01 Jul McDonalds and other food franchises announce home delivery across Australia – Significant Capital Expenditure for Franchisees
Tips on Significant Capital Expenditure for Franchisees.
McDonalds and KFC have both unveiled plans in the past month to trial home delivery in partnerships with UberEATS and Foodora. LaPorchetta has also announced that they will trial delivery service, and RedRooster has also announced a stronger push into home delivery, although both will involve the franchisee expending their own capital to roll out the service.
What happens when a franchisee is required to buy the expensive equipment for a new service introduced to the market or brand, especially mid-way through the life of the franchise agreement? Another high-cost situation can include the requirement to implement a completely new fitout which is more than a standard refurbishment.
Many franchisees have experienced tough market conditions over the past few years and may struggle to afford any significant outlay. Notwithstanding your financial difficulties, it may come as a shock to hear that the franchisor can require this expenditure provided certain conditions are met.
In 2015, the Franchising Code of Conduct was updated so that a franchisor can require a franchisee to undertake significant capital expenditure if either:
- the franchisee approves the spend;
- it was disclosed to the franchisee in the disclosure document they received prior to commencement or renewal;
- the majority of franchisees agree;
- it is necessary for legislative obligations (for example, a change to health laws); or
- it is considered necessary by the franchisor, and is justified by a statement setting out the rationale for making the investment, the costs, as well as the risks and benefits.
Although the Franchising Code was updated in 2015, it applies to all franchise agreements entered into after 1st July 1998 on this issue.
If you are looking to buy a franchise, we cannot emphasise enough the importance of Franchisee Due Diligence – read the Disclosure Document before buying into the franchise! These documents can be quite large but must contain a section on significant capital expenditure requirements.
But if you are already a franchisee, how do you then manage significant capital expenditure?
- Talk to your franchisor – they will often work with you to find a solution – can they help you find alternative quotes, assist with negotiating with a bank for finance, or extend the timeframe for compliance?
- Seek professional advice on your rights, especially if you feel like you have no options or if you feel like you are being pressured. For example:
- Sometimes a small capital expenditure for one franchise can be ‘significant’ for another franchise.
- Has the franchisor not acted in good faith or acted unconscionably considering your financial difficulties or the circumstances?
- Did the disclosure document provide enough specific information on the sort of capital expenditure you may be required to spend?
- Do you have the protection of Unfair Contract Terms legislation?
A significant capital expenditure can place a large financial strain on you and your family, so use this as an opportunity to reflect on whether this is a brand which you are still passionate about.
If you require assistance in relation to your franchise, our Adelaide commercial lawyers are available on (08) 8212 1322 and we would be pleased to assist.