Exiting Your Franchise - What are your options?

[This is an article written for the Inside Franchise Business magazine titled: Leaving on your terms - pages 124, 126-127.  Certain formatting and emphasis as appearing in the magazine article were that of Inside Franchise Business magazine's]

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What are your options and what do you need to be aware of?

Your options:

  • Sell your franchise
  • Negotiate a termination with the franchisor
  • Walk out

Selling your franchise

Check your franchise agreement to see if there is a requirement that you offer the franchise back to the franchisor first.  This is referred to as a “first right of refusal” granted to the franchisor. 

Most franchisors have a first right of refusal to purchase your franchise and such procedures vary.  Essentially this right involves:

  1. Offer: you must first obtain an offer from a purchaser (to show that it is a genuine offer) and then submit this offer to the Franchisor OR you must make an offer first to the franchisor;
  2. Acceptance: the franchisor will then have a period of time within which to elect to purchase your franchise on the terms and conditions set out in the Offer;
  3. Free to sell: if the franchisor decides not to exercise its rights within the time frame set out in the franchise agreement, then you will be free to sell to a third party.

Practical steps to ensure a smooth transition

The length of time the franchisor has to consider your offer can range from 30 to 120 days.

What you can do: where possible, ensure that your purchaser is locked into a Contract of Sale of Business (“Contract of Sale”) subject to a condition that the franchisor does not exercise its right of first refusal.  This way, you will be able to proceed with the sale to your purchaser as soon as the franchisor turns down its right to buy back the franchise. 

Note here also that most franchise agreements provide a finite window for you to sell and if you are unable to sell your franchise during this period, you need to go through the process of offering the franchise to the franchisor before you can go to market again.

Franchisor’s consent

Once you are cleared to sell to third parties, they still need to be approved by the franchisor, to have satisfactorily completed all training required and are proven to be respectable, responsible, solvent and capable of conducting the franchise. 

What you can do: request financial and business references from your purchaser when they sign the Contract of Sale and have them ready for submission to the franchisor as soon as the franchisor declines the buy back offer.

Know your exit obligations

To the franchisor who will look to you for the payment of:

  • a transfer fee (this is set out in your franchise agreement and can be expressed as a fixed amount or a percentage of the sale price)
  • All monies owing by you under the franchise agreement
  • A Performance bond (if applicable) – some franchisors require a certain amount of money to be deposited with them to cover your liabilities which may only be revealed or discovered after the transfer.  Such monies will be refunded to you in manners set out in the franchise agreement.

To the landlord and where you occupy under a licence from the franchisor, the franchisor:

  • Before changeover, landlords and franchisors (as the case may be) will carry out an inspection of the premises to ensure that they are in a satisfactory condition for the incoming franchisee;
  • You may be required to carry out certain refurbishment works and clean the premises.

Ensure that you factor this cost into your exit plan.

Negotiate an early exit with the franchisor

This involves negotiations with the franchisor to try and find a way to reduce your exposure to damages and compensation while keeping the value of the franchise business until a new franchisee comes along.  Open negotiations with the franchisor are always encouraged as it is in the interest of both parties that the goodwill of the franchise business is maintained for the next owner.

In some instances, the franchisor may offer to buy you out or assist with the management of the franchise (at a fee) until you find a purchaser.   

Walk Out (abandonment)

This is not a recommended exit choice as you will be in breach of the franchise agreement. 

The franchisor will have the rights to pursue you for all losses and expenses that it will incur and suffer as a result of your abandonment of the franchise. 

With a usual requirement that directors of corporate franchisees provide personal guarantees for the obligation of the franchisee under the franchise agreement, your personal assets will be exposed to satisfy such claims from the franchisor. There is no way of knowing the extent of the exposure to damages this will entail.

Other Exit Considerations

Premises Lease

If the lease is in your name:

Check to see if there is a clause in the franchise agreement requiring you to assign the lease to the franchisor upon termination of the franchise agreement.

In any event, before you vacate the premises, you will be required to reinstate the premises to their condition as at the time of commencement of the franchise/lease. 

If you are retaining the premises and just getting out of the franchise (no compulsory transfer to franchisor), you will need to de-brand the premises so that they do not resemble the franchised business.

 Both de-branding and de-fitting (if you vacate) the premises can be very costly.

You will be required to make good any damage to the premises caused by you in the de-fitting or de-branding.

Note here that some leases and franchise agreements give the landlord or the franchisor (as the case may be) a right to require fitouts to be left at the premises.  In this case you may be able to save on defit and reinstatement costs.

Now that you are out, are there ongoing obligations?

Restraint of Trade

You will be restrained for a period of time after the termination of your franchise from operating in competition with the franchisor.  This usually means that you cannot be “involved in” a similar business as your previous business, solicit custom from customers of the franchisor or poach staff from the franchisor (to name some common restrictions).

Note here that “involved in” usually extends to your involvement as a director, manager, agent, partner, shareholder or employee of another entity. This effectively means that you cannot work in a similar business for the specified time.

Confidentiality

You must continue to keep all confidential information of the franchisor confidential.

CONTACT US FOR A CONSULTATION TODAY.

Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.  

 

 

 

Startup Funding in the Cryptocurrency Era—Is ICO an option?

All startups, regardless of the industry they are in, require funding. Traditional fund raising channels have been:

Before 29 September 2017

  • the non disclosure option where offers are confined to small scale offerings, sophisticated investors, institutional investors and associated personnel; and
  • the disclosure option which requires the compilation of a disclosure document (prospectus, profile statement or an offer information statement;

From 29 September 2017

  • a third option was introduced with ASIC facilitated Crowd Funding utilising a specific platform via licensed intermediaries. Such intermediaries must have an AFS licence with authority to provide crowd-sourced funding services.  Refer to our  ASIC Facilitated Crowd- Funding article for eligibility and fund raising restrictions.
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ICOs (Initial Coin Offerings)

With the emergence of Bitcoin and tech start-ups in the blockchain environment, ICO (Initial Coin Offerings) have surged in recent years.  ICOs seem to be an effective channel to raise funds in the cyptocurrency era but are they regulated?

How are ICOs regulated outside of Australia?

We have seen overseas regulators such as the United States Securities and Exchange Commission attribute a defined status for ICOs in 2017.  In July 2017, the SEC further equated it to an IPO bringing ICOs within the realm of its securities regulations.  As early as 2014, the IRS already determined that a virtual currency would be considered property for federal tax purposes.

In Canada, ICOs targeting Canadian investors would fall within their securities law regime and requirements for issuers of ICOs and cryptocurrency exchanges looking to trade in tokens have been issued. 

What is happening in Australia?

ASIC is our corporate, markets, financial services and consumer credit regulator which promotes investor and consumer trust and confidence, ensures that there are fair and efficient markets for financial products and maintains a register of accredited personnel.

ASIC’s approach is to ascertain on a case by case basis, whether an offering concerns product or service offerings or if the fund raising model resembles regulated financial products under the Corporations Act 2001 (Cth) ("the Act").

If an offer falls into any one of the following categories, then the ICO is likely to be subject to the fundraising regime regulated by ASIC:

Is the ICO an offer of shares?

If shares are issued to investors which carry rights of ownership of the company, voting rights and various entitlements to future profits of the company and/or a claim on the residual assets upon winding up of the venture, this will be regulated.

This application is not limited to the legal form that the investment vehicle takes. Even where a company structure is not adopted for the funding raising exercise, a coin, in certain instances, can fall within the definition of a “share”, for the purposes of the Act.  If the characteristics of a “share” is found in the coins to be issued pursuant to an ICO, then a prospectus will need to be issued where large scale offerings to the public is anticipated.

Is the ICO an offer of a derivative?

Where you are offering a product that derives its value from another underlying instrument or reference asset or where the underlying asset is a commodity, this may be a "derivative" regulated by the Act.  Where a coin is priced based on factors such as the value of a financial product or an underlying market or asset price moving in a certain direction (similar to options or futures contracts), before a trigger event giving rise to payment obligations, chances are that it may be caught.

Could it be a managed investment scheme?

Where investors contribute assets, including digital currency, to acquire an interest in a scheme where such assets are pooled together for a common enterprise to produce financial benefits for all while investors do not have day to day control over the operation of the enterprise, there is a managed investment scheme.

How do you ensure compliance?

Before launching an ICO, you need to be clear on:

  • what is being offered in the market;
  • what rights and obligations are attached to the offering;
  • how will the value of the offering (coins/digital currency) be determined; and
  • whether the coins/digital currency have the attributes of investment.

Depending on the answers to the above questions and the purpose and outcome of the venture to be funded, the ICO may or may not be regulated under current legislation.   

As cryptocurrency law is still developing, it is important to keep up to date with any new developments, policy guidelines and any information that may be issued by ASIC from time to time.  New players in this market will find it more and more difficult to ensure compliance when governments start taking steps towards a more regulated cryptocurrency environment.

NEXT STEPS

The ASIC website is a very useful starting point for all concerns regarding ICOs but should you be unsure as to how to proceed, please feel free to:

CONTACT US FOR A CONSULTATION TODAY.

Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.  

Data Breach Notification - Know Your Responsibilities

The Privacy Amendment (Notifiable Data Breaches) Act 2017 established a Notifiable Data Breaches Scheme (NDB) in Australia.  The NDB Scheme will commence on 22 February 2018.

If you are an organisation or agency covered by The Privacy Act 1988, you must be already very familiar with the APPs (Australian Privacy Principles). In essence, agencies and organisations are required to take reasonable steps to protect the personal information they hold from misuse. interference and loss, and from unauthorised access, modification or disclosure.

It is now time to review your practices, procedures and systems to ensure that you are ready for the NDB Scheme.

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What the Office of Australian Information Commissioner (OAIC) has done to assist organisations

Over the years, the OAIC has published various guides to assist organisations with compliance under the Privacy Act 1988.  One example of this is their Guide to securing personal information. This is a very useful guide which does not only take you through the basic concepts of what constitutes personal information and sensitive information but also provides practical guidelines as how to conduct a privacy impact assessment (PIA) which identifies the impact the proposed activities might have on the privacy of individuals and sets out recommendations for managing, minimising or eliminating the impact.

The PIA assists an organisation with identification of any personal information security risks and the reasonable steps that may be required to be undertaken to protect that personal information concerned.

What is a Notifiable Data Breach?

A Notifiable Data Breach is a data breach that is likely to result in serious harm to any of the individuals to whom the information relates.  A data breach occurs when personal information held by an organisation is lost or subjected to unauthorised access or disclosure.

Examples referred to on the OAIC website include circumstances when:

  • a device containing customers' personal information is lost or stolen;
  • a database containing personal information is hacked; or
  • personal information is mistakenly provided to the wrong person.

Four key steps to consider when responding to a breach of suspected breach

  • Step 1: Contain the breach and do a preliminary assessment
  • Step 2: Evaluate the risks associated with the breach
  • Step 3: Notification
  • Step 4: Prevent future breaches

Resources to prepare for the NDB scheme

The OAIC has devised a guide to assist organisations in their development of a Data Breach Response Plan as well as a Guide to handling personal information security breaches.  These contain detailed steps and considerations to be taken into account to ensure that appropriate practical measures are adopted where there is or a suspected data breach.

Without going into the details of the Guides, to meet their information security obligations, agencies and organisations should generally consider the following:

  • Risk assessment – Identifying the security risks to personal information held by the organisation and the consequences of a breach of security.
  • Privacy impact assessments – Evaluating, in a systemic way, the degree to which proposed or existing information systems align with good privacy practice and legal obligations.
  • Policy development – Developing a policy or range of policies that implement measures, practices and procedures to reduce the identified risks to information security.
  • Staff training – Training staff and managers in security and fraud awareness, practices and procedures and codes of conduct.
  • The appointment of a responsible person or position – Creating a designated position within the agency or organisation to deal with data breaches. This position could have responsibility for establishing policy and procedures, training staff, coordinating reviews and audits and investigating and responding to breaches.
  • Technology – Implementing privacy enhancing technologies to secure personal information held by the agency or organisation, including through such measures as access control, copy protection, intrusion detection, and robust encryption.
  • Monitoring and review – Monitoring compliance with the security policy, periodic assessments of new security risks and the adequacy of existing security measures, and ensuring that effective complaint handling procedures are in place.
  • Standards – Measuring performance against relevant Australian and international standards as a guide.
  • Appropriate contract management – Conducting appropriate due diligence where services (especially data storage services) are contracted, particularly in terms of the IT security policies and practices that the service provider has in place, and then monitoring compliance with these policies through periodic audits.

The above list should always be considered in light of:

  • the sensitivity (having regard to the affected individual(s)) of the personal information held by the agency or organisation;
  • the harm that is likely to result to individuals if there is a data breach involving their personal information;
  • the potential for harm (in terms of reputational or other damage) to the agency or organisation if their personal information holdings are breached, and
  • how the agency or organisation stores, processes and transmits the personal information (for example, paper-based or electronic records, or by using a third party service provider),

as these would dictate both the extent and breadth of the measures to be undertaken.

Next Steps

The OAIC website is a very useful first port of call for all concerns regarding your organisation's privacy obligations but should you be unsure about how to proceed, please feel free to:

CONTACT US FOR A CONSULTATION TODAY.

Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.  

ASIC Facilitated Crowd Funding - Should your Business consider this?

Businesses that opt to extend beyond the private corporate structure will have wider opportunities to raise capital from the public with the amendments to the Corporations Act 2007 which come into effect on 29 September 2017.

The amendment aims to facilitate flexible and low-cost access to capital for small to medium sized unlisted public companies by reducing the regulatory requirements for making public offers, while ensuring adequate protections for retail investors.

Before 29 September 2017, capital raising options include:

No Disclosure Option

Some offerings fall within the disclosure exemption provisions and are limited to (not the full list) the following:

  • small scale personal offerings of no more than $2,000,000.00 from a maximum of 20 investors in any 12 month period (advertising of such offers are prohibited)
  • offerings to sophisticated investors with assets of at least $2.5 million or a gross income of at least $250,000.00 pa for the past 2 years
  • investors who invest at least $500,000.00 in the company
  • offerings through an ASIC licensed investment dealer confirming the experience of the investor in assessing merits of the offers
  • investment from professional investors
  • people associated with the body

Disclosure Option

All other offers to the general public will require one of the following, depending on the nature of the offer:

  • a prospectus
  • a short form prospectus
  • a profile statement
  • an Offer Information Statement

The two options have drawbacks where the no disclosure exempt option is restrictive as to the scale and reach of the offering whilst the disclosure option entails extensive documentation, time and cost.

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Now a third option - Crowd Source Funding (“CSF”) is available to certain unlisted public companies to raise capital from the public

This option fills the gap between large offerings which require extensive disclosure and small scale offerings with very restrictive advertising opportunities and a limited categories of offerees.

Who is Eligible

Unlisted public companies (not investment companies) with a principal place of business in Australia with less than $25 million consolidated assets and the majority of directors residing in Australia.

Maximum Capital Raising Cap

$5 million in any 12 month period

Obligations to Investors

Retail investors are subject to a cap of $10,000.00 per company per 12 month period and a 5 day cooling off period after making an application

CSF offers must be made via a licensed CSF intermediary’s platform.

Advertising is permitted provided that ASIC regulations are complied with. ASIC is now accepting applications from potential CSF intermediaries for AFS licence authorisations to provide a crowd-funding service. 

Offer Document

A CSF offer document containing prescribed information must be prepared. ASIC has issued a template as a guidance tool for this purpose.

Temporary Corporate Governance and Reporting Concessions (AGM, audit and reporting requirements)

To be eligible for these concessions, the company must state in its application for registration for or conversion to a public company that it intends to make a CSF offer within the next 12 months and that it will be eligible for temporary concessions on registration or conversion.

It must also:

  • be eligible to make CSF offer
  • successfully complete the CSF offer within 12 months of registration or conversion

Note also that the exemption from audit requirements only applies when the aggregate amount raised via CSF is less than $1 million.

What this means to you

Businesses looking for funding of less than $5 million in any 12 month period now have the option to reach out to the general public without producing a detailed prospectus which is expensive and time consuming. Exemptions from certain public company reporting and governance obligations mean even more savings on administrative costs of running a public company.

If you are a business with an innovative idea which is likely to appeal to the general public, whether as a start up or branching out into a related business, this venue can be your best option.

Practical Tip

Public companies are subject to more stringent requirements under the Corporations Act 2001 as opposed to private companies and before registering or converting to a public company, it is important to note some of the requirements that apply to public companies listed below:

  • External audit of financial statements must be lodged with a directors’ report with ASIC annually
  • Provision of reports to members within 21 days prior to the AGM or 4 months after the end of the financial year, whichever is the earlier
  • Lodgment with ASIC of its constitution, special resolutions adopting, modifying or repealing the same
  • Directors with a personal interest in a matter to be considered at a meeting are not allowed to be present or vote without the other directors’ consent
  • Directors cannot be removed by other directors but can be removed by members
  • Directors are subject to personal liability when the company trades insolvently (this same liability applies to private company directors)

Next Steps

Once you have decided to either register a public company or convert your private company into an unlisted public company to avail the crowd funding venue, you should:

  • Create a structure (whether as a single entity or a group structure) for your venture which is capable of supporting both your short and long term business strategies
  • Discuss with your accountant as to the most tax effective way of setting up stakeholders’ interests
  • Have a funding plan for ongoing costs and future expansions 
  • Create a marketing plan in sync with your short and long term goals with built in flexibility to cater for changes in market sentiment
  • Have assets protection plans in place both built into the corporate group structure and on the shareholders' and directors’ levels
  • Have a tailored Constitution that reflects the rights and obligations of the members, sets out meeting protocols and procedures, power of the board and exit mechanisms
  • Implement risk management strategies for all immediate and perceived risks

Once the above foundation is laid, you will need to look at compliance issues, some of which are set out below which contains links to our previous articles:

Industry/Mode Specific

Franchisors

Food manufacturers and retailers

Premises

Disability Access Standards

Employment

Fair Work Act 2009 requirements

Contractual agreements with third parties

Unfair Contracts

Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.  

NOT SURE whether the Crowd Funding Option is right for you?

CONTACT US FOR A CONSULTATION TODAY.

 

How to Create the Ultimate Team to Drive your Business

Business owners can have the best planning, marketing strategies, products and services but without a great team, no plan can ever get off the ground.

As Anne M. Mulcahy said:

Employees are a company's greatest asset - they're your competitive advantage. You want to attract and retain the best; provide them with encouragement, stimulus, and make them feel that they are an integral part of the company's mission.
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Building the ideal team by nurturing the individuals

We all want the right candidate for the job who will share our passion and be instrumental in turning our dream into reality.

As business owners, we should take note of the following:

1. Hire for attitude and train for skills.

We all want our new candidates to hit the ground running and by saying that we hire for attitude, we are not saying we ignore skills altogether. For every position, there is a skills set that candidates need to possess in order to perform their responsibilities. Beyond this, we need to look for people who are committed to taking personal responsibility for offering unforgettable service, produce products that are of the highest standards and deliver over and beyond. They also need to be able to think and act like owners.

Practical tip:

To screen for the right attitudes, work out what attitudes you are after and then design targeted questions to get at the specific attitudes that you want. For instance, ask a candidate about a time when he/she went above and beyond to meet the needs of a customer if you are looking to hire someone who is prepared to do whatever it takes to provide sensational service.

2. Set the expectations of the role from day one

Match expectations, responsibilities and rewards. More often than not, employees are most dissatisfied when they feel their efforts are not being recognised and rewarded or that their role in the bigger picture is negligible.

Practical tip:

Draw up an employment agreement which clearly sets out the expectations of the role, perhaps build in incentives to reward exceptional results and efforts and go through the agreement with the prospective employee in person. The importance of the role within the business structure also needs to be expounded. This way, you will have the opportunity to dispel any disillusions, answer any questions that the employee may have which also sends a message to your employee that you are always ready and willing to have open discussions with him/her. 

3. Make Work Life Balance part of your corporate culture

Time off after an intense working period, the occasional early leave day and respecting your employees’ personal space can go a long way to ensuring that you have a healthy, rejuvenated workforce and a workplace that is attractive to all the talents out there.

Practical Tip

Explore employment benefits programs, wellness programs to create happy, loyal and engaged employees. Such programs can also foster team bonding within your business for better overall performance.

4. Growth and training

Employers who help employees grow not only in their current roles but also in the development of new related skills play a part in shaping the careers of their employees. Prospects of advancement and the opportunity to learn new skills are often more valuable than monetary compensation from the employees’ perspective.

Practical Tip

Communicate with your employees on a regular basis and explore with them paths of advancement within the organization.

5. Fair remuneration

Compliance issues aside, employees should be rewarded and recognized for their good work and dedication.

Practical Tip

Incentive payments tied to productivity can be introduced into employment contracts, have “best achiever” awards within the organization so that achievements are celebrated, conduct fair annual appraisal of each employee and perhaps offer share options.

Other non monetary benefits can be flexible working hours where possible, allowing employees the occasional long weekend offs or longer lunch breaks. Bestow employees with responsibilities so that they can take ownership of their actions.

Determine Your Labour Structure for better bottomline

Labour costs are variable costs and careful management of such costs will have significant impact on your bottom line. Employers need to find the right mix of full time, part time, casual employees and may also want to supplement them with independent contractors. Different roles call for different modes of employment to minimise labour costs when creating an overall structure that is conducive to hard work, a sense of belonging, creativity and innovation.

Australian businesses need to work within our workplace law framework and understand how and when labour on-costs apply to different modes of labour engagement. We will elaborate on the difference between employees and independent contractors in our upcoming articles.

In the meantime, refer to our earlier articles on how to comply with the Fair Work Act 2009 and the new protection of vulnerable workers legislation.

Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.  

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How to prepare for the Fair Work (Protecting Vulnerable Workers) Legislation 2017

The Fair Work (Protecting Vulnerable Workers) Bill 2017 has passed through both Houses of Parliament with Senate amendments to be referred back to the House of Representatives before Royal Assent can be given. The changes will apply 6 weeks after Royal Assent is obtained.

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What are the proposed changes?

The aim of this Bill is to protect vulnerable workers by:

  • introducing a higher scale of penalties for "serious contraventions" of certain workplace laws
  • increasing penalties for record-keeping failures
  • making franchisors and holding companies responsible for underpayments by their franchisees or subsidiaries where they knew or ought to have known of the contraventions and failed to take reasonable steps to prevent them
  • prohibiting employers from requiring their employees to make payments
  • strengthening evidence gathering powers of the Fair Work Ombudsman in its investigations of vulnerable workers exploitations

SErious Contraventions

Certain contraventions in the Fair Work Act 2009 can be subject to the higher penalties where such contravening conduct is deliberate and constitutes part of a systematic pattern of conduct relating to one or more other persons.

If the Senate amendments are adopted, a serious contravention case is only made out if:

  • the person knowingly contravened the provision; and
  • the person's conduct constituting the contravention was part of a systematic pattern of conduct relating to one or more other persons.

Contraventions that are subject to the higher civil penalties are:

  • s.44(1) Contravening the National Employment Standards);
  • s.45 (Contravening a modern award);
  • s.50 (Contravening an enterprise agreement);
  • s.280 (Contravening a workplace determination);
  • s.293 (Contravening a national minimum wage order);
  • s.305 (Contravening an equal remuneration wage order);
  • s.323, 325 and 328 (Method and frequency of payment, unreasonable requirements to spend amounts, Employer obligations in relation to guarantee of annual earnings);
  • ss.535 and 536 (Employer obligations in relation to employee records and pay slips).

The higher penalties are 10 times the penalties otherwise applicable where the contravention is not a "serious contravention".

Franchisors and holding companies held liable

While the existing law already holds persons responsible where they are "involved in" a contravention even when they are not the direct employer (accessorial liability), this responsibility does not attach if the person concerned genuinely does not know about the contravention.

The new proposed laws however, will apply to franchisors which have a significant control over the affairs of their franchisees' affairs and holding companies. Control relates to the affairs of the franchisees broadly and turning a blind eye to contraventions will be caught under the new laws. Holding companies, by definition, have control over the affairs of their subsidiaries and the "control" test here will invariably be satisfied.

Franchisors and holding companies will be responsible for certain contraventions by businesses within their control if they knew or could reasonably be expected to have known that:

  • the contraventions would occur; or
  • contraventions of the same or a similar character were likely to occur.

(Note that there is no liability if the franchisor or holding company has taken reasonable steps to deal with the problem)

Next Steps for business owners and franchisors

First Step: conduct an audit of all your employment contracts/arrangements within your business to ensure compliance with the Fair Work Act.

Second Step: hold meetings with employees to ascertain whether there is room to introduce some flexibility arrangements into their employment contract (refer to our detailed article ).

Third Step: if you are a franchisor or a holding company, review your agreements with your associated entities and introduce new requirements in your policies and procedures for your franchisees and subsidiaries in light of the new laws.

Fourth Step: have in place an internal policy to be followed by management for vetting and auditing franchisee's and subsidiaries' compliance with the Fair Work Act 2009 with prescribed actions and steps to be taken where there are reasonable grounds to suspect contraventions.

Fifth Step: Commence drafting your next franchise agreement and agreements with your subsidiaries to manage your risks under the new laws.

Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.  

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How to comply with the Fair Work Act 2009 for a Sustainable Business

Various employment types and options are open to business owners and it is important to get the right combination of employment types that suits the unique requirements of your business. Very often, business owners feel that their hands are tied when it comes to negotiating employment or hiring terms in light of the operation of the Fair Work Act 2009. This is often due to a lack of understanding as to how to work within the parameters of our employment law landscape.  

The Fair Work Act 2009 – Recent Decision

The phasing in of penalty rates reduction for industries covered by the Hospitality, Fast Food, Pharmacy and the Retail Award from 1 July has given affected employers more flexibility in terms of:

  • Trading options on Sundays and Public holidays
  • Reorganizing their workforce and hence labour costs in light of the cost variable
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How to create a sustainable business with a harmonious and vibrant workforce

Step 1: Ensure your labour structure is cost effective in light of the Fair Work Act 2009

First of all, note the minimum standards set out in the Act such as:

  • Minimum rates
  • Overtime rates
  • Penalty rates
  • Allowances
  • Breaks
  • Shiftwork rates

Practical Tips:

Consider taking advantage of the option to offer annualised salaries which are more certain for both the employer and the employee rather than relying on an hourly or weekly rate.

Be mindful of built in progression in some awards where employees can automatically progress from one paypoint to the next within a classification level (Social Community and Disability Services Award)

Take advantage of the award flexibility option in most awards to tailor particular roles to individual employees. It is possible to vary overtime, penalty rates, allowances, leave loading and the times for when work is to be performed for each role. A carefully drafted employment agreement can alleviate any concerns that either party may have deviating from the Act’s standard requirements.

Step 2: Determine the combination of full time, part time and casual employment positions that best suit your business.

Before favouring casual employment over full time or part time positions, consider the following:

  • The nature of the work required may not meet the minimum hours requirementThe additional 25% casual loading does not cover overtime or other penalty rates
  • Casual workers working regular hours are eligible for unfair dismissal remedies after a qualifying period
  • In some awards such as the Food Beverage and Tobacco Manufacturing Award and the Hospitality Award, casual employees have the right to elect to convert to permanent employment.  Different conditions apply under different awards including whether there are grounds of refusal available to employers
  • The security of permanent employment can foster a sense of belonging in the employees resulting in a more stable and reliable workforce for your business.

Heads Up:

The Fair work Commission has ruled in favour of incorporating a model casual conversion clause into 85 modern awards and a minimum engagement period into 34 awards. The aim of the conversion clause is alleviate concerns that casuals working effectively part time or full time hours are not afforded permanency of employment.

It is proposed that employers can only refuse a request for conversion on the following reasonable grounds:

  • it would require a significant adjustment to the casual employee’s hours of work to accommodate them in part-time or full-time employment under the applicable modern award
  • it is known or reasonably foreseeable that the casual employee’s position will cease to exist
  • it is known or reasonably foreseeable that the employee’s hours will significantly change or be reduced within 12-months, or
  • on other reasonable grounds based on facts which are known or reasonably known.

View a  copy of the decision here to ascertain if the model clauses apply to your business and if so, how they can impact your existing labour structure.

Practical Tips

Open communications with your employees are important and very often, conversations initiated by management will go far in identifying the employees’ needs and matching those with that of the employers’. More often than not, a mutually beneficial agreement between the employer and its employees addressing both parties’ concerns will create an environment conducive to positive culture and increased productivity.

Seek out other options such as:

  • Award Flexibility agreements with individual employees
  • Enterprise Bargaining Agreement with 2 or more employees (note where you have a unionised workforce, you will be negotiating with the union representative who will negotiate on behalf of the employees. These agreements, if approved by the Fair Work Commission, can have a duration of up to four years, giving you, as the employer, certainty in respect of labour costs and conditions independently of changes on the employment law scene

FWA has issued an enterprise agreements benchbook setting out what you need to know when considering an EBA for your business.

Step 3: Have in place an HR Manual and Policies

 This document is not only just required so that you can discharge your legal obligations. It is the “go to” document for employees and management. This ensures there is clear understanding as to the rules, expectations and consequences across your organisation. There are templates that can be downloaded from Business Victoria website.

Step 4: Have a clear and up to date employment agreement with each employee at all times

Your employment contract should set out (in addition to the mandatory requirements under the Act):

  • The job description of the role
  • The Modern Award that applies to this role
  • Wage rates or annualized salary (clearly stating whether superannuation is included in annualized salary)
  • Ordinary hours of work
  • Performance Targets/Expectations of the role
  • KPIs
  • Performance Reviews and management procedure
  • Whether the NES will apply or if more generous provisions are offered
  • Clear reporting lines

*Where required - An Award Flexibility Agreement varying Award provisions allowed under the Act can be useful too. 

Finally:

A working and up to date knowledge of the Fair Work Act 2009 and all related legislation including the Occupational Health and Safety 2004 Act will assist you in your budgeting and provisioning for your labour requirements.

Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.  

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How can The Disability Access Standards Affect Your Business Premises

The Disability (Access to Premises – Buildings) Standards 2010 (“Premises Standards”) which came into operation on 1 May 2011 can mean a potential blow out of your fit out budget if you are not careful.  

Which businesses are affected

Cafés, restaurants, kiosks, hairdressing salons, showrooms, service stations, yoga/fitness studios or other retail business of goods and services.

lau-legal-consulting_steps-to-determine-whether-the-disability-access-standards-apply-to-your-business-premises.jpg

How and when do they apply

Fitting Out Existing Premises

If you intend to carry out any fitout works that require a building permit which do not fall within the exemptions set out in Schedule 8 of the Building Regulations the Premises Standards apply to your premises.

Where you are seeking to change the use of the premises for your purposes, for instance, from a warehouse use to a retail use, you will require a building permit for the works regardless of whether the works fall within the Schedule 8 exemptions. You will need a Certificate of Occupancy from your building surveyor before you can commence trading. 

Practical Tip

Ensure that your building surveyor works in conjunction with your architect, builder and designer from day 1 and everyone is informed of the compliance options.

In this instance, care must be taken when budgeting for the build to include compliance works referable to the Premises Standards.

Extending Or Modifying Existing Building

Works on an existing building, whether extending or modifying all or parts of it will require a building permit if they are not exempted under Schedule 8 referred to above.

Where a building permit is required for new works to be done on an existing building, the Premises Standards’ application applies to the new part of the existing building as well as the “affected part” of an existing building. 

As an example:

Building.png

The ‘affected part’ within a building includes the main entrance of the building and associated paths of travel from the principal entrance of the building within the entry level to the ‘new part’.

This means that where works are planned on upper levels within a building, the affected part would also include any existing passenger lifts and paths of travel from the passenger lift to the new parts. 

Practical Tip

Care must be taken to consider whether any affected areas require upgrading works as these can have the potential to blow out construction costs, making the project non-viable.

No Renovations, Just Taking Over Existing Premises

If, prior to your occupation, the premises had undergone building works (which would have required a building permit but none had been applied for or a Certificate of Occupancy was never issued pursuant to an existing building permit) after the commencement of the Premises Standards on 1 May 2011, you need to be aware that:

  • It is your responsibility to ensure that the premises comply with all building regulations which includes the Premises Standards. 
  • The fact that you obtained a transfer of the premises from the previous tenant when you purchased the business does not absolve you from these obligations.
  • As business owner, you are required to ensure that your business and the business premises comply with all applicable laws.
  • Failure to do so will not only be a contravention of the Building Code but will also most likely trigger a default under your lease with the landlord.
  • It is usually a condition under a commercial lease that it is the lessee’s obligations to ensure that the business complies with all legislative requirements and regulations. 

If the Premises Standards Apply, Your next steps are to ascertain Compliance Requirements and the Availability of Concessions.

Plan ahead before submitting an application for a building permit as an application for a building permit will trigger the application of the Premises Standards. Have round table meetings with your architect, designer, structural engineer (where applicable), building surveyor and builder so that all parties involved in the fitout works are aware of your intended outcome, taking into account the building regulations and structural requirements.

In essence, the following should be covered in such meetings:

  • The design and build of the premises which take into account the Premises Standards
  • Advice from the building surveyor and the builder (informed by the architect) as to whether compliance should take the form of a Deemed to Satisfy Solution (1), a Performance Solution (2) or a combination of both
  • The likely costs, pros and cons of the various compliance options
  • Whether there are exceptions and concessions set out in the Building Act 1993 that are applicable to your circumstances.
  1. A Deemed-to-Satisfy Solution includes prescriptive examples of materials, products, design factors, construction and installation methods, which if followed in full, are deemed to comply with the Performance Requirements of the Building Code.

  2. A Performance Solution is any solution that can meet the Performance Requirements, other than a Deemed-to-Satisfy Solution.  

Unjustifiable Hardship Is A Concession

Even though there is no pre-approval for non compliance on the ground of unjustifiable hardship, the Premises Standards set out a list of factors that should be taken into account when considering this defence. 

In the event that your building experts made the decision to proceed in contravention of the Premises Standards on grounds of unjustifiable hardship, there is a risk that you may be subject to a Disability Discriminatory Act complaint if subsequently someone with a disability experienced discrimination as a result of the non compliance. 

What all these mean for business owners

  • Engage experienced building practitioners and surveyors to ascertain how the Premises Standards may apply to your fit out works and your business premises
  • Allow for possible time delays with construction due to the additional compliance works
  • Be mindful that it is not unusual for the planning and building permit applications process to take up to 5 months even without having to deal with objections and appeals to the AAT
  • Ensure that your architect and designer are aware of the compliance parameters and work within such parameters to avoid having to go back to the drawing board after having spent tens of thousands on designing fees
  • When negotiating lease terms, be mindful of the application of the Premises Standards and the likely compliance costs. Build in a clause in the lease to enable you to withdraw in the event that the required planning and building permits cannot be issued within a specified timeframe. 

Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.  

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How To Protect Your Investment in Private Companies

Whether you are an angel investor or are looking to invest in established businesses, you need to be aware of your rights as stakeholder in the entity even when you are not intending to be involved in the operations of the business.

Preliminary Steps - obtain Information on the company’s:

  • Financials (debtors, creditors, cash flow, revenue forecast, salaries and wages, accrued employee entitlements, pre-payments, guarantees, bonds, business maintainable earnings)
  • Business plan and detailed financial projections for the next 2 years
  • Competitors in the market, market trends and issues
  • Products and services, their diversity
  • Marketing campaigns, customer feedback
  • % margin earned on main product and service over the recent years
  • suppliers and their terms of trade.

The above are also relevant to business purchase due diligence investigations and more details can be found in our previous article.

Angel Investors evaluating looking at start ups will also need to consider:

  • The capital that the company is looking to raise
  • Whether the company is valued appropriately
  • What the monthly burn rate will be
  • Key cost components for the service or product
  • The likely gross margins
  • The typical sales cycle
  • The founders and management team structure
  • Whether key additions will be required in the short term
  • Whether further additional rounds of financing will be required

Private Company Structure

If you are buying into a private company structure, you will be a shareholder of the company.

Your rights and obligations can be found in:

  • the Corporations Act 2001 (Cth)
  • the Constitution of the Company
  • the Shareholders Agreement (if any)

General Rights – Corporations Act 2001 (Cth)

  • Voting rights (as attached to your class of shares) at shareholders meetings
  • Right to receive annual company reports
  • Pre-emptive right on issue of new shares (to maintain percentage shareholding)
  • Rights to remove directors with majority of shareholders in favour
  • Right to receive dividends

Additional Rights that can only be included in a Shareholders Agreement or a tailored Constitution, to name a few, are:

  • Right to inspect the books of the Company (not just the annual company reports)
  • Confidentiality and Non competition covenants from all Shareholders
  • Pre-emptive rights on disposal of shares by other shareholders
  • Requirement that all shareholders vote in the interest of the Company at all times
  • Right to partake in any offer made for shares owned by other shareholders or require other shareholders to sell their shares to achieve a sale of the business (Drag along and tag along rights)
  • Restrict the power of the Board by subjecting certain Board decisions to shareholders’ consent
  • Dispute resolution provisions both at Board and shareholders levels
  • Clear and reasonable exit mechanisms to enhance liquidity of the shares (as it is very difficult to sell shares in a private company to a third party when fellow shareholders do not take them up)
  • Set a time frame for the preparation of an annual plan and an annual budgets in order to keep track of where your investment is heading
  • A clear dividend and distribution policy setting out the frequency of distributions and whether there is any dividend reinvestment plan
  • Future funding obligations and proposed source or funding
  • To be entitled to an entrenched seat on the Board of Directors and be represented at Board level. Note: There is usually a shareholding threshold for board representation and you need to be clear on what this is.

Whilst a certain level of risk is acceptable in any investment, all investors should take care in their due diligence investigations and ensure that their investment is best protected in every possible way. This starts with a carefully drafted shareholders agreement which works hand in hand with the company's constitution.

Next Steps

  1. Request a copy of the company’s constitution and shareholders agreement to understand your rights and obligations.
  2. Negotiate terms to be included in the shareholders agreement to protect your investment.

Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.  

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What To Look Out For When Buying Off The Plan

Australian Bureau of Statistics figures show there were 28,527 units completed over the December 2016 quarter, compared to 28,102 houses in the same period. This is 5901 more than the number of units built during the September 2016 quarter.  

In Melbourne, we continue to see new developments enter the market and potential buyers are really spoilt for choice. These apartment purchases usually come with a daunting 200 (approx.) page contract which the agents advise is a “standard” off the plan contract.

What are the “standard” conditions and how they affect you?

Subdivision plan yet to be registered

As construction hasn’t started with the development, the subdivision plan which carves out your apartment from the title of the whole block is not registered when you sign the contract.

A proposed Plan is included in the contract to give you some idea as to the location of your apartment within the development but you will not have any right to claim compensation from the developer if the Plan as registered is not exactly the same as the proposed Plan in the contract unless the amendment "materially affects" your apartment. The developer also has ample rights to terminate the contract for a variety of reasons.

Covenants to be registered on title

Usually, when land is being developed and various planning and building permits are obtained from Council, agreements will be made between the developer and Council/or other relevant authorities regarding the land and such agreements (known as S.173 Agreements) will be registered on title which will affect all future owners of the land.  

You will be bound by all these obligations whatever they are. Most of these obligations apply to the developer during the construction period and do not have any ongoing effect on the purchaser. However, there can be maintenance provisions or restrictions which will bind all future apartment owners.

Construction of the Building and the Works

The building is usually constructed pursuant to a building contract between the developer and the builder where you do not have any contractual relationship with the builder.

Usually the Works are not detailed in any architectural drawings with only a list of fixtures and fittings for your information and selection. The developer may approve variations to the Works and the substitution of the standard finishes and fittings with other finishes and fittings of the same nature and similar quality without your consent.

There is also a defects and faults liability period which will run from the date of issue of the occupancy permit ("Defects Liability Period").  You are required to advise the developer of any defects within a stipulated time period after settlement if you require those defects rectified. Please note that as you do not have any "agreement" with the builder, you will need to rely on the developer to arrange for the defects to be fixed during the Defects Liability Period.  

Changes to fixtures and fittings     

Essentially, what is stated in the Plans and Specifications can change as well as the proposed configuration of the apartment.

Limitation of rights as owner

You must comply with the Owners Corporation Rules which govern and regulate how common property is to be used by all. Usually until the developer has sold all of the units in the development, you are not allowed to exercise your voting rights as owner at Owners Corporation meetings which may hinder the completion of the development, delay the approval required for the development, be contrary to the reasonable directions of the developer.

Restrictions on re-sale

You are not allowed to sell, transfer or enter into an agreement to sell the apartment until after settlement.

Utilities connection

The purchase price does not normally include connection to utilities and if some utilities are not available to the apartment at settlement, you will not have the right to delay settlement.  It is your responsibility to connect the utilities to your apartment or pay the developer additional fees for such connections. 

Car Park and Storage

The final location of the car park and storage units can change from the locations indicated on the Plan attached to the contract as the developer has full rights to rearrange such locations.

Staged Development

If your apartment is part of a staged development, the developer has the right to decide when and how the next stages of the development will take shape.  You must also be prepared for any inconvenience or disruption that may affect your enjoyment of your apartment arising from future construction works.

In essence     

Given the right on the part of the developer to make changes to the Plans and the finishes and fittings, you may find the end product very different from what you may expect.  

With off the plan contracts, you are buying a property without seeing what it is like and when the plans that you are shown can be changed by the developer, there is no guarantee that what you will get will meet your expectations.  

Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal advice.  

do not sign any contract until you have obtained legal advice

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How Unfair Contract Terms Can Affect Your Business

Whether you are a B2C or B2B business, you need to be aware of how unfair contract terms laws can affect the way your business operates.

The Law

The national unfair contract terms laws that came into effect on 1 July 2010 allow courts to declare unfair terms, when found in standard form contracts, void.

From 12 November 2016, the unfair contract terms laws extended to protect small businesses as well (with some exclusions).  Small business owners, subject to certain pre-requisites, are now protected when they are on the receiving end of unfair standard contracts.

The 3 Element Test for Unfairness:

  • It would cause a significant imbalance in the parties’ rights and obligations under the contract;
  • It is not reasonably necessary to protect the legitimate interest of a party to the contract (note that the party who would be advantaged by the term must prove that it is reasonably necessary); and
  • It would cause detriment to a party to the contract if it were to be applied or relied upon.

In determining whether a term is unfair in accordance with the above, the whole contract needs to be considered as well as the term's transparency.

Terms that are excluded are those that set the upfront price and subject matter of a contract and those that are permitted under another law.

B2C

Supply terms and conditions that have been the subject of review by the ACCC:

Terms which allow you to change the contract without consent from the consumer

Example:  telecommunications companies (prior to ACCC’s review and recommendations) had clauses requiring consumers to pay subscription fees applicable to the plan where fees and charges could be altered from time to time.

To comply: delete the right to vary fees or allow consumers to terminate the contract without penalty if they do not agree to the new fees.

Terms that absolve you from liability when you are actually acting as agent for a principal in a transaction

Example: If you are a booking agent (for hotels, airlines,) and have not disclosed your agency relationship with the providers of the services and have included in your contract that you are not liable in the event that services are not available.

To comply:  It is advisable that your agency relationship be disclosed and that you accept liability for your failure to provide the agency services which results in the non supply of the travel services.

Terms that unfairly restrict the consumer’s right to terminate the contract

Example: Fitness studio long term contracts can be challenged if consumers are not made fully aware of the duration of the contract or the practical effect of exit and termination clauses when they sign up.

To Comply: Sign up procedures must ensure that consumers understand the exact duration of their contract, the effect of the exit and termination clauses with the removal of unnecessary and onerous pre-requisites to termination.

Terms that suspend or terminate the services being provided to the consumer under the contract

Example: Telecos having the right to terminate for “excessive or unusual use” where such clauses were  designed to prevent customers from on-selling and supporting spamming and illegal activities.  The provision, however, when couched in broad terms without definition or explanation, were found to have provided a broader right to the Telcos which verged on being unfair.

To Comply: A definition of “excessive or unusual use” was inserted to limit the telco’s rights to instances the clause was intended to prevent in the first place.

Terms that make the consumer liable for things that would ordinarily be outside their control

Example: Clauses requiring consumer to pay for all charges regardless of whether they authorised that use or not.  Businesses reviewed by ACCC included major car hire companies and telcos.

To Comply: Here it is a matter of creating a balance between the supplier’s and the consumer’s rights.  Perhaps guidance should be given to consumers as to how to prevent unauthorised use and transparency as to the limited circumstances when the customers assume responsibility for unauthorised use.

Terms that prevent the consumer from relying on representations made by your business or your agents

Example: Supply contracts sometimes contain a provision which places the responsibility on the part of the consumer to make his/her own enquiries and that statements made by the business/its agents or representatives not included in the written contract do not form part of the deal.

To Comply: Either a very limited application be accorded such provisions or these provisions need to be deleted in its entirety.

Terms seeking to limit consumer guarantee rights

Example: Provision stating that all warranties not specifically included in the contract are excluded.  This is in contravention of the ACL (Australian Consumer Law) and is not valid.

To Comply: Such provisions must be qualified to the extent that they do not contravene the ACL.

Terms that seek to remove the consumer’s rights to a credit card chargeback facility when buying services through an agent

Credit card chargeback rights cannot be removed.

B2B

As suppliers, businesses need to be aware that the same laws apply when they transact with:

  • small businesses (with < 20 employees)
  • where the upfront price payable is less than $300,000.00 or $1 million if the contract is more than 12 months and
  • relates to the supply of goods and services or the sale or grant of an interest in land.

The ACCC has identified some clauses that may raise concerns in its implementation of the unfair contracts terms laws (these are not exhaustive):

Limited Liabilities and broad indemnities

The guiding principle here is that a purchaser’s indemnity should only cover losses and expenses caused by its breaches or default and that a supplier should accept responsibility for its obligations.

A balance of the rights and obligations of the supplier and purchaser needs to be struck when drafting these clauses. 

Termination clauses

Rights of termination by the supplier are to be assessed in light of the possible adverse consequences to the purchaser and the seriousness of the breach that triggers the right.

Unilateral variation

While acknowledging that the cost of supply to businesses can change during a long term supply contract, it is unfair to allow suppliers to amend pricing without the consent of the purchaser or giving the purchaser the right to terminate the contract if new pricing is not agreed.

Early Termination Charge

These charges can be fair if they are your genuine estimate of losses if the customer terminates the contract prior to the expiration of the term.

Restraint of Trade

If you are a franchisor, then the restraint of trade in your franchise agreement needs to be reasonable in terms of the restraint area, duration and activities.

Where the ACCC took action

In ACCC v Chrisco Hampers Australia Ltd [2015] FCA 1204 the Federal Court found a term in their lay-by agreement authorising Chrisco to continue debiting customer’s account after full payment has been made was an unfair term. Whilst there are no pecuniary penalties for breaches of s.23 of the ACL, the Court separately found that Chrisco made a false and misleading representation under s.29 of the ACL that customers could not cancel a lay-by agreement after making their final payment and imposed a penalty of $200,000.00.

Exetel, in 2015, informed its broadband customers who were on a 12 month fixed term plan that they were required to either change their broadband plan or terminate their Exetel service without penalty.  The term that Exetel relied on in making this announcement was a clause which allowed Exetel to unilaterally vary its agreement for any reason. The ACCC considered that clause an unfair contract term and liaised with Exetel which resulted in the removal of the said clause, a refund of any additional monthly subscription costs incurred for the residue of the fixed term for customers who changed over to a new plan and a refund of any activation charge previously paid by customers who elected to terminate their service.

Next Step

Conduct a review of your standard supply contracts to ensure that you are compliant.  If you are a small business and have contracts with suppliers falling within the scope of protection referred to above, be mindful of the protection afforded by the ACL when negotiating your terms with your suppliers.


Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.  

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Turning Ideas Into a Business - What Business Start Ups Need to Look Out For

Great ideas when implemented strategically, in the right place and at the right time, will take off and make their mark in no time.

Founding a business, however, is more than just having a great idea.  It is akin to building a multi storey building the height of which is determined by how steady and broad the foundation is.

Laying the Foundation

Various professionals with expertise in accounting, capital raising, legal compliance and risk management are required to turn an idea into a commodity or service offering.

On the basis that you have a line of products or service offering in mind and have sourced suppliers, manufacturers, personnel required to make or provide the service, you need to consider:

The Business Structure(s)

Trading Vehicle

This is usually liability, tax and scale driven.  For instance, if you are aiming for a medium to large scale business, perhaps with a few business partners, it is best to opt for a limited liability company as the trading vehicle.  Here the tax rate is currently 30% and provided that the the company does not trade insolvently, liabilities are limited.

Assets holding Vehicle

This is to quarantine your important assets from risks associated with the running of the business.

If you are building a unique brand from day 1 and are looking to carve out a niche in your relevant industry, having a distinct brand (consider ways to protect your brand in our previous article) is imperative.  The brand itself will accumulate goodwill and such goodwill will become an important asset of the business.

Other important assets can be leasehold interests of the premises if location itself carries goodwill or has the potential to with respect to your business.  If you own the freehold, then definitely this should be held in an entity separate from the trading vehicle. At this point, how the shareholdings are to be held, whether a discretionary or a unit trust should be considered to sit behind the trading vehicle or asset holding vehicle or whether debt or equity contribution is to be preferred, will also need to be decided.

Internal Operations Rules

Ground rules need to be set amongst business partners so that there are clear roles and responsibilities, entry and exit strategies, couched always in terms to ensure that the business’ interests are well balanced against the interests of individual shareholders. Partial shareholders' agreements which favour majority shareholders may not withstand an oppression challenge. To ensure minimal business interruption, ongoing funding rules and exit strategies are particularly important (refer to our previous article).

You will want as little disruption to the business from your business partners as possible and 100% co-operation from them to propel the business to heights that will benefit all.

Statutory Compliance

Each industry is governed by its own set of requirements, ranging from specific permits, planning and building regulations, Modern Awards (which sets the minimum employment conditions for your employees) to quarantine regulations if you are importing ingredients or goods into Australia, to name a few.  The timing and cost of compliance must be factored into the business model.

The Business Premises

Selection of the appropriate business premises will entail assessments of:

  • The location
  • Local competition
  • Proximity to public transport (if a retail premises)
  • The mix of offerings in the immediate vicinity
  • Proximity to possible allied partners
  • Parking availability
  • Spread of competition in the general location

The Lease Documentation

Once a suitable location is selected, usually a lease will need to be entered into to secure rights of occupation (unless you are looking at purchasing the freehold).  When negotiating the lease, other than the usual commercial terms regarding rental, outgoings, term and rental review, the following must also be considered:

Permitted Use

Ensure that the permitted use is broad enough not just for your business but also allows you to assign to a third party which may want to put the premises to a different use.  An assignment of the premises mid term may not mean that you are selling your business (in which case the use will be the same), you may be expanding and therefore need to move to larger premises. To have a limited permitted use in the lease may reduce your chances of a timely assignment.

Council Requirements

If you are looking to carry out renovations or a change of use of the premises dictates that a planning permit and a building permit be obtained, this must be taken into account when negotiating the lease.  Otherwise you may find yourself at best having to pay rent during the long dragged out period of planning permit application, dealing with objections, getting plans drawn and a building permit issued or at worst bound to a lease without a valid permit to operate your business.

Fit Out Works

Here, a large group of professionals will be involved: architects, designers, builders, town planners, building surveyors, suppliers/installers of materials, painters, electricians and this list is not exhaustive.

It is important that all these professionals work together to ensure that the end result is built for its purpose and is done properly.  The contract with the builder needs to state the scope of works clearly and what the builder’s obligations are.  Very often, when problems arise, it is hard to pin point which party should be responsible for rectifying the faults.  For instance, where the flooring is selected by you and the builder is asked to source the flooring from the supplier and install the same, who is responsible for the costs of lifting and re-installing floor boards when a manufacturing fault is discovered? Here the manufacturer/supplier is clearly at fault but the builder, if it has followed installation instructions perfectly, cannot be held liable to lift the old and relay the new flooring.

Equally, the interior designer, architect, structural engineer and the builder need to work together to ensure that the design takes into account the location of drains, pipes, weight loading thresholds, power supply and that the materials used are fit for the purpose of the build.  Only then can you be assured that the fit out works can be carried out in a cost effective and timely manner.

Does your Lease have provisions for fit out works to be effected? How long will the landlord’s consent take? Should a request be made to the landlord to contribute to the fit out cost? Are there additional costs involved in obtaining the landlord’s consent?  These are all questions to be mindful of when negotiating with the landlord.

Other Lease terms

Care must always be taken to understand all your obligations as tenant under the lease and in particular, your responsibilities with respect to maintenance and reinstatement.

Various Insurance Covers

In addition to the mandatory insurance policies required to be taken out under the Lease, you should consult your insurance broker as to other advisable insurance policies to take out to cover business interruptions and other risks.  Public Liability, Plate Glass, Contents and WorkCover insurances are usually mandatory requirements under commercial leases.

Building a Market

To create a market for your products or service offering, you will need marketing, communications advisers to put your offerings in front of your target audience to elicit engagement and response. Different industries call for different marketing methodology and a product/offering strategically positioned in the market place can take off in leaps and bounds.

This is also the time to ensure that agreements with your suppliers, employees, contractors are in place to provide seamless delivery of quality product/service and that your chosen branding is registered with all trade secrets adequately protected.

A solid foundation gives you the peace of mind to focus on growing your business, fostering customer relationships, nurturing staff and gives you the time to attend to the day to day management demands of your business.

Expanding Your Market

When you start to venture into multiple locations, interstate or overseas opportunities, further ground work will be required to support such growth and you will need to revisit all the above considerations in light of the new venture (using a separate entity or creating an associated entity of the existing framework).

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How to Navigate the Country of Origin Food Labelling Requirements

The Country of Origin Food Labelling Information Standard will be enforced from 1 July 2018 affecting businesses in the food industry that supply food for retail sale in Australia. 

Food Manufacturers, Suppliers, Processors Take Note

Failure to comply with the Standard or inaccurate description of food labelling will not only expose your business to fines of $40,000.00 (for individuals) and $200,000.00 (for companies) under the Food Act 1984, the contravention can also potentially constitute misleading or deceptive conduct under the Competition and Consumer Act 2010, which carries a maximum penalty of $1.1 million for corporations and $220,000.00 for individuals.

Where Do We Start? Some Questions to Ask

Do you supply or manufacture priority or non priority foods?

Non priority foods are:

  • Seasonings
  • Confectionary
  • Biscuits and snack foods (other than cakes, muesli bars, processed nuts, coated nuts and nut mixtures)
  • Soft drinks and sports drinks
  • Alcohol drinks
  • Tea and coffee
  • Bottled water.

Note there are exceptions specified by the ACCC in each of the above category.

Here, only a text statement about where the food was grown, produced or made is sufficient such as “Product of Australia”, “Made in Thailand”.

Food packaged in a country which originates from more than one country will need to contain a statement that identifies where the food was packaged and indicates the food is from multiple origins or comprises imported ingredients.     

For priority foods, were they produced, grown, made or packaged in Australia or in another country?

Key concepts and preliminary considerations:

“Grown in”

Did the food materially increase in size or was materially altered in substance by natural development or were germinated or otherwise arose in that country. Note: only food that are exclusively grown in Australia can bear the “Grown in Australia” label.

“Produced in”

Here we look at the significant ingredient in the food and where that was grown or otherwise obtained. Note: only food that contains exclusively Australian ingredients can carry the “Produced in Australia” label. The overlap of the concepts of “Produced in” and “Grown in” will see such labels used interchangeably where food grown in Australia are also produced in Australia.

“Made in”

This concept looks at the place where the last substantial transformation of the food product was effected.  A last substantial transformation process is usually the process that brought about the final identity, nature or essential character of the food concerned. Where processing procedures are involved, it is useful to consider whether such processing would bring into existence a fundamentally different product. For instance, roasting a green coffee bean to make coffee for consumption.

Requirements that must be met before the Australian country of origin labels can be used

When a food is grown, produced in, packed or made in Australia, it is mandatory that proportion of Australian content be disclosed. Where businesses cannot accurately identify the percentage of Australian content in a food, the claim that the food contains Australian content cannot be made.

Proportion here is based on weight of the ingredients where processing aids and water (when used other as an ingredient) are excluded. In some instances, disclosure of “average proportion of content” is allowed where the origin of certain individual ingredients may vary due to reduced availability or seasonal changes. Such averages are worked over any continuous 12, 24 or 36 month period within 2 years before the date the labelling is affixed to the product.  When labeling these products, they must include a text stating “ingredient sources vary – average *% Australian ingredients” and a direction available to consumers to contact information or website to access further information on the product.

There is a label library available to assist businesses to design their country of original food labels, packaging and marketing materials.

Be Compliance Ready

First step: Utilise the Department of Industry, Innovation and Science’s online decision tool to ascertain whether you need to display a country of origin label on your products.

Next step: Where the proportional Australian content must be displayed, ensure accurate calculation and display requirements.

Final step: Ensure the compliance date of 1 July 2018 can be met by taking actions now.

TO ENSURE COMPLIANCE

CONTACT US FOR A CONSULTATION TODAY.

Some Practical Considerations for Buying a Business

Businesses of various sizes in different industries are bought and sold every day.  As prospective purchasers, what can we do to ensure a smooth transition with no surprises, both before and after settlement?

Some Preliminary Enquiries

Obtain as much information as you can about the business': 

  • Financials (debtors, creditors, cash flow, revenue forecast, salaries and wages, accrued employee entitlements, pre-payments, guarantees, bonds, business maintainable earnings, premises and equipment rentals);
  • competitors in the market, market trends and issues;
  • marketing campaigns both current and in the pipeline and how effective past campaigns have been;
  • customers and suppliers databases;
  • customer survey reports and reviews;
  • spend per customer and whether there is sufficient data to enable you to work out spending patterns;
  • alliances with other business and its relationship with these businesses;
  • warranties and claims and whether it is subject to any legal proceedings, unrealised legal claims and any contingent and other potential liabilities.

In order to obtain the above information from the business owners, you will usually be required to sign a NDA (Non Disclosure Agreement) which will restrain you from using or disclosing the information other than for the express purpose of evaluating the business for a purchase consideration.

(Note: this is not an exhaustive list and needs to be customised for each purchase)

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Making an Offer

Having reasonably satisfied yourself that you have identified the business to purchase, the next step is to negotiate the price with the vendor.  Ideally, you should not sign any document at this point before obtaining legal advice.  If you are dealing with a business broker, you will be asked to sign a Heads of Agreement setting out the commercial terms of the proposed purchase.  If you do not have time to engage a solicitor to provide advice to you before signing, ensure that you make the offer "subject to the approval of the purchaser's solicitor and the execution of a formal contract to be approved by the purchaser's solicitor.".  

Negotiation of the Contract

The vendor usually provides the draft contract for your consideration. This contract sets out the terms and conditions of the business purchase.  

Some points to consider:

  • the purchase price;
  • proposed settlement date;
  • how stock is to be valued and whether you have the right to reject or set a upper limit to the value of stock you must purchase;
  • premises lease terms and conditions and in particular the make good provisions in the lease;
  • Usually there is no room to negotiate variations to the lease but if the vendor is prepared to accept a sale subject to variations to be granted by the landlord, these must be included in the contract.  The contract should be drafted to ensure that you will get all your monies refunded unless the variations are granted by the landlord;
  • if you are taking over any employee of the business (within 3 months of the settlement date), you will need to verify all accrued employment benefits and understand whether they are governed by Modern Awards, under an enterprise agreement or otherwise.  The manner in which the vendor manages the cessation of the employees' terms will have an impact on the calculation of the various types of employment benefits after they become your employees.  
  • If you decide to recognise the employees' accrued annual leave and long service leave with the vendor, specific adjustment clauses must be included in the Contract to ensure that you are not out of pocket when you are called upon to make payments to the employees under your employ;
  • All necessary permits and licences for the business must be included in the sale and such transfer must be a condition precedent to settlement so that you will have the right to terminate the contract if you do not obtain a transfer of the permits, licences and a transfer of the premises lease;
  • Ensure that all assets, plant and equipment, together with all distinctive indicia of the products and service offerings of the business are included in the sale and will be unencumbered at settlement.  Proper release will need to be obtained from all security interest holders over the assets of the business;
  • There have been due compliance with industry and trade regulations and any contraventions must be rectified by the settlement date. Various due diligence investigations will need to be undertaken to ensure that the business is compliant by the settlement date.

(Note: each business is different and different industries have their peculiar compliance requirements. The above is just a sample list of issues to be considered)

Proceeding to Settlement

  • If taking over employees from the vendor, ensure that all employees are terminated by the vendor with proper termination notices and redundancy pay so that their period of service with the vendor will not be recognised for redundancy purposes;
  • attend to the transfer of phone and fax numbers, domain names, website, social media accounts and utility connections;
  • inspect the business premises and all assets to be transferred to ensure that they are in the same condition they were in when the contract was signed.

(The transfer of leases and assets with documents of title will be effected by your solicitor)

FOR A SMOOTH BUSINESS PURCHASE WITH NO SURPRISES

CONTACT US FOR A CONSULTATION TODAY.

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Is Franchising an Option for My Business?

More and more businesses are looking to franchising as a means of expansion.

The reasons are simple:

  • Savings on fit out costs, labour costs and labour on costs such as payroll tax, superannuation and worker’s compensation
  • Franchisees usually have greater commitment and accountability than employees as they share the risks as owners of their respective franchises.

However, not every business is suitable to be operated as a franchise.

What then, are the preliminary questions that all prospective franchisors should ask?

A. What is my business model?

  • Manufacturer-Retailer: where franchisee retailer sells the franchisor’s products to the public
  • Manufacturer-Wholesaler: where the franchisee manufactures the franchisor’s products and distributes them
  • Wholesaler-Retailer: where franchisees purchase products from the wholesaler franchisor
  • Retailer to Retailer: where the franchisor has a developed business system, markets the product or service under a common name through a network of franchisees

B. As the business format franchising model (Retailer to Retailer) has by far been the most prevalent model, let’s have a look at what the fundamentals of this model are:

  • A proven concept, product or service with ongoing potential delivered to customers via a proven and successful business format;
  • Systems and procedures which can be taught and replicated and which can deliver profitability for both franchisor and franchisee;
  • A distinctive brand and image, featuring a trade mark;
  • A clear plan for the development of the network, with sound processes for Franchisee recruitment, screening and selection;
  • Appropriate personnel to provide the Franchisees with the requisite training, support, advice and assistance and to audit and enforce the system, image, standards, procedures and controls;
  • Effective communication systems;
  • A relationship structure, negotiated and conducted in good faith; and
  • Strong, competent and ethical management.

Once we have established that the fundamentals exist, we need to always keep in mind:

The Golden Rules of Franchising

First Rule:

The business model must ensure that franchisees will make an adequate return on their investment.  Unsuccessful franchisees will fail to pay ongoing royalties and may take legal action against the franchisor to recover their losses.  Inadequate returns will make it difficult to attract quality franchisees.

Second Rule: 

The network must generate sufficient profit for the Franchisor to make and system worthwhile. The franchisor's revenue is dependent on continuing royalties which is linked to the Franchisee's gross sales.

Find out how Franchising can work for your business.

Contact us for a consultation today.

Co-mingled Families – Are Wills enough to provide for your loved ones?

Second marriages and co-mingled families have their fair share of issues but none more important than the uncertainty that minors may face in the unlikely event that one of the guardians or parents passes away.

Are Wills enough?

Where families consist of step children, have joint custody arrangements with ex-spouses, joint assets with ex-spouses and existing partners, just relying on Wills to distribute assets can be tricky.

Where new relationships are entered into, existing assets are brought into the relationship, new joint assets are created and children are being born into the new relationship, questions as to who owns what and who is responsible for whom become muddled. As parents, none of us would want to leave the security of our children to chance if something unfortunate were to happen to us.

Very often, individuals who have Wills in place clearly stating how their assets are to be divided between their beneficiaries forget to update them to reflect any changed circumstance. This can be fatal as every new relationship brings new responsibilities (imposed by law) and in order to ensure that your loved ones are adequately looked after, your Wills need to be updated and reviewed even before your circumstances change.

Having a frequently updated Will has a better chance of bringing about the outcome that you are after at any stage of your life but this only deals with assets when you are gone.

Inter Vivos (Living) Gifts

Rather than distributing assets after your death, it is possible to lock away certain assets/investments in a trust with specific capital beneficiaries in mind. This way, you know that a particular home, share portfolio, investment property or even monies in bank accounts are earmarked for the benefit of your children from a previous marriage. This trust is controlled by you during your lifetime with the control handed to your executor/executrix named in your Will.

By doing this, uncertainties as to possible challenges to your Will are eliminated and more importantly, risks of arguments within the family are minimised.

Trusts as Asset Holding and Investment Vehicle

Other than setting aside assets for your loved ones during your lifetime, trusts can be useful vehicles to hold assets and investments. 

Consult your accountant as to whether setting up a Family Discretionary Trust is the best way to hold your family investments, taking into account tax benefits pertaining to your circumstances, the flexibility of distribution of income and capital and the nature of the assets concerned. 

Contact us to arrange a consultation or a joint meeting with your accountant and start planning ahead.

Protect Your Brand Wisely

What is in a Brand?

This is the distinctive indicia for your product or services. This is the repository of customer loyalty, trust, your vision and mission as owner of your business. It can take years for a brand to take shape in customers' awareness and much longer to stand out amongst the many many other similar businesses in your industry.

Your brand is a very important asset which carries goodwill and has great value.

How do you choose your Brand?

Firstly you need to make sure that there are no similar names or visual images to the one that you have in mind that are already on the market. Search not just within your industry but generally to see if you have chosen a name that is used for other services.

When there are similarities between your chosen mark and a registered or pending trade mark even if you believe you can effectively distinguish your trade mark from the others, assess this from the perspective of the consumers. You do not want to spend money and effort to build a brand only to have similar one joining you for the ride.

How do you protect your Brand?

If you intend to use the trade mark in Australia, you need to register your trade mark with IP Australia. Aspirations to protect the use of the same mark in other countries will require registration in those countries as well. You can choose to make an application under the Madrid Protocol when applying for the Australian registration for countries that are signatories to the Madrid Agreement. Alternatively, you can register in each of your desired country separately.

Making the local and international applications at the same time is obviously easier but the drawback here is that the international application rises and falls with the Australian application. For instance, where a particular trade mark is not available in Australia, its international application will also fail. Usually different trade marks are used in different countries, with the exception of global brands, it is always advisable to search your desired country's IP register before deciding whether to register in that country and if so, should a joint application be lodged here in Australia.

What if you don't register your trade mark?

Unregistered trade marks can still be protected if the user or owner can establish a reputation exists in the marks and that the proposed use of same marks by a third party is misleading or deceptive. Usually this means the trade mark must have been used on a large scale, for a relatively long period of time and let's not forget that proving a reputation is not only costly but also an uncertain process. Rights to such unregistered trade marks are generally limited to the geographical area in which they are used and applied to the designated goods and services.

We provide advice on trade mark registration, infringements, design registration, copyright protection and all other matters pertaining to Intellectual Property Rights.

Contact us for a Consultation.

Co-founding a Business—Set the ground rules right

Turning dreams into reality

We all have our dreams and what is better than having a few friends, with the same vision, jump in to start a business together?

More often than not, due to the many many operative considerations that confront a business in the start up phase, founders of the businesses lose sight of the importance of having an agreement between themselves to avoid future disputes and to protect the business from interruptions from internal disputes.

What's in this agreement?

 If you have established a company, this will be a shareholders agreement.  If you use a unit trust as the trading vehicle, this will be a unitholders agreement.

This agreement will set out salient points such as:

  • the agreed responsibilities of each participant in the operation of the business;
  • what contribution is each participant bringing into the business - skills, know-how, access to funding, connections;
  • consequences of failure to deliver one's responsibilities;
  • future funding options;
  • exit mechanisms;
  • decision making process including day to day business operations and internal matters such as the remuneration of directors, reinvestment of dividends into the business;
  • procedures when one participant becomes incapacitated or dies.

Can we do without it?

Yes and there are many many businesses out there which are operating without this agreement.

Below are some examples of problems that we have seen business owners encounter:

  • a major participant whose asset to the business is his/her skills in the trade/professional decides to set up shop in competition with the business while refusing to relinquish his/her shares in the business;
  • a shareholder refuses to inject much needed funds into the business and expansion of the business is put on hold;
  • a director refuses to attend board meetings making it impossible for the remaining director/directors to make time sensitive decisions;
  • directors refusing to disclose company books to shareholders;
  • minority shareholders holding out on a potentially profitable sale of the business;
  • disputes regarding the valuation of shares/interests in the business when a party seeks to sell out;
  • director misusing information for his/her own benefit to the detriment of the company.

What happens then?

Without a shareholders or unitholders agreement, the parties cannot refer to an agreed way to resolve the dispute and the only resort is to the Courts to obtain a Court Order for the outcome that you are after.

Needless to say initiating proceedings in Courts involves legal costs in obtaining advice, initiating proceedings and most important of all, your business is left in limbo while you are sorting out your issues with your business partner who now has more important concerns/interests than the the business that you created together.

It is invariably the remaining shareholders/partners/unitholders who want to continue with the business in such instances who will suffer the most.

While we cannot anticipate all dispute scenarios that can crop up, it is always best to have the ground rules set right with your business partners before taking the leap together.

Contact us for a consultation today.