The International Who’s Who of Franchise Lawyers has brought together Jennifer Dolman of Osler Hoskin & Harcourt, John Pratt of Hamilton Pratt and Andrew Wiseman of Allens to discuss levels of activity, access to financing for franchise clients, pressure on fees and levels of specialisation in this area of law.
Osler Hoskin & Harcourt LLP
Who’s Who Legal: What levels of activity are you seeing in your local marketplace? Has there been an emphasis on inbound or outbound franchising? Which industries are proving busiest, and is there more or less work than in previous years?
John Pratt: In most recessions/credit crunches, franchisors have found it an attractive environment in which to recruit franchisees. This credit crunch has been different. Because of its severity, those in work have not been willing to take the risk of starting their own business and those that have been made redundant do not believe it is the right time to start a business of their own. Accordingly, franchisors have struggled to find suitable franchisees. Indeed, for the great majority of UK-based franchisors finding suitably qualified and financed prospective franchisees is their biggest challenge.
There has also been a substantial reduction in the number of new franchisors entering the market. We believe that there is an approximately 50 per cent reduction in the number of new entrant franchisors as compared to the pre-2007 height of activity. As with prospective franchisees, the reason for this is that businesses have been reluctant to launch new ventures even if such ventures are the relatively safe “tried and tested” franchise model.
Paradoxically, franchisors have been more willing to expand overseas, perhaps because they believe other markets have been less affected by recessionary pressures or because they hope that the grant of master franchise rights (if that is their chosen method of expansion) will result in a substantial initial payment.
Jennifer Dolman: Canada was fortunately not affected by the recession in the same way as the United States. We continue to see a lot of activity including franchisors from the United States and other countries with an interest in expanding into Canada, primarily through master franchise transactions. Domestically, there continues to be a number of new entrants and we are regularly receiving notices from the Canadian Franchise Association advising of new applicants for membership. According to the January/February edition of FranchiseCanada magazine, the six franchise sectors in Canada with the most significant growth from 2008 to 2013 are business consultants/services/training; hair and nail salons/spas; seniors/home care and services; food-restaurants/dining rooms; home-based businesses; and health and fitness/nutrition. Franchise trade shows remain extremely popular and we have noticed a number of new lawyers showing an interest in franchising and attending at the Canadian Franchise Association and Ontario Bar Association Franchise Law Section franchise law conferences.
Andrew Wiseman: The continued growth of the Chinese market (despite a bit of a splutter in 2009) has, until this year, driven significant activity in the mining sector. This has single-handedly pushed the Australian economy along (no doubt disguising a multitude of other economic sins). The Australian dollar has been sought after – seen as a safe haven. This has probably made revenue from Australian businesses an attractive opportunity for inbound franchising, and a strong currency benefit for outbound franchise systems wishing to grow elsewhere. Food (including ice cream, cheesecake, Mexican food and salads), beverages (juice and coffee), health and fitness (fitness centres, laser clinics and retail eyewear) and swimming pool services have been vibrant. Clothing has had it tough. Motor vehicle dealerships (deemed franchises under the Australian Franchising Code of Conduct) has had mixed fortunes. Reduced government support has seen some manufacturing exit (but not retail distribution) and there have been some movements of master franchises amongst the independents. Some brands have exited altogether (Opel, after only 12 months) and the Chinese revamped MG is a new entrant with EagleRider flagging its interest.
Work levels have been steady in an era of uncertainty, brought about by a turbulent period of federal politics but brought to an end with a new majority government (the Liberal/National coalition) voted in at the beginning of September. However, uncertainty in the senate may mean that it takes some time for the new government agendas to come to fruition unless some deals are done with a number of the independent or micro party senators. Hopefully this will herald a new era for franchising with a focus on growth and profitability (instead of trepidation, hesitation and speculation about the future).
Who’s Who Legal: Are there issues with access to financing for franchise clients in your local jurisdiction? How is this affecting the activity in the market?
John Pratt: The leading UK banks, with the exception of Barclays, all have franchise units which seek to provide finance to franchisors and their franchisees. The banks have made it clear that franchising is a business activity which they wish to support.
When banks are prepared to make funds available to franchisees, the general rule of thumb is that they will match, pound for pound, every pound provided by a franchisee. For highly rated and successful franchises banks may be prepared to lend on ratios of 1:2.
Although the banks claim that they are very keen to lend to the franchise sector, currently the anecdotal evidence suggests that the availability of bank finance is being restricted so that only the most successful franchise systems have easy access to finance for their prospective franchisees. Further, the amount of checks that banks are undertaking have increased as has, the length of time it takes for a bank to decide whether to make a loan available. Further the amount of the loan and the loan terms have become less attractive.
Jennifer Dolman: We are not hearing any particular concerns from our franchisor clients that either they or their franchisees are having difficulty obtaining financing. However, we believe that some of the main Canadian chartered banks are delegating responsibility for franchise financing programmes to relatively junior management personnel, which may be indicative of a diminished interest in such programmes. New franchisees should consider the Canada Small Business Financing Program (the CSBF Program) for their financing. The CSBF Program (which used to be called the Small Business Loan Program) enables new franchisees with annual revenue of C$5 million or less to finance up to 90 per cent of the cost of purchasing or improving equipment or land. There is a C$500,000 maximum with financing of up to C$350,000 available to purchase or improve equipment, or to purchase leasehold improvements. The entire C$500,000 maximum can be used towards the purchase or improvement of real property. A CSBF loan has a one-time loan registration fee of 2 per cent of the total loan amount and limits a borrower’s personal liability to 25 per cent of the original loan with the result that a lender cannot require a personal guarantee that exceeds 25 per cent of the total amount loaned. Traditional loans ordinarily require a 100 per cent personal guarantee. A CSBF loan, however, cannot be used for franchise fees, working capital, royalties, advertising fund payments, legal fees, goodwill or for inventory/supplies. These fees and costs must therefore be paid for by the franchisee with other funds, whether readily available or borrowed from other sources. Since not all Canadian financial institutions offer CSBF loans, franchisees interested in obtaining a CSBF loan must identify Canadian lenders who have small-business banking and/or franchise banking specialists.
Andrew Wiseman: The four major Australian banks have franchise offerings and special sections that service them. This is not surprising with the franchise sector contributing over A$120 billion to the economy. The purse strings were a little tight in the years immediately following the global financial crisis (GFC), but this has eased as the banks have strengthened, with many reporting record profits in the last couple of financial years. That said, the banks have also been quite ruthless with risky businesses and have not been shy about calling in debts where the perceived risk has gone beyond comfort level. This has pushed a number of franchise systems over.
Who’s Who Legal: We received reports of greater fee pressures from clients in this area. Has this been true in your experience, and how are law firms meeting these demands? Does it affect the nature of the work being done?
John Pratt: We have not noticed fee pressures from clients although, of course, the “old” method of law firms not providing accurate pre-estimates of costs and sticking to them, no longer prevails. Certainly other than the very largest franchisors, there remains (but there always was) a sensitivity on fees. Having said that, in the United Kingdom there are relatively few law firms with a reputation and expertise in franchising and so there is limited choice available for franchisors.
Jennifer Dolman: We are not seeing fee pressures from clients in this area any more than clients in other areas. More and more clients, including our franchisor clients, are requesting budgets/estimates prior to initiating a particular project, especially in-house counsel who have their own legal budgets. Some firms, including ours, have implemented administrative and technological practices to record and monitor docketing to help ensure a matter stays within budget. It is important that we keep our clients informed so that there are no surprises when they receive our accounts. This is particularly important in litigation where the costs have a lot to do with the lawyer on the other side, that lawyer’s experience in franchising and how aggressively he/she is pursuing or defending a matter. Additionally, maintaining a comprehensive record of completed matters and their associated costs helps firms provide estimates for related matters with greater accuracy, which benefits both the firm and the clients.
In terms of commercial franchise work, we regularly assist clients who are entering Canada for the first time. Often, they shop the work around and only ask about the cost of preparing a Canadian disclosure document and form of franchise agreement. However, we make a point of emphasising that, given the significant repercussions under Canadian franchise legislation if there is a deficiency in the franchise disclosure document, start-up franchisors and franchisors entering Canada need to consider these costs as a wise initial investment in order to help avoid potentially devastating consequences down the road. We also highlight that when entering the Canadian market there is more to consider than just the cost of preparing these documents and that it is important to obtain advice on all other aspects of national Canadian law relevant to franchising, including tax, corporate structure, real estate, labour and employment, French-language laws, intellectual property and privacy. We have been pleased to find that prospective clients have been very receptive to this clear and candid approach, rather than receiving a bare-bones quote now and an unpleasant surprise later.
Andrew Wiseman: In our experience fee pressure, perhaps more aptly described as price sensitivity, has always been present in the franchising sector. This in part flows from the (low fee) expectations that have developed in the highly competitive and well-serviced US market and some European markets. To meet this we try and resource matters at the lower-cost end of the resource spectrum, although this is not always possible. Another option is to offer different prices depending on how much work the client in fact does (eg, completing disclosure document templates) which is cost-effective because the information resides with the client anyway and saves double handling. Flat or capped pricing finds favour with many clients (eg, for a disclosure document or for Australianising a template master franchise agreement). We do see active shopping around. Jennifer’s approach to bare-bones quote competition is a good one and one we try to use in similar circumstances.
Who’s Who Legal: What level of specialisation is possible in your jurisdiction? Are you seeing more lawyers focusing exclusively on franchise law, or are lawyers diversifying their practices? Are younger lawyers getting the necessary experience in this type of work?
John Pratt: Unlike the situation that prevails in the rest of Europe where there are some, but relatively few lawyers, who specialise in franchising, in the UK there are 20 (possibly as many as 30) lawyers who would spend more than 50 per cent of their time undertaking work for franchisors or franchisees.
A relatively new development has been the creation of the franchisee bar in the UK with a number of firms specialising in assisting franchisees but here again, unlike in North America, the situation that prevails in the UK is that very often specialists in franchising represent both franchisors and franchisees although obviously not from the same system!
Jennifer Dolman: In Ontario, the Law Society of Upper Canada offers a Certified Specialist Program which recognises members of the Law Society who have met established standards of experience and knowledge requirements in one or more designated areas of law and have maintained exemplary standards of professional practice. Franchise law is not one of these areas although franchising is included under the corporate and commercial law specialty. However, because of the draconian consequences associated with not properly disclosing a prospective franchisee in regulated provinces (Alberta, New Brunswick, Ontario, Prince Edward Island and Manitoba, with draft legislation being currently considered in British Columbia), it is imperative that franchisors and franchisees alike seek legal advice from individuals who do not merely dabble in franchise law. There are a number of lawyers across the country, both transactional lawyers and litigators, whose firms are members of the Canadian Franchise Association. In addition, the Ontario Bar Association has a very active Franchise Law Section. Franchise lawyers who have been recognised by their peers in Canada may be identified in the Lexpert Legal Directory, Best Lawyers of Canada and other international directories.
Andrew Wiseman: There are some small boutiques that specialise in franchising law, but this is the exception in Australia. Given the related areas of litigation, tax, IP and corporate work (structures and sales) and at times financing, franchising lends itself to a full (or quite full) service firm. Diversification is a trend often observed in tougher times. That said, franchising is a distribution model. More traditional distribution arrangements and the huge demand for online sales platforms sit comfortably with other distribution models.
It is a great opportunity for younger lawyers. As indicated above, price sensitivity can be dealt with by greater use of the lower-cost more junior lawyers. This is seeing younger lawyers getting the necessary experience.
Australia also has an enormous propensity for revisiting the regulatory environment and is (again) in the midst of a government review. Time will tell whether, and if so how quickly, the new government pushes ahead with this process. There is broad support for many of the proposals (including graver sanctions) and in a franchise-hungry society it might be seen as an easy vote winner by the new government.