VIC Can a franchisor double dip?

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29 June 2019
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Can a franchisor double dip on merchandise they provide to the franchisee by selling the merchandise to the franchisee at a profit to their wholesale cost, and then also take royalties when the franchisee sells said merchandise?
 

Paul Cott

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Hi I think the contract would have to be looked at to answer that question. But if the contract was drawn up by lawyers for the franchisor it is quite possible that it has been drafted in their favour.
 
29 June 2019
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So ultimately if the disclosure document suggests the franchisor can sell goods at a profit to the franchisee then tough titties?

It’s a twisted document but I’m sure it would say something like that if I had someone interpret it.

I was hoping there was just a general law that they couldn’t double dip. But if it comes down to the contract I’m no doubt out of luck.
 

Rob Legat - SBPL

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Franchises are a peculiar animal where some of the normal things, which aren’t allowed, are actually the norm. One of those is requiring you purchase stock from a particular supplier (even the franchisor). Outside a franchising situation this would be called third line forcing.

The trade off, for what it’s worth, are things like prescriptive disclosure and the duty of utmost good faith. The rationale allowing it, for my mind, is that the franchisee is using the franchisor’s systems and goodwill - so the franchisor can dictate how the franchisee goes about that.
 

Rod

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Can a franchisor double dip on merchandise they provide to the franchisee by selling the merchandise to the franchisee at a profit to their wholesale cost, and then also take royalties when the franchisee sells said merchandise?

Maybe. But it should be disclosed.

Also, depending on the nature of the goods, you may be able to purchase elsewhere.

If you want specific advice give me a call.
 
29 June 2019
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The goods are branded items, drink bottles, lunch boxes etc. There is a point in the disclosure document that is as follows:

“Whether the Franchisor, or an associate of the Franchisor will receive a rebate or other financial benefit from the supply of goods or services to Franchisees, including the name of the business providing the rebate or financial benefit”

Response:

“The Franchisor or it’s associate will receive commercial margins on product supplied directly to Franchisees.

The Franchisor obtains a 5% mark-up on the sale of equipment to new stores from the buying house which covers the Franchisor’s liability insurance and administration costs”

So the first part, is the Franchisor’s get out of jail free card to being able to double dip? If the franchisee requested would they have to disclose what commercial margins they get?

And the second part on equipment - if we have evidence that they are taking more than 5% mark-up on sales how much trouble can they get in?

Ultimately, we are trying to catch them out in order to rebrand and leave the franchise model. We know of other stores that have found ways but they can’t disclose how due to whatever deeds have been written up. This companies brand name is more important to the Franchisor and they seem to settle outside of court by allowing franchisees to leave the franchise, yet keep the premises and just rebrand.
 

Rod

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So the first part, is the Franchisor’s get out of jail free card to being able to double dip?

Partly. The margin needs to be at 'commercial rates' for your industry. Think of it as Manufacturer -> Wholesaler -> Retail. Each party can make a margin along the way. Franchising complicates the picture but in any case the Franchisor has responsibilities to the Franchisee.

If the franchisee requested would they have to disclose what commercial margins they get?

Not necessarily. Would need to read the franchise agreement to see what rights have been granted. Sometimes it can be worked out from financial reports, other times it may be possible to invoke a dispute resolution procedure and draw out the information as part of the dispute.