Apart from the impact of COVID-19 on all sectors of business in Australia has over the past 12 months, we have had new Franchise regulations commence on 1 June 2021. The good news is there are still great opportunities for overseas companies to expand their business in Australia with many workers who are unemployed or made redundant looking to franchising as a way to earn an income.
Franchising is well entrenched in Australia with over 90,000 businesses employing over 500,000 people, generating around $155.1 billion in turnover per annum.
It is expected that the sectors revenue will decline by 2.5% with an anticipated drop around 6.8% this financial year 2021/22 largely due to the COVID-19 pandemic and flow-on economic effects. Yet Australia is still an attractive market for overseas systems due to our standard of living consumer spending and our stable economic political and regulatory systems.
NEW FRANCHISE CODE IMPACT ON FOREIGH FRANCHISORS
The new Franchise Code Regulations came into operation on the 1 June 2021 and apply to all franchise agreements entered into on or after the 1 July 2021 and include a number of key changes for franchisors. View Robert’s simple guide to these changes. https://www.linkedin.com/pulse/simple-guide-franchise-code-changes-robert-toth/
Overseas Franchisors since around 2015 are no longer required to provide a Disclosure Document to its Master Franchisee, or a separate disclosure to its unit franchisees.
A Master franchisee must still comply with the Franchise Code and provide its unit franchisees proper Disclosure (FDD) and a Code compliant franchise agreement.
The cost to upgrade overseas franchise documents (dependent on the jurisdiction) and provide Franchise Code compliant documents generally range from around $8,000.00 to $12,000.00 AUD subject to the model and its complexity.
There are numerous provisions we find that need to be updated in overseas agreements that around the disclosure of supplier rebates, end of term arrangements, online sales, audit of marketing funds, jurisdiction and governing laws, dispute resolution and terminations provisions.
Clear and concise agreements assist in the process of onboarding franchisees and reduce unnecessary negotiations with a franchisees advisor so you can get out to the market.
MODELS TO ENTER THE AUSTRALIAN MARKET
There are various business entry models for overseas companies to enter the Australian market such as:
- Master franchising;
- Direct licensing to a single or multi-unit Franchisee;
- Area Development Agreements;
- Partnership, Joint Venture or Partnering Agreements.
Each model has its own pros and cons and seeking advice from a Franchise Specialist is highly recommended to select the right model for a successful roll out of the system.
Robert Toth and his Franchise legal team has over 35 years’ experience advising local and overseas companies in the franchise and corporate sector. We are Members of the Franchise Council of Australia (FCA) the recognized National Franchise body, the IFLA (International Franchise Lawyers Association) and the US Commercial Service, International Advisory Experts (IAE) and the Lawyers Alliance Global Network an alliance of global lawyers.
We know the trends in the market, the local regulatory environment and have a network of consultants in Franchise development, demographic research, leasing and tax advice to assist overseas franchisors and companies to establish their business successfully in the Australian and New Zealand market.
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MASTER FRANCHISING
This is the most common model adopted by overseas Franchisors, the advantage is that effectively the obligations, role and responsibilities of the overseas Franchisor are taken up by the Master Franchisee.
The overseas Franchisor does not contract directly with the unit franchisee and therefore, legal liability and any “litigation” risks rest with the Master Franchisee under Australian law.
The Master Franchisee is responsible for compliance with the mandatory Australian Franchise Code to establish its own sites and recruit Franchisees, meet performance criteria, train and support franchisees and meet the costs of establishing infrastructure to ensure the system operates successfully.
The overseas Franchisor may have worldwide brand recognition and systems in place to support the Master Franchisee.
The key ultimately is choosing the right Master Franchisee as this can make or break the successful roll out of the brand.
A disadvantage of Master franchising is that although there are controls via the Master Franchise Agreement, the Franchisor is one step removed from practical control and input into the local unit franchisees as face-to-face management is left primarily to the Master Franchisee. The Master franchisee therefore needs to not only have the capital resources but also the ability, personality and skills to succeed!
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DIRECT FRANCHISING
This is where the overseas Franchisor grants rights directly to an individual unit Franchisee in the country which can now more readily be done due to the online environment and systems operating in the cloud.
Here the overseas Franchisor has more direct involvement and control in relation to their unit Franchisee as they contract with the local franchisee directly but at the same time this means the overseas franchisor is directly liable and carries the risk if the franchise fails.
The overseas Franchisor is usually well established and confident in its systems and business format to support the Franchisee from abroad. This model may not be suitable for many business sectors where local on the ground training and support is required.
It may also not be as attractive to prospective franchisees, as they may be concerned about the lack of a local presence by the Franchisor.
The Overseas Franchisor in this case will need to be registered as a foreign Company with the ASIC our corporate regulator or they may set up a fully owned subsidiary entity.
Financially it can be better for the overseas Franchisor as the royalty is paid directly without a split to a Master Franchisee.
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AREA DEVELOPMENT ARRANGEMENTS
This model enables an overseas Franchisor to test the market by appointing an Area Developer whose role is not to actually establish a franchise but act as an agent for the overseas company to find and secure a Master Franchisee or unit Franchisees.
The Area Developer may be given strict performance criteria, but they do not enter into any agreement with a Master or unit Franchisee.
The local unit Franchisees contracts directly with the overseas Franchisor which means that the overseas Franchisor has direct control over its Franchisees.
The Area Developer may be paid a success fee on signing up a franchisee and also paid to provide additional services and support to franchisees.
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JOINT VENTURES OR PARTNERING AGREEMENTS
We have been involved in a number of joint venture partnerships and Limited partnership arrangements which involve careful tax considerations for both the overseas entity and local partnership. A Limited partnership protects the limited partners as all liability rests with the General partner.
This model requires shareholder or partnership agreements to cover the key issues such as capital contribution, distribution of profit, the parties’ roles and responsibilities and also exit rights such as pre-emptive buy out rights and triggers on default.
The benefit here is that the partners each have contributed some equity and they have a vested interest to ensure the success of the business in the market.
Here the overseas Franchisor still remains as an independent entity and is protected from the risk of liability if the business does not succeed.
Where do overseas companies go wrong?
A lack of local due diligence and market feasibility: That is overseas companies often do not understand the Australian market and how different the market is between our regions, States and Territories.
This is an area where we can assist with our on the ground knowledge as it is a big country and the State or Territory of entry can make or break the system. Consumer demand varies greatly between States and Territories as does the demographics so a franchise system highly successful in Queensland may not transport well to Victoria.
Overestimating the market and placing unrealistic performance criteria on a Master Franchise: We often see unrealistic targets set on master franchisees and area developers which cannot be met as the process from sign on of a franchisee top opening can take many months. Setting unrealistic targets places undue pressure on the local master franchisee.
We have had to renegotiate a number of Master Franchise arrangements due to unrealistic performance and roll out criteria, which was impacted by a tightened financial and lending market and other economic impacts more recently of course COVID-19 pandemic event.
Seeking an unrealistic Master license fee: The days of asking a Master franchisee to pay a huge upfront capital fee for the rights are gone. There is now an expected “sharing of the risk” with both parties sharing the risk and also the rewards over time. The Overseas Franchisor may have to accept a less upfront payment and receive payments on the successful sign up of each franchisee particularly as obtaining finance is very restricted in the Australian finance sector.
Not appointing experienced Franchise specialists in the region: Getting local on the ground Specialist legal, tax and demographic advice will limit the risks.
Failing to develop a specific business entry plan: We recommend (as for any business) that an overseas company has a business entry plan for a new territory to identify the risks, costs and benefits, competitors in the market and also do their financial modelling to make sure it is financially viable for the overseas franchisor, the Master franchisee and the unit franchisee.
Without this plan it is like sailing a ship without a rudder! A Happy franchise system is one where the model works for the unit franchisee If they are making money that is, they can take out a reasonable salary for their effort, pay their loans and overheads and get a return on their investment then the franchisor will also do well.
Failing to ensure their IP and brand is registered before entering the market: We have seen cases where an overseas company did not conduct the basic trademark searches and could not then use their overseas brand in the local market due to the name being registered by a local company.
Summary
Master Franchisees and unit franchisees now expect more from their Franchisor’s by way of systems, support and marketing.
The upfront Master License fee and the Franchise fees set, must be realistic with the trend being that the fee is significantly less to make the business opportunity attractive and affordable. The key for an Overseas Franchisor is selecting the right Master or Area developer as often the best candidate may not have the capital necessary to take up the rights, whereas the interested party may have the money but not be the right fit or person for the role.
Franchisors therefore need to think laterally as to how to get the right people on board, where they don’t have the capital. We are finding that vendor terms and staggered payments based on milestones are ways to achieve this.
As Edward de Bono says (may he rest in peace) we need to think “outside the square” particularly in the current world we are living in. There are still great opportunities in Australia, and we can assist you to get established for the best chance of success.
Robert TOTH Consultant – Accredited Commercial and Franchise Law Specialist MARSH&MAHER RICHMOND BENNISON PH: 0412 67 37 57 Email: robert@mmrb.com.au
