Autumn 2010 Newsletter

What is a Franchise Agreement?

Franchising is a business model in which one business (the franchisor) allows a separately owned business (the franchisee) to use the systems, brand name and other intellectual property rights of the franchisor in return for regular payments.  The franchisee benefits from a proven and tested business model.  According to Franchise Information New Zealand around 80% of franchised businesses still operate after 5 years, compared with only 20% of independently started businesses.  The franchisor, on the other hand, expands the business without providing the capital and taking on the risk.

The association between the parties is symbiotic.  The franchisee relies on the franchisor and the other franchisees to maintain the reputation of the brand.  The relationship is based on the franchise agreement which sets out the terms on which the franchise is to operate, including:

  • fees to be paid, both upfront and ongoing
  • duration of the agreement and renewal rights
  • intended territory or market
  • dispute resolution procedure, and
  • rules relating to the on-sale of the franchise

To assist the franchisee and to ensure consistent quality of service amongst franchisees, there is usually a franchise manual which sets out operational standards and procedures.  This manual contains the business model, with most agreements requiring strict adherence to it.

Fundamentally, franchise agreements should be approached like any other contract and must clearly reflect the arrangement between the parties.  Manyfranchise agreements, particularly for large well known brands, are non-negotiable, but prospective franchisees should be prepared to refuse to sign contracts which contain onerous and one-sided terms.

There are a number of common pitfalls in franchise agreements.  For example, the franchisee needs an exclusive territory within which the franchisor may not grant any other franchise licences.  Clauses allowing reduction of this territory by the franchisor are common and should be considered carefully.  Also, the franchisor should identify measures to protect the intellectual property rights being paid for.  The exact method of calculating the royalties needs to be specified as well as penalties for late payments.  Clauses which allow for early termination are very common and need to be clearly understood as they often involve a penalty payment.  Agreements limiting the liability of the franchisor to the franchisee are also cause for concern, particularly when related to obligations for marketing, training, and disclosure statements in the negotiation phase.

There is no specific franchise legislation to protect franchisees, however around half of franchisors abide by a self regulating code of conduct which aims to “promote high standards of franchise conduct” and does offer some protection against unreasonable and unfair conduct on the part of the franchisor.  A good franchise arrangement will provide the franchisee with many benefits and often provide inexperienced business owners with a supportive base to develop expertise and commercial skills.

For further information contact Graeme McLelland on (09) 407 0179 or Sue Wooldridge on (09) 407 0174.

 

This is not a mother in law joke!

Germany’s Federal Court of Justice held earlier this month that a son in law had to repay a NZ$40,000.00 gift from his parents in law to buy a house, following the couple’s separation.  The son in law kept the house following the end of the marriage.

The Court decided that the gift was based on a contract in which one of the terms was that the parents in law’s child (the wife) live in the house.

This will not give any comfort to New Zealand parents in law who are distressed to see one half (or more) of their financial support walk off with the son or daughter in law when a relationship collapses.  Unless the gift is protected by a formal agreement (preferably a relationship property agreement between the young couple) there is no “clawback” for the parents in law’s generosity.

For further information about relationship or separate property, or family matters generally, contact Sarah Jury on (09) 407 0176.

 

Second Chance Study Award

The Kerikeri branch of Business and Professional Women annually makes a study grant and is calling for applications from women who normally reside in the Bay of Islands and who are wanting professional or technical education at a tertiary level.

For application forms and further information, contact Julia Giacomelli at julia.giocomelli@gmail.com

 

Big Ideas for Small Businesses

Small (or even medium sized) business owners are sometimes daunted by the process and cost of searching out information and advice to help develop their businesses, and to take them to the next stage in terms of their potential.  Statistics New Zealand website “Business Helper” (www.stats.govt.nz/methods_and_services/guide-and-tutorials/user-guides) may be what you are looking for.  Statistics New Zealand collects and analyses data which can help businesses with:

  • marketing
  • monitoring economic trends
  • benchmarking financial performance
  • industry analysis
  • inflation information

The information available is useful for those wanting to analyse sector trends, identify potential markets and seek out niches for development.  The “Business Toolbox” page on the website www.stats.govt.nz/businesstoolbox includes “Market Mapper” allowing analysis on an area by area basis, by age, sex, income or family type, and “Industry Profile”, identifying the number of businesses of a particular type in a district, new and ceased businesses over the last five years, survival rates for businesses, worker turnover and average earnings.

The Statistics NZ website also has links to helpful resources on http://business.govt.nz/ and business mentors www.businessmentor.org.nz.

If you have a business plan you want to develop, or even if you just have a good idea and want a second opinion, we can point you in the right direction with a one off consultation.

If you would like more information contact Graeme McLelland on (09) 407 0179 or Sue Wooldridge on (09) 407 0174 for an appointment.

 

Trust Beneficiaries’ Rights to Information

How much information should beneficiaries under a trust be given, and what information are they entitled to?  In many trusts the settlors and trustees are Mum and Dad and the beneficiaries are the children.  Usually the children are kept informed and advised of the assets in the trust and the question of what information should be disclosed to the beneficiaries is often not an issue.

Questions may arise as beneficiaries get older or where communication between trustees and beneficiaries is limited or has broken down.  The beneficiaries may become suspicious of the actions of the trustees and demand financial statements and other financial information from the trustees.  This is more likely to occur where trustee parents may be losing mental capacity due to age related dementia.

Trustees are not legally required to show beneficiaries all trust documents, although in many cases trustees will, for example, supply a copy of the trust deed, information and explanation as to investments, financial statements and accounts of the trust.

Historically, it was thought that a beneficiary under a fixed trust (“fixed beneficiary”) had an entitlement to view trust documents and information, and a beneficiary under a discretionary trust (“discretionary beneficiary”) did not.  Under a fixed trust the number of beneficiaries and the share they will receive are defined.  This is more common in a trust established under a will.  Under a discretionary trust (which includes most family trusts) the trustees may use their discretion as to who will be a beneficiary and what share a beneficiary will receive.  The reasoning is that a fixed beneficiary has an entitlement to trust property, whereas a discretionary beneficiary merely has the right to be considered as a beneficiary.

In Schmidt v Rosewood Trust Ltd the Privy Council held that a beneficiary’s entitlement to seek disclosure of trust documents is based on the Courts’ inherent jurisdiction to administer trusts rather than whether the beneficiary is a fixed beneficiary or a discretionary beneficiary.  Both fixed and discretionary beneficiaries can apply to the Court for disclosure of Trust documentation.

Where a beneficiary applies to the Court for disclosure of a Trust’s documents, the Courts will, in exercising their discretion, balance the interests of trustees, beneficiaries and third parties.  The beneficiaries do not have an absolute right to information.  The Court will consider the nature of the information and the interests of all the beneficiaries.

Information which the Courts have in the past provided to beneficiaries include:

  • copies of the trust deed
    • financial accounts and statements of the trust
    • any deeds of variation of trust deed, and deeds of retirement and appointment of trustees
    • valuations of assets of the trust, and
    • legal opinions related to beneficiaries rights and the interpretation of a trust deed’s provisions

In exercising their discretion, the Courts will consider such factors as issues of personal and commercial confidentiality and sensitivity, whether limitations need to be placed on the use of the documents provided, whether some documents should be withheld in full or in part, and what impact the disclosure will have on the trustees, the beneficiaries or third parties.

There will no doubt be times when a trustee will refuse a beneficiaries’ request for trust information.  This decision is more likely to be respected and accepted where the trustee and beneficiary have developed a history of communication and respect.  As trustee, if you are unsure as to what type of trust information you need to disclose to the beneficiaries, we recommend you seek legal advice beforehand.

For advice about all aspects of trusts, contact Sue Wooldridge on (09) 407 0174 or Graeme McLelland on (09) 407 0179.

 

Snippets

We are pleased to welcome Stacey Price who has joined us as receptionist.  Anna Edwards who has been filling in during the summer break has returned to Invercargill to continue her studies.

 

All information in this newsletter is to the best of the authors’ knowledge true and accurate. No liability is assumed by the authors or publishers for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting on this information.

 

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