Rewind 140 years or so to find that in 1863 the world’s first commercial franchise was granted by Singer Sewing Machine Company, which allowed franchise owners to sell products using the Singer name. Although franchising subsequently expanded into the automobile and fuel industries in the USA, it wasn’t until the late 1960s that the seeds of modern franchising took hold. Since then, the growth in franchising has been amazing.
Franchising in Australia
The average Australian became exposed to franchising in the 1970s when the USA fast-food operators such as McDonalds, KFC and Pizza Hut first started franchise outlets in Australia. As a consequence, by the 1980s Australians began to associate the word ‘franchising’ with sectors other than fast-food and the idea that anything can be franchised became more familiar.
Today, Australia is the most franchised nation per head of population in the world and there are more franchise systems in Australia compared to our population than any other country (for example, Australia has at least 3 times as many franchise systems per capita than the USA).
Pharmacy Franchises
Over the last 20 years or so, there was a marked increase in the number and type of buying or marketing groups in the pharmacy industry. In reality, pharmacy franchises were essentially created by default as these buying or marketing groups developed their systems and standards and became more formalised. During this era, franchise was a dirty word in the pharmacy industry as marketing and banner groups were at pains to reject any notion that their member agreements constituted a franchise.
However, with the introduction of a mandatory Code of Conduct (referred to as the Franchising Code of Conduct) on 1 October 1998, which has the force of law under the Commonwealth Trade Practices Act 1974, banner and marketing group operators were forced to embrace the words franchise as most (if not all) member agreements fell within the definition of a franchise agreement under the Franchising Code.
Franchising Code
The Franchising Code of Conduct sets out the rights and obligations of franchisors and franchisees. The Code regulates franchising conduct in three key areas:
- prior disclosure
- mandatory standards
- dispute resolution.
The Franchise Agreement
Although every franchise agreement which details the terms and conditions of the franchise arrangement is different, its main purpose is the same in each instance.
A franchise agreement will typically deal with franchise fees and how and when payments are to be made, it will set out the territory in which the franchisee can operate, it will contain controls to protect the franchisor’s intellectual property, it will outline how the contract may be terminated or transferred (including limitations associated with any transfer) and it will stipulate the number of years for which the franchisee is given the right to own and operate the franchise.
As a word of warning, franchise agreements are drawn up by franchisors, and so are comprehensive in imposing restrictions and obligations on the (pharmacist) franchisee but are usually silent in terms of detailing the obligations of the franchisor.
Evaluating the Franchise Agreement
Given the evolution of franchising in the pharmacy industry, it is surprising that many pharmacists still sign the franchise agreement (whether the likes of a Terry White or Amcal franchise) without having the agreement properly evaluated. Simply having the agreement inspected by an accountant or bank manager is insufficient. A pharmacist needs to take the trouble to have a lawyer – preferably one who specialises in franchising – go through the agreement in detail with the pharmacist.
Ideally if you are considering taking on a franchise for your pharmacy business, you should seek out the assistance of a lawyer with extensive experience both in franchising and also the buying and selling of pharmacy businesses.
Impact on the Value of your Business
Any evaluation of a proposed franchise and relevant franchise agreement needs to also incorporate an assessment of the likely impact of the franchise on the future value (and saleability of the pharmacy business) especially if the franchise must be retained by a subsequent owner.
Until the recent entry of a large retail competitor (ie. Priceline) generally pharmacists felt comfortable signing franchise agreement for banner groups offered by the large wholesalers, who were not perceived as a retail threat. Obviously with the likes of Priceline and/or possibly Woolworths, Coles and other major retail competitors attempting to move into the business of granting pharmacy franchises, it is imperative that pharmacists seek appropriate legal and accounting advice at the outset to ensure that signing the franchise agreement does not end up becoming a millstone around the neck of the pharmacist and/or impacting upon the future saleability or value of the franchise business.
Prepared by
Anthony Cannizzo
Partner
Robert James Lawyers
Level 10, 200 Queen Street
Melbourne 3000
Tel (03) 8628 2000
Fax (03) 8628 2050
Email: anthony@robertjames.com.au
Web site: www.robertjames.com.au