it to others
• Well known ‘name’ in the industry

Franchising iF successful, offers FRANCHISORS

• Motivated owner-operators
• Reduced capital commitments
• Reduced middle management and associated costs
• Communication with others within the group
• Increased co-operative marketing strength
• Higher returns on investment and reduced risk
• Access to bulk buying and group benefits
• Strong public image
• On-going product and system development
• Management advice and training

For any further information please email rxt@wisewoulds.com.au or contact Robert Toth, Franchise Partner on 9612 7297

NEW DEVELOPMENTS
GOVERNMENT REPORT ON FRANCHISE INDUSTRY
MATTHEWS REPORT RELEASED:

On 6 February 2007, the Australian Government responded to the Matthews Enquiry review of the Franchising Code of Conduct.  The Review consisted of 34 recommendations, and the Government has now, through the Federal Minister, Fran Bailey, released its report responding to the recommendations. 

The recommendations are not mandatory as yet and to date there have been no amendments to the Franchising Code of Conduct and no indication when these will become necessary to implement. 

They do however provide an insight to likely changes to the Code and therefore both Franchisors and Franchisees should take note of the following key issues;     

RECOMMENDATIONS AGREED TO BY THE GOVERNMENT

The following recommendations were agreed to by the Government and are likely to be implemented:

• A complete draft Franchise agreement (in the form in which it is to be signed) must be provided with the disclosure documentation to Franchisees.  The Government did comment that this “best practice” should be the norm. 

Our comments; We have been operating on this basis with our client Franchisors for some years now.  It does not restrict negotiations In relation to the final form of the Franchise Agreement.

• A Franchisor must disclose the details of any s87B Trade Practices Act 1974 undertakings given to the ACCC within 14 days of an undertaking being given.

• Clause 9.1(j) of the Code (rebates) should be extended to include disclosure of the financial benefits a franchisor receives on the supply of goods and services to a franchisee. 

Our comments:  This have been a topical issue of late in the industry on the issue of rebates, lease incentives and the obligation of a Franchisor to disclose (if it receives a rebate) and also whether the rebate is passed on to the Franchisee.

• Marketing and other co-operative funds will be subject to a compulsory annual audit by a registered company auditor.  The Government has indicated that the auditing of marketing and other co-operative funds will be a requirement.

Our comments: This will no doubt increase Franchisors accountability and also their operating costs and compliance.

• The opt out provision in Part 2 clause 6C of the Code, allowing a Franchisor to withhold information if it is reasonable to do so, is to be deleted.  Therefore all material information needs to be provided to a Franchisee upon request.

• Part 3 clause 18(1) of the Code to be amended to require Franchisors to disclose materially relevant facts within 14 days of becoming aware of them rather than the present 60 days.

• The exemption referred to in Part 1 clause 5(3)(a)(i) and (ii) of the Code for overseas Franchisors is to move so that all Franchise systems operating in Australia are subject to the same rules.

• Directors must disclose their criminal convictions for non serious offences as this information may be material to existing and new franchisees.

• Franchisees will be permitted to contact past and current Franchisees to enable them to conduct their due diligence.

• The requirement to disclose financial details under item 20 of Annexure 1 of the Code will be extended to include financial reports of consolidated entities if the Franchisor.

• The principle of good faith and fair dealing should be developed and included in Part 1 of the Code.

• A separate document detailing the history of the territory or site to be franchised is to be provided with disclosure documents.

• Part 1 clause 3(1)(b) of the Disclosure Document should be amended to include the words “real property” as payments for property are often a major expense to Franchisees.

• Franchisees will need to be informed by skilled and experienced advisors prior to them entering into franchise agreements.

These are just some of the key points.  The report refers to a number of other matters and we have not covered all of them.

The Government indicated that the following recommendations are agreed to “in principle” and therefore the view is that these recommendations may also be implemented where possible.

• Franchisors will be required to provide copies of all documents, where available, at least 14 days before the Franchise agreement is expected to be signed or as soon as they become available.

• The Code be amended to allow more disclosure with regards to the names, location and contact details of past Franchisees subject compliance with Privacy Laws where consent is obtained from a past Franchisee.

Summary

It was recommended that there should be a “Risk Statement” given by Franchisors to Franchisees outlining the risks on termination, expiry and non-renewal of the agreement.  The Government did not agree to this recommendation but indicated that it would be appropriate for the ACCC to refer to these risks in its educational material.

The Government chose not to adopt a number of recommendations recognising that they may encroach on the rights of Franchisees and Franchisors to freely negotiate and contract:

A significant one of these was the recommendation that the ACCC audit the financial information of Franchisors and its consolidated entities. 

The Government made the point that the viability and associated risks of a business venture are ultimately the decision of the parties involved.  This seems in our view, to be a sensible approach.

The Matthews Enquiry report made comment as to the concerns regarding the quality of advisors in the industry.  The point here is that Franchisors and Franchisees are best served by advisors who are recognised within the industry, members of the FCA and have specialised knowledge.

These recommendations are not law at this time however, it would be timely for Franchisors to review their file documentation and take into account the recommendations some of which may need to be considered in greater detail.

Wisewoulds are recognised Franchise Law specialists and members of the FCA and IFLA with 25 years of experience acting for Franchisors and advising Franchisees.

The FCA (Franchise Council of Australia) has implemented schemes for accreditation in the industry which seems to have been timely in avoiding the Government imposing any further regulation.

For any further information please email rxt@wisewoulds.com.au or contact Robert Toth, Franchise Partner on 9612 7297