Big business, big responsibilities – Small business, big responsibilities

When buying a franchised business, do not be fooled into believing that you are immune to risk by virtue of having a franchisor looking over your shoulder.  Taking on a business is a huge responsibility, irrespective of whether the business is big or small.

The responsibilities take on three major forms.

First, there are the responsibilities that a franchisee agrees to accept by signing various agreements, including the franchise agreement and lease/licence (if applicable).

Second, there are responsibilities owed under the laws that affect franchisees as traders, corporate entities and employers.

Third, each franchise owner has a responsibility personally, not just under any personal guarantees given, but also to ensure that their personal assets, and by implication their families, are protected.

Agreed responsibilities

Each franchisee will sign a franchise agreement and will also sign either a lease or a licence unless the franchise is a mobile business.

Irrespective of the size or cost of the franchise purchased, the franchise agreement will impose onerous obligations on the franchisee and the franchisor will expect the franchisee to comply.

There are obligations

• to pay fees
• to provide reports
• to carry on the business in accordance with the operations manual
• to keep certain information confidential
• to maintain the fitout of the premises and to change the fitout at a franchisee’s own cost
• to only use the intellectual property of the franchisor in a certain way
• to not compete with the franchise
• generally, to live and operate within the system of the franchise and ensure that as the franchisee, you do not breach the franchise agreement

For those franchised businesses with premises, there will be obligations under the lease of the premises.  If the franchisor is the tenant under the lease, it is the franchisee’s responsibility under a licence or sublease to comply with the lease, as though the franchisee was the tenant.  Sometimes franchisors require franchisees to provide personal guarantees under the lease directly, as well as under the licence or sublease. These obligations continue to the end of the term, irrespective of whether the franchise agreement or lease/license is terminated unless otherwise expressly agreed in writing by the franchisor and/or landlord.  This includes the obligation to pay fees and rent.  Some obligations will continue to apply to a franchisee beyond the end of the term, such as the obligation not to compete with the franchise.

Responsibilities under law

There are numerous areas of law that apply to business owners, irrespective of size.

For those structured as a corporate entity, there are responsibilities under the Corporations Act 2001.  For example, the responsibility to have an annual general meeting, to comply with director’s duties and to lodge an annual report with ASIC, just to name a few.

There are responsibilities under taxation legislation including the requirement to be registered for GST and to lodge BAS statements monthly or quarterly and to pay various taxes.

In addition, there are the responsibilities under the Fair Trading and Trade Practices legislation in relation to misleading and deceptive conduct and numerous consumer protection provisions such as selling goods and services that are of merchantable quality and fit for the purpose.

For those with employees and also for those with contractors, there are responsibilities that apply irrespective of the size of the business.  For example, the responsibility to pay superannuation, to meet minimum wage levels, to provide work cover insurance and to operate the business in accordance with reasonable occupational health and safety standards.

All of these responsibilities apply irrespective of the size of the business and the consequences of non-compliance are potentially huge.

Personal Responsibility

The signing of personal guarantees can be the conduit that allows risk from the business to travel right into a franchisee’s lounge room.  Put simply, the effect of giving a personal guarantee is that all the assets owned by the person giving the guarantee, are at risk, including the family home.  From an asset protection point of view, signing a personal guarantee carries the same risk as if the franchisee had entered into business as a sole trader. However, for anyone who has a corporate structure, signing personal guarantees is usually required by franchisors and landlords and so is a necessary and unavoidable evil.

However, there are a number of ways to minimize risk and to ensure, as far as possible, that the risk does not extend to personal assets.  Ensuring that the person giving the personal guarantee does not have any assets in his or her own name is one of the best ways to quarantine the risk.   Prior to entering into any personal guarantees, a franchisee must seek both legal and accounting advice about asset protection.

There is also the risk of being sued by third parties.  The reasons are innumerable and differ depending on the nature of the business.  They could result from a case of food poisoning or a customer slipping over, a child breaking a limb on play equipment or an employee being hurt while at work.

Obtaining advice about business insurance is absolutely imperative.  As a minimum, a franchisee (both as a sole trader and a corporate entity) must have public liability insurance and may also need professional indemnity insurance, depending on the type of franchise.  In addition, franchisees should consider life and disability insurance and income protection insurance.

Another personal responsibility of the franchisee is to the franchisee’s family/partner.  On one hand, this responsibility is separate to a franchisee’s business, and should not be considered as important in an article such as this.  On the other hand, the business and the family/couple are dependent on each other for their success.

Some franchised businesses involve both husband and wife (terms are used for convenience) and separation by the couple could, depending on the terms of the franchise agreement, result in the end of the franchised business as well.  ‘Money worries’ are one of the most common factors placing stress on couples and families and so a business that is not properly structured, where asset protection advice has not been sought or followed, where proper insurance has not been maintained, and where the financial security of the family/couple is at risk, is something that can place considerable pressure on families/couples.

Properly drafted wills for both the husband and wife (again, terms are used for convenience) which include testamentary trusts and take into account the structure of the business can also be a lifesaver, so to speak.

Final responsibility

Successful franchisees will tell you that owning your own business can be one of the most rewarding experiences that you will ever have.  The honest ones will also tell you it has been one of the hardest things they have ever done.

There is a lot of responsibility, in a number of different areas.  The consequences of not dealing directly with and planning for each of those areas of responsibility can be devastating, if things do not operate as planned.

So it is critical to plan ahead.  Do not cut corners when it comes to the types of responsibilities mentioned in this article.  Follow qualified advice of lawyers and accountants who are experienced in their field. And then, get on with the business of owning and operating your own franchised business.

For further information please contact one of Franchising lawyers.

Author: Louise Wolf