The Age yesterday published an article here in which franchisees complain about receiving no payment or compensation at the end of a franchise agreement for the goodwill that they have established during the term of the franchise agreement.
This is a common complaint by franchisees who feel that the franchisor who refuses to renew the franchise (or, more properly, grant a new franchise agreement) gets a windfall gain, either by:
- operating the franchisee's former outlet as a corporate store; or
- granting a franchise agreement to a new franchisee who may be willing to pay more for an established outlet than for a greenfield site.
It is usually an inherent feature of a franchise arrangement that the franchisees are left with nothing at the end of their term or terms (although this will, of course, depend on the terms of the individual franchise agreements and possibly the tenancy arrangements)
. However, this may be different if the franchisor has encouraged or allowed the franchisee to proceed on the erroneous belief that a new franchise agreement would be granted.
The article serves to remind practitioners that when acting for potential franchisees:
- they should advise the franchisee on their entitlements at the end of the franchise agreement;
- they should conduct their due diligence and assess the potential returns on their investment on the assumption that the franchisee will not be granted any further terms or a new agreement; and
- if the franchisee would like a new franchise agreement, then they should start negotiating early and may need to pay fees under a different fee structure (which could well mean higher fees).
When acting for franchisors, it may be prudent to obtain either an acknowledgement or a solicitor's certificate from the franchisee confirming that the franchisee is aware of their rights at the end of the agreement.