PROTECT YOURSELF NOW NOT WHEN THE SIHT HITS THE FAN.
In recent months we have been approached by Bakery Managers, transitioning through Bakers Delights ‘management training program’ or potential franchisees making their foray into franchising.
Some are in dialogue with Bakers Delight management and are actively being seduced to buy an existing or a relocated bakery. Some have told us they are concerned about the contract that they are about to sign and ask for advice on how to protect themselves.
For the record we are highly critical of Bakers Delights franchise agreement and business ethics. We are even more critical, of its efforts to promote its business model as a proven system. The company is currently advertising for 100 new franchisees-taking out half page advertisements around the country trying to flog a system that we believe is fundamentally flawed.
We believe that entering a franchise agreement with Bakers Delight or any other Australian franchise system is fraught with danger.
Bakers Delights contract is seriously lacking, one sided, and they claim like many other franchisors that it is not open for negotiation. Entering this type of agreement should be done with absolute caution and only after seeking advice from a specialist franchise lawyer (preferably one who is not on a retainer from a franchisor) Potential franchisees need to ask themselves whether they want to spend $2,000 now on good legal advice or $250,000 in the future when the proverbial and the often inevitable hits the fan.
Potential franchisees need to know that the Bakers Delight franchise agreement has evolved over many years and has been cleverly crafted to give a significant financial advantage to the company at termination. It (the agreement) offers no protection to the franchisee when there is a dispute. Often leaving the franchisee financially and emotionally decimated.
The current reality is that potential franchisees are in a powerful position-no one is buying franchises. Therefore franchisees are much better placed to achieve fair contract terms .
Firstly, if the franchisor you are looking to invest your life savings in refuses to give you a fair contract DO NOT sign it. Find a franchisor who embraces the principles of fair franchising and give them your business.
It is absolutely crucial that potential franchisees forget all the marketing material and representations made by the franchisor or their sales people-if it is not in the franchise agreement a franchisee cannot rely on it.
We want to help protect franchisees interests because there are too many ways in which a franchisee can be exploited through unfair contracts. To this end BDlies will publish a more detailed checklist in the coming weeks. In the meantime here are a few things to consider:
• Term – some franchise agreements give franchisees an option to renew the franchise, in others the franchisor may in its absolute discretion opt to offer the franchisee another term at the end of the original term. Bakers Delight is one such franchisor who only offers a new term in its absolute discretion and “can terminate the contract at any time and do not have to give you a reason why”.
Franchisees need to be cautious of this type of clause and ensure that their lawyers negotiate contracts that give them first right of renewal-many franchisees have been sent to the wall by rogue franchisors that have made a habit (and a lot of money) from invoking this clause.
• Franchisees do not “own” their businesses - A lot of franchisees do not realise that they do not really “own” their business. What they buy is really only a very expensive licence to use a particular business system in a particular area for a particular time. They can sell the business before that time is up (and even then they usually have to pay a hefty sum to the franchisor), but if they do not or cannot sell before their time is up they have an asset that is virtually worthless to them should the franchisor terminate the contract. However this same business may be extremely valuable to the franchisor.
Franchisees need to consider whether the return on investment is there, and if they can reasonably expect to amortise the debt and make a large profit by the end of the franchise term. It is advisable to insist on a buyout clause should the franchise not live up to its claims. In many franchise systems too many franchisees are struggling to survive and are left with huge debt years after exiting the franchise.
• Breach and termination – most franchise agreements set out numerous circumstances which allow a franchisor to terminate the agreement for breach either real or contrived, very few give the franchisee the same rights, no matter how blatant a franchisors breach might be.
Bakers delight has been known to change the terms of the contract at renewal to help them to get rid of a struggling franchisee.
It is important to have the terms of future agreements in place before you sign to prevent the franchisor from moving the goal posts effectively forcing a breach of contract that enables them to steal your business and personal assets.
• Supply of products – many franchisors want to maintain control over the supply of products used in the production of their products. Understandably this is considered to be important to maintain consistency throughout the franchisor’s network. The difficulty for franchisees with this is that the franchisor effectively grants a monopoly over the products it approves. This can be a good thing if it results in savings to franchisees due to its purchasing power, but if savings go directly to the franchisor then there is no obvious benefit to franchisees.
• The disclosure document may state that the franchisor is entitled to receive rebates from its suppliers. A good franchisor will use any such rebates to subsidise the costs of goods to franchisees, or for other ways of benefitting the franchisees such as subsidising marketing campaigns or training or conference costs.
Bakers Delight is a franchisor where additional income streams are derived from kickbacks or commissions. There is no actual or obvious benefit to the franchisee. Moreover many of the ingredients/packaging used to produce the product can be purchased at up to 30% cheaper through other suppliers.
Ensure that your franchisor passes on at least some of these ‘savings ‘to the franchise network.
• Guarantees – even if a franchisee sets up a company to run its business, often they (and their partner) will be required to personally guarantee their obligations. The franchisor’s directors are never in our experience required to guarantee the franchisor’s obligations.
Bakers Delight Directors do not guarantee their obligations.
• Licence - be careful of the area of exclusive rights (if any) – in some retail leases it may only be the precincts of the shopping centre in which the store is situated, so the franchisor could open another franchise or company store in another location close by, in direct competition to the franchisor’s store. With some products the franchisor’s online operations might directly compete with the franchisee.
• Beware if the franchisor is the lease holder as well.
Bakers Delight has been known to have two stores within the same shopping centre or demographic target area. We have been told of franchisees that have been advised by Bakers Delight representatives, that if they do not purchase the new business at the other end of a shopping centre they will be forced into competition with a new franchisee.
• Inspection of records – often the franchisor retains the right to without notice inspect and audit the franchisee’s records during the term of the agreement-.the same cannot be said for a franchisee who wants to audit the franchisor.
Ensure that a specialist franchise lawyer addresses this aspect and that you (the franchisee) has the express right to open the franchisors books should you have a reasonable belief that they the franchisor owes you money or has not accounted for your money properly.
• Franchisees need to speak to current and former franchisees and ask lots of questions, and be suspicious where there are high numbers of former franchisees that are said to have requested that their contact details not be made available. There may often be disgruntled people and confidential settlements behind those stories.
• Unforeseen capital expenditure – a franchisor can require a franchisee to expend significant amounts of money in refurbishing their shop, or if there is rebranding of the franchise.
Bakers Delight uses this strategy and many franchisees have been required to complete expensive refurbishments only to find within months their contract is terminated. An experienced franchise lawyer can make provisions in the agreement to prevent the franchisor invoking this clause on a whim. Invoking this clause can have serious financial repercussions for the franchisee. Also note that in the case of Bakers Delight each and every refurbishment lines their pockets, so therefore there is no incentive not to routinely refurbish.
• Indemnity – the franchisee is normally required to indemnify the franchisor from and against any losses incurred by the franchisor arising from or in connection with the franchisee’s business but rarely the other way round – yet a franchisee’s business can be irreparably damaged by the actions of the franchisor or indeed other franchisees.
• Restraint of trade – franchise agreements invariably include restraint of trade clauses, and it is important for the protection of a franchisor’s business to prevent franchisees from setting up business and competing against the franchisor after the franchise is complete. However, many restraints are far too broad and are not for the legitimate protection of the franchisor’s business. Many would not stand up in court.
From a practical point of view we emphasise the need for all franchisees to be mindful of the potential dangers in franchising. This together with Australia’s flawed franchise laws, makes it imperative that the services of a specialist franchise lawyer be employed when a franchisee is first thinking of buying a franchise. It is too late for a lawyer to have an influence and possibly save you from financial catastrophe, when you have already psychologically committed to the purchase. For some franchisors this pure strategic posturing to push recruits through their selection process and before lawyers are consulted .