AUSTRALIA Trends and Developments Contributed by: Warren Scott, Stewart Levitt, Erik Purcell and Lachlan Speirs, ARCHER SCOTT Lawyers
Adopting this structure (subject to it being properly implemented) means that the business moves out of an environment where the regulator is the ACCC and instead becomes regulated by the Australian Securi - ties & Investments Commission (ASIC). If correctly structured, the Franchising Code no longer applies, with regulation under the Corporations Act and related legislation instead taking over. The level of control improves substantially for the busi - ness if it elects not to franchise and instead adopts a corporate structure. It can direct employees to do exactly what they want them to do. Furthermore, this corporate structure provides a higher value business for both the entity that would have been the franchisor and the person who would have been the franchisee. The following case study is intended to demonstrate this concept. Case study – Back in Motion Back in Motion was a physiotherapy franchised busi - ness with 64 clinics across Australia and New Zea - land. As an aside, it was quite a unique franchise in Australia (and perhaps globally) because it is a health and professional services franchise; many people have considered that medical and health profession - als could not successfully be obliged to comply with a franchise system. Franchises in the Back in Motion network were tra - ditional franchises, with an upfront fee and ongoing royalties and marketing fees paid by franchisees on their revenue. Once up and running, a single Back in Motion busi - ness operating under a franchise agreement might be capable of being sold at up to approximately three x Earnings Before Interest and Tax (EBIT). The franchisor was considering a sale of its business as the franchisor of the network, and was able to negotiate a sale of not just the franchisor company, but of 100% of the franchisee businesses as well, at the same time to the same purchaser, which was an Australian Stock Exchange-listed company that did
not itself operate a franchise system but operated similar businesses. In this transaction, the value obtained by each fran - chisee was substantially above three x EBIT, which was a fantastic outcome for the franchisees involved, who could never have individually achieved a financial outcome at that level by selling their individual fran - chises. The franchisor also benefitted by a share in the upside that was recognised in the former franchisee businesses. In the transaction, Back in Motion became “unfran - chised”. Upon the sale date, each franchise agree - ment was cancelled and instead each former fran - chisee was granted a unique class of share that related to the physiotherapy clinic from which they operated their former franchise. The unique share meant that each former franchisee could choose what percentage of their business they wanted to sell and what percentage they wanted to effectively retain to continue to work in a relationship akin to a joint venture with the purchaser company. The unique share also enabled each former franchisee to share in a corresponding percentage of profits relat - ed to the business they were working in and manag - ing, now as an employee of the company. In this model, there is a true symbiotic relationship between the company and the employee, whereby they are both focused on profitability rather than rev - enue (noting that most franchises take their royalties from the top line whether or not a franchisee business makes any profit). Choosing a structure or restructuring An entity that already operates a franchise network does not need to wait for a sale of its entire network to restructure away from franchising to a corporate model. This can be done at any time. If a business is considering franchising as a business model to grow the business, it should consider all business models before determining if franchising is in fact the best model. Models other than franchises can include:
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