With the proliferation of pharmacy “banner group” type franchises over the years, in deciding to adopt a specific franchise brand (e.g. the hypothetical “Kolesworth Super4Less Discount Warehouse Outlet Centre Pharmacy) pharmacist owner Gavan Sconn may be lulled into the misconception that there is no need to check the contents of the franchise agreement on the assumption that it is just a pro-forma document.
The reality is that all franchise agreements prepared by the franchisor are drafted substantially in favour of the franchisor and typically, these one-sided agreements are presented as the franchisor’s “standard” agreement to pharmacy owners, who sign on the dotted line unaware of the significant dangers buried within.
Therefore, before entering into a legally binding franchise agreement, pharmacist owners such as Gavan Sconn should engage an experienced pharmacy franchise commercial lawyer to review the agreement and ensure its contents do not include unexpected provisions prejudicing the pharmacy owner’s legal and commercial interests, thus resulting in unexpected “heartburn” being suffered.
Some of the more typical dangers buried in a franchise agreement are the following:
First right of refusal
Despite the pharmacy owner already being the owner of the pharmacy business when it decides to adopt a franchise brand, nearly all franchise agreements will require the franchisee to first offer the pharmacy for sale to the franchisor, if the franchisee wishes to sell the business. The terms of the offer and process will usually be onerous and include an obligation on the franchisee to give the franchisor a long period of time (e.g. 42 days) to accept or object to the offer.
These provisions do not take into account the commercial circumstances of the individual franchisee (e.g. a franchisee owns several pharmacy businesses operating under several different brands which it wishes to sell as a group) and unreasonably restricts the franchisee’s freedom to sell to the highest bidder.
Franchisees should also be wary that these types of provisions:
- will apply to a sale of the business as a whole or a part interest; and
- are not restricted to when the franchisee wants to sell to a third party (or transfer to a family member) but will also apply to a restructure of the existing business.
Restricted purchase obligations
It is not uncommon for a franchisor to require a franchisee to purchase a minimum quantity and/or value of products from the franchisor for resale in the business. However, what happens when the franchisor is out of stock of a key selling item for the business, or is not offering the best price for that stock?
A franchisor’s “standard” franchise agreement will not permit the franchisee to purchase stock from another supplier or grant a reprieve from the minimum tied purchase requirements. This standard restriction in stock suppliers introduces significant commercial risk to pharmacy owners.
Right to re-brand
Your franchisor will likely have a right under the franchise agreement to re-brand at any time and you will have to accept any such re-brand, whether or not the re-brand fits your business vision or even if it will result in significant rebranding costs.
Franchisor lease consent
Typically a pharmacy owner will negotiate or deal with its lease as a completely separate commercial matter from the franchise agreement. Given this, such owner would expect to have the freedom to vary or transfer the lease or sublease the premises to the exclusion of the franchisor, subject only to obtaining consent of the landlord.
Despite this expectation, many standard franchise agreements require the franchisee to obtain the prior consent of the franchisor before dealing with their lease in any way, no matter how immaterial the issue is.
Many pharmacy owners believe that as they agree to pay the franchisor significant fees under their franchise agreement in order to utilize the franchisor’s branding, the franchisor will not take any steps to diminish the franchisee’s use of such branding (e.g. by granting a nearby competitor the right to use the same branding).
Despite this belief, in general all “standard” pharmacy franchise agreements prepared by the franchisor will not grant any form of exclusive territory. A pharmacy owner would need to specifically negotiate with the franchisor for the inclusion of an exclusive territory into the agreement.
It is dangerous for you to assume that a franchise agreement prepared by the franchisor will protect your interests. There are many other unfavourable provisions we have come across in our extensive experience reviewing agreements prepared by leading pharmacy franchisors. Despite this, we are often successful in obtaining amendments to overcome the pitfalls mentioned above.
If you require any specific information or assistance to protect your interests, please do not hesitate to contact the writer on 03 8628 2012 or firstname.lastname@example.org.
Anthony Cannizzo is a Partner at Robert James Lawyers practising in commercial law with a significant focus on health, business and property across Australia.
Anthony’s significant pharmacy experience includes pharmacy business and franchise transactions Australia-wide, related leasing transactions Australia-wide, structuring advice and associated structure documentation, advising clients regarding State and Territory Pharmacy Regulatory Bodies, applications to Medicare, advising and handling all aspects regarding applications and objections under the Pharmacy Location Rules and Ministerial Discretional Applications, ownership including partnership disputes.
Disclaimer: The content of this article is intended only to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice. You should seek legal or other professional advice before acting or relying on any content of this article.