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CASE STUDY nxt2U Bars Pty Ltd

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Overview

This case study will assist you in developing a practical understanding of theory covered in workshops in lectures. By critically analysing and understanding the issues facing nxt2U and its owners, you will be able to formulate:

1) Your reason for choosing self-employment

2) Your choice of industries- retail goods, wholesale goods and services

3) Your choice of participating in business- buy an existing business, buy shares in an

existing business, and establish a new business

4) Your choice of channel to market- physical, on-line and omni

5) Your choice of business models- Independent business, franchising, licensing, co-

operative, and distributorship

6) Your choice of legal structure- sole trader, partnership, company, and trust

7) Your decision regarding contracts and agreements, tax registrations, insurance, human

resource, corporate image, marketing, digital presence/SEO, licenses, and banking

arrangements

8) Your choice of financing the business

9) Your revenue and cost budget

10) Your plans for resource management, staff training & incentive and customer relationship

management (CRM)

11) Your key performance indicators (KPI) to monitor business performance

12) Your local area marketing, advertising and promotion and resourcing plans

13) Your plan to manage your supply chain, your capacity and to grow intellectual property

assets

14) Your plan to exit the business

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Key concepts

1) Definition and evolution of entrepreneurship

2) Economic and behavioural profile of an entrepreneur

3) Role of entrepreneurship in economic development and growth

4) Definition of a small business

5) Economic profile of a small business

6) Role of small businesses in economic development and growth

7) Risk v reward model for entrepreneurship and small business

8) Motivations for self-employment

9) Risk v reward model for self-employment and employment

10) Opportunities for self-employment

11) Options of business ownership models and the relational, legal, and financial risks

12) Factors affecting channel choice- industry, product, target audience and capital

13) Relational, legal, financial, operational, structural theoretical and practical framework of

being in business as a principal or an agent

14) Personal liability, asset protection and taxation issues associated with various legal

structures

15) Regulatory compliance before, during and after business participation

16) Advertising, marketing, and promoting the business during various phases of its life-cycle

17) Digital presence and optimising social media strategies

18) Legal, financial, relational, and operational risks associated with the business prior to

commencement, during and at the end of ownership.

19) Key points of investigation in Business Sale Agreements, Franchise Agreements and

Disclosure Documents

20) Equity and debt financing

21) Bank finance, leasing, chattel mortgage, factoring, crowd-funding, peer-2-peer lenders,

angel investors, private equity, venture capital, government grants, factoring, initial public

offerings, and warrants

22) Cash-flow modelling, revenue, and expense forecasting

23) Finance applications and information memorandum

24) Designing staff incentives and profit share arrangements

25) Customer relationship management systems and strategies

26) Designing and interpreting KPIs to improve profitability

27) Challenges of the franchisor/franchisee relationship

28) Local area marketing constraints

29) Resourcing challenges

30) Control and management of tangible and intangible resources

31) Protecting and growing intellectual property assets

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John Smith is a qualified Electronic Engineer who has worked at BHP Billiton for the last fifteen years. During his tenure, John has enjoyed a portfolio of senior roles across the organisation which ranged from marketing to finance to logistics. While his self-confidence and charisma earnt him the respect of his peers, his willingness to take social risks and be disagreeable often created conflict with his superiors.

John is 46 years old. He is married with a 24-year-old daughter (Pip) and a 15-year-old son (Zac) who is not performing well at high school. Pip is completing her final year of a Business/Law degree. She has accepted an internship at PWC in the Corporate Advisory

department. She is very keen to own a business in the future.

Following a restructure of BHP’s chemical division, John was offered a redundancy package of $1.1ml net of tax. Like his daughter, John is very entrepreneurial and has a passion for business. His father owned a business for most of his adult life where John worked and developed his appetite for self-employment. That business had an annual turnover of $2.5ml and employed 14

adults. It also offered short term apprenticeships to dozens of young people from the local community.

John and his wife (Kara) spent many long hours discussing his future as he was the family’s main income earner. The prospect of him going back to employment disturbed him. John explained his motivations for self-employment… “I want to create a legacy for Pip and Zac and their children by creating an enduring income-producing asset that they can either operate for themselves and by themselves or by someone else. Specifically, I want to take control of my

employment so that I can’t be forced in redundancy again. It’s not a good feeling to be told that you are no longer needed when you know you still a lot of value to add”. He also emphasised that “the independence of being one’s own boss will allow me more flexibility to balance work and family”.

While Kara understood, and shared his motivations, she cautioned him of the risks of going into a small business and pointed out these potential issues:

1) He may be trading off the regularity of pay cheque especially during the initial stages of building the business. 2) They will be risking personal financial capital with no guarantee of a return. She was particularly concerned about the family home and stressed that professional advice must be sought before they proceed.

3) They will be relying of the cash-flow of other people. If customers don’t have the money to spend on their products, the business will not be able to pay its debts when they fall due and This would not only impact the family’s budget but may also create issues for them as Directors under Corporations Law.

4) While he will have control over certain aspects of his income generation activities, he will not be able to control changing customer preferences and tastes.

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5) Attracting, employing, training, managing, and retaining employees of a small business is a very challenging task and is he ready to take this on.

6) The work/life balance he believes he will attain by owning his own business may not become a reality for many years.

7) He may miss the interaction with other senior executives and the intellectual stimulation that he so much enjoys.

Acknowledging Kara’s concerns, John argued that the potential rewards far outweigh these risks. He spoke convincingly about his ability to manage small teams, care for customers, maintain supplier relationships and implement processes to ensure quality control always, which he said were “the key drivers for success in a small business”.

Kara was tasked with researching the options for going into business which she summarised for John as follows.

Start-up Business

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Existing Firm

Existing Business

Following several hours of analysis and discussion, they identified two options for self- employment. Option 1: Buy an existing business with positive cash-flows (which Kara preferred) or Option 2: Start a new-to-market concept of combining a cold-pressed juice bar with a healthy wrap offering. The wraps would be sold by inches filled with fresh ingredients- nothing fried, and calorie controlled. She liked the idea of a healthy offering and the industry, however being a professional project manager, Kara insisted that John undertakes a full feasibility study before proceeding. After several weeks of research John presented a report containing a SWOT analysis of the start-up, a three-year sales, labour, inventory, operating cost, and cash-flow budget detailing capital (initial and ongoing) requirements and financing options. He even supported his sales budget with a detailed Market Entry Plan comprising strategy for price, product, promotion, place, people, process, and physical evidence. Convinced of his due diligence investigation and the potential financial returns offered by the business, Kara agreed to discuss their financing options with their neighbour (Susan) who is a franchise owner of one of Australia’s leading finance brokerage brands.

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Susan cautioned them that obtaining finance for either acquiring a business or for working capital is not easy. She insisted that “it’s a process that requires a deep understanding of how lenders think, and that information should be precisely presented to give the loan application the maximum chance of success”. Upon further questioning, Susan detailed that lenders would be expecting the following:

1) Profile of business being acquired.

2) Profile of the principal of the business.

3) Profile of the corporate entity, which will own the business.

4) Details of the acquisition cost and proposed funding mix.

5) Summary of the investment required and the funding mix.

6) Summary of business and personal debts to be financed.

7) Historical balance sheet extract, and profit and loss.

8) Budgeted balance sheet at the end of three years.

9) 3-year budgeted cash flow statement.

10) 3-year budgeted profit and loss statement.

11) 1-year budgeted profit and loss statement.

12) Budgeted gross revenue and gross margin

budget.

13) Budgeted fixed cost schedule.

14) Budgeted labour cost schedule.

15) Budgeted controllable cost schedule.

16) Budgetedprincipal’sremunerationschedule.

17) Budgeted financing cost schedule.

18) Budgeted principal’s personal expenditure

schedule.

19) Statement of personal assets.

20) Statement of personal liabilities.

21) Statement of security available for the loan.

22) Details on freehold and leasehold contacts.

23) 3-Year marketing plan.

Being well-informed about what to do next, Kara and John met with an experienced business accountant to discuss the next steps in setting up the business. Specifically, the accountant

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was instructed to prepare the financing plan in line with Susan’s advice and provide advice on as to the most efficient legal structure to achieve the business’ growth ambitions, asset protection and tax minimisation.

Several days following the meeting, the accountant advised that Kara and John would need a total of $1.6ml to fund the establishment of the business and meet its ongoing working capital requirements. He reminded them that their combined net assets amount to $3,177,500 which comprise the following:

Asset & Liability

Family home

Investment residential property Cash at bank

Cars and household furniture Less Liabilities

Credit cards

Home loan

Net assets

Amount

$1,550,000 $550,000 $1,250,000 $125,000

$12,500 $285,000 $3,177,500

He discussed a financing plan that included a mix of debt and equity, which effectively meant that Kara and John would need to use all or some of their cash holdings together with borrowings to finance the business. He pointed out that there are three issues to consider when seeking finance are (1) Fund-provider’s perspective: – whether funding should be debt, equity, or a combination, (2) Timeframe perspective: – short or long term and (3) Business life stages: – early stage or expansion. When queried further by Kara, the accountant explained that there are two primary sources of finance, comprising Debt finance: – Funding which is borrowed from an outside party (major banks, non-banks, P2P, and mutual) and Equity finance: – Funding provided by the owner(s) of a business venture. He also cautioned that going into debt implies having an obligation or outstanding liability to an outside party and that small businesses often fail to obtain finance mainly because of insufficient security, payback term is too long and track record of performance is lacking.

He further added that a lender would require real estate security as collateral for loans to the business. When queried further about other security measures that a lender would require, the accountant took time to explain the implications of giving personal and directors’ guarantees. Having agreed on the funding amount and the mix of debt and equity together with the type of security and guarantees that John and Kara are prepared to offer to a lender, he discussed at length the merits of different types of legal structures.

Sole Proprietorship Distinguishing characteristics

Advantages

Ease of formation

Total control

Low establishment/maintenance cost Few regulations

Disadvantages

Unlimited liability Limited resources Lack of continuity Low tax minimisation

  1. A person who wholly owns and operates a business
  2. No distinction in law between the business and the individual owner
  3. All profits/assets belong to the owners
  4. All liabilities/debts belong to the owners
  5. Sole trader does not mean sole employee

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Partnership

Distinguishing characteristics

Advantages

Ease of formation and operation Distinct existence

Combined resources and direct rewards

Private Company Distinguishing characteristics

Advantages

Perpetual existence Limited liability

Rights of a natural person

Tax rate lower than top marginal rate for individuals

Trust

Distinguishing characteristics

Advantages

Income splitting Capital gains tax Control

Asset protection

Not disclosed to public

Disadvantages

Unlimited joint liability Potential conflicts Lack of continuity

  1. A commercial relationship that exists between individuals/companies/trusts carrying on a business in common with a view to make a profit
  2. Minimum two people- maximum of twenty people
  3. Share of profit/loss declared in partner’s individual tax returns
  4. Liability is joint and several
  5. A separate legal entity that exists independent of its shareholders, directors, and managers
  6. Owned by shareholders
  7. Shareholders elect directors
  8. Shareholder’s liability is limited
  9. Can exist in perpetuity

Disadvantages

High set up and maintenance costs

Spread ownership

Risk transfer to directors in privately held companies

Attracts greater scrutiny by regulators

  1. A trust is an obligation imposed on a person (called a trustee) to deal with the trust property over which he or she has control, for the benefit of specified or unspecified persons (called beneficiaries)
  2. The trust deed sets out the terms and conditions on which the trust assets are held and outlines the rights of the beneficiaries
  3. It is not a separate legal entity like a Company

In Australia, there are five main types of trust that a family or small business may consider, discretionary, fixed, hybrid, unit and bare

Disadvantages

Generally, not well understood Divorce and death

Expensive to set up & administer Legislative risk

Difficult to get to assets

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Income splitting Generally, not well understood

After much discussion about their tax, asset protection and business needs, the accountant recommended the following structure. Kara and John agreed to be the directors and equal shareholders in a newly established company called nxt2U Bars Pty Ltd. The accountant agreed to be the Settlor, John’s older brother as Appointor and Zac and Pic were named as specified beneficiaries. He also registered the business name nxt2U Bars.

Before establishing the new company, the accountant took time to remind John and Kara that they would be subject to onerous obligations under the Corporations Act in their capacity as directors. He handed them a one-page document that summarised these obligations as follows:

1) s180 Care and diligence – Directors must act with the degree of care and diligence that a reasonable person might be expected to show in the role.

2) s181 Good faith – Directors must act in good faith in the best interests of the company and for a proper purpose, including avoiding conflicts of interest, and reveal and manage conflicts if they arise. This is both a duty of fidelity and trust, known as a ‘fiduciary duty’ imposed by general law and a duty required in legislation.

3) s182 Improper use of position – Directors must not improperly use their position to gain an advantage for themselves or someone else or to the detriment to the company.

4) s183 Improper use of information – Directors must not improperly use the information they gained whilst performing their directors’ duties to gain an advantage for themselves or someone else or to the detriment to the company.

5) s558G Insolvency – Directors have a positive duty to prevent the company trading whilst insolvent. A company is insolvent if it is unable to pay all its debts when they are due.

6) s286 Financial records – Directors must ensure that the company keeps adequate financial

records to correctly reflect and explain transactions and the company’s financial position and performance.

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The accountant was officially retained to administer the bookkeeping and compliance requirements of the Company and Trust and to provide taxation advice to John and Kara when required. Having completed the legal structuring and attended to the necessary registrations with ASIC, ATO and WorkCover, the accountant recommended an experienced Commercial Lawyer to John and Kara for advice on trademark and patent registration. John was keen to protect his invention (the machine to produce five different custom-sized flavoured wraps on- site), trademark the business name and logo, or even protect the unique packaging of his wraps and juices. He reminded Kara of the value of protecting and growing intellectual property in readiness for franchising in a few years. After several months and an investment of $28,000.00, he was successful in securing the following:

Trademark Business name Company name Domain name Patent

Design Copyright

nxt2U

nxt2U Bars

nxt2U Bars Pty Ltd

nxt2U.com.au

Machine process of making and sizing flavoured wraps The shape of his product packaging

nxt2U Operations manual

It took a while to find the right premises for the business, due to the specific physical infrastructure required such as size, structure (internal & external), facilities & staff amenities, location, zoning, configuration, and parking (on-site or close-by). However, with the assistance of a competent real estate advocate a site was secured and renovations commenced to accommodate their new business.

Whilst the premises were being fitted, John took time to undertake a detailed labour resource planning. He began with a job-analysis, which entailed required him to determine the duties and skill requirements of each job. The two main components were (1) job description which is a written statement of what a job entails, how it is done and under what conditions and (2) the job specification which detailed the personal traits and experience required to do the job effectively. He had to strictly adhere to his accountant’s budget when structuring the remuneration and rewards plan for his staff. He needed to factor in that remuneration rates for many jobs are set by regulations or industrial bodies. However, most job pay rates are determined by market mechanisms which are usually structured as a wage where employees are paid at a set hourly rate and a salary where receive a fixed ‘total pay’ package regardless of the hours worked. In some industries, performance or commission-based remuneration is used instead.

The labour resource planning process culminated with a meeting with a specialist lawyer in Industrial Relations to evaluate the different ways in which employment relationships can be contracted. While John and Kara understood that industrial awards set standard minimum conditions of employment in their industry,

they wanted to understand more about the benefits of individual written contracts that are negotiated directly between the company and employees and informal contracts which can be unwritten and can create problems if a dispute occurs. Much information was shared during

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the meeting which covered such issues as occupational health and safety rules, workers’ compensation insurance, PAYG tax system, equal employment opportunity, retirement and superannuation funds and record keeping.

John and Kara developed a local area marketing campaign that comprised only of letter-box drops and local sporting club memberships. They soon discovered they needed more depth and breadth in their efforts and consequently retained the local marketing agency to discuss various physical and digital branding and local area marketing strategies.

After several years of operating John and Kara sought the advice of a leading franchise consultant and rolled out an innovative franchise model. As a minimum, the model mandates that franchisees will adopt common branding and business image, common systems, and procedures, pay of an upfront fee, observe a prescribed product list, and enter performance guarantees.

At the time of offering their first franchise they had opened four bars within a 20 kms radius of each other. In preparation for a meeting with their first potential franchisee, they researched the type of questions that the right candidate ought to ask of them as part of their due diligence investigation. With their research in hand, they met with their newly appointed Franchise Relationship Manager, their daughter Pip to inform her of the following.

That she must ensure that the potential franchisee is getting what they think they are buying and what they are buying is worth what they are paying. And it is also important that understand legal, financial, commercial, relational, and operational risks associated with the business prior to commencement, during and at the end of ownership. This must be accompanied by a commitment to make informed decisions throughout the life of the business i.e. the due diligence process is ongoing as the business plan is revisited. John was resolute to point out that:

  1. Due diligence equally applies to nxt2U as sellers of a franchise as it does to the buyer.
  2. The buyer will ultimately become a seller at one point in the future. In that sense the buyer is initially subject to the

doctrine of caveat emptor and later

as seller caveat venditor.

  1. This essentially means that as a buyer the franchisee or small independent has a responsibility to ensure that they know and understand the risk associated with the business they are buying.
  2. On the other hand, the seller is increasingly being required (by various consumer laws) to take responsibility for any representations made about the business they are selling. The merging of these two doctrines creates complex levels of comprehension and responsibilities for both buyer and seller which both parties should consider, subject to their motivations.
  3. Due diligence investigation may include advice from professional and personal networks, own research, desktop research, market research, speaking to other business owners, observing the target business, observe/visit other businesses and speaking to customers of the target business.

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It was not long after successfully appointing their first franchisee that nxt2U expanded rapidly across Australia. With a footprint of 68 franchises, the company employs over 67 people at its head office and a further 380 people are employed by franchisees. A succession plan is in place for Kara and John to stand down in 10 years. Pip is being groomed to lead the company and Zac is thriving as the Operational Manager.

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Annexure 1 Disclosure document

  • Defines a franchise agreement
  • Specifies who should comply
  • Cooling-off period
  • Mandatory mediation process
  • Procedures for termination
  • Materially relevant facts
  • On-line sales
  • Marketing funds- Audited Financial Statements
  • Capital expenditure
  • Earnings forecast
  • Site selection
  • Annexure1- Disclosure document
  • Annexure 2- Information statement
  • End of term arrangements
  • Codification of good faith

Annexure 1 of Disc Doc

  • Franchisor details
  • Business experience
  • Litigation
  • Payments to agents
  • Existing franchises
  • Master franchises
  • Intellectual property
  • Franchise site or territory
  • Supply of goods or services to a franchisee
  • Supply of goods or services by a franchisee
  • Supply of goods or services-online sales
  • Sites or territories
  • Other payments
  • Marketing or other cooperative funds
  • Financing
  • Unilateral variation of franchise agreement
  • Arrangements to apply at the end of the franchise agreement
  • Amendment of franchise agreement on transfer of franchise
  • Earnings information
  • Financial details
  • Updates
  • Receipt

Operations manual

  • Franchise agreement
  • Training and/or ongoing support provided by the franchisor.

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  • Trade territory (physical and virtual)
  • Duration of the franchise grant
  • Upfront franchise fee and total anticipated investment
  • Ongoing fees and capital outlays
  • Advertising and marketing fees
  • Operating protocol
  • Renewal rights and franchisee termination/cancellation policies
  • Resale rights
  • Goodwill entitlement
  • Intellectual property- trademark, patent, and signage use

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Annexure 2

Franchise Agreement Operative Framework (This is example only)

  1. Grant of franchise
  2. Details of the FRANCHISOR franchise business
  3. Right to operate the franchise business, term, and territory
  4. Co-location requirements, type of partner/host, relational, operational, and

financial obligations

  1. Agency relationship between the FRANCHISOR and Franchisee
  2. No authority to create any obligations on behalf of FRANCHISOR
  3. Term and Renewal
  4. Initial Term
  5. Renewal Term, process to renew, fees payable and new obligations
  6. Breach at Renewal, notification, remedy, and consequences
  7. Right to use intellectual property
  8. Right to use the Intellectual Property on license, detail IP being licensed and conditions of the license
  9. How the Intellectual Property is to be used in the franchise business
  10. Ownership of the Intellectual Property, details of any proprietary and/or contractual interest in IP (will FRANCHISOR operate the franchise system

under a different corporate vehicle, discussions required)

  1. Materials featuring the brand or trade mark, when, how and where can the

Franchisee use the brand or trade mark

  1. No registration of the brand or trade mark, restrictions on Franchisee regarding

registering any aspect of the brand or trade mark

  1. Use of corporate name, conditions under which it can be used, Franchisee

must conduct the franchise business under its own company name but as Agent of FRANCHISOR, and is licensed to trade under the FRANCHISOR brand

  1. FRANCHISOR Business brand, registration may be required, transfer of registration to FRANCHISOR required on termination, transfer, sale, or surrender, signed transfer form required at on signing of the franchise agreement and power of attorney given with respect to the transfer
  2. Goodwill, acknowledgement by Franchisee that goodwill always belongs to FRANCHISOR and its associated companies, also includes data base, client list and client base
  3. Operations manual
  4. Loan of Operations Manual, provided to the Franchisee on license only and no

proprietary interest is created in favour of the Franchisee at any time during the

term

  1. Compliance with Operations Manual, mandatory always and at Franchisee’s

own cost

  1. Amendments and additions, obligation of FRANCHISOR to inform Franchisee

and Franchisee must implement and comply at own cost

  1. Disclosure of Operations Manual, confidentiality required of Franchisee and its

staff, present and past

  1. Dispute, contents to be determined by FRANCHISOR in its absolute discretion,

however Franchisees may be invited to provide constructive input

  1. Operations manual is a collateral document and as such forms part of the franchise agreement, any inconsistencies as to terms and terminologies between the manual and the agreement shall be interpreted in favour of the

agreement

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  1. Availability of Operations Manual, subject to FRANCHISOR’s discretion, can be provided in paper, electronic, web or any other format and cannot be copied or modified without FRANCHISOR’s written agreement
  2. Replacement copy, where replacement copies are required due to wilful damage or the negligence of the Franchisee, FRANCHISOR may require a fee of the Franchisee
  3. Code compliance, Franchisee and FRANCHISOR agree to be bound by the requirements of the Franchising Code of Conduct
  4. Payments
  5. FRANCHISOR’s Costs to be recovered from the Franchisee, includes share of

legal fees associated with the franchise and other legal agreements, stamp duty, legal fees associated in enforcing the terms of the franchise and other legal agreement

  1. Set-up Costs, Franchisee must pay FRANCHISOR set-up costs which may comprise upfront franchise fees, site selection fees, initial training fees, equipment and fit-out
  2. Marketing Fees, any contributions required by the Franchisee with respect to initial launch costs and ongoing advertising and marketing costs
  3. Increase of Marketing Fees, FRANCHISOR cannot increase Marketing Fees without obtaining approval of the Franchise Advisory Council
  4. Products and Related Products, consistent with the Agency model, any products supplied to the Franchisee by FRANCHISOR for resale will be on consignment
  5. Equipment, uniforms, stationery, and signage, who pays for what and when
  6. Costs of training and attending meetings at Franchisee’s costs
  7. Method of Payment by FRANCHISOR to Franchisee will be by way of

electronic transfer into a nominated bank account on a fortnightly basis

  1. Set off, FRANCHISOR may set off any financial obligations to it by Franchisee

against any financial obligations to Franchisee by it

  1. GST, Franchisee and FRANCHISOR must adopt recipient created tax invoice

system about GST requirements

  1. Marketing area, defined as the Hub & Spoke model comprising an exclusive

marketing area covered by the three Spokes and the Hub

  1. Allocation of customer enquiries, call centre, web, and direct telephone

FRANCHISEE OBLIGATIONS

  1. Telephone, facsimile and computer use
  2. Telephone, facsimile and e-mail, FRANCHISOR will own utilities contracts but

Franchisee responsible for payment all charges. Franchisee must only use

authorised numbers to promote the franchise business

  1. Software, Franchisee must only use FRANCHISOR authorised software and

programs in the franchise business, a fee may be levied by FRANCHISOR for the license and franchisee and staff must undergo initial and ongoing training at own cost

  1. Web Site, property of FRANCHISOR and domain name cannot be registered by Franchisee and Franchisee must not set up its own web site
  2. Sales proceeds
  3. Revenue collected from sales to be banked daily in a central account in the

name of FRANCHISOR

  1. Daily balancing of till and other on-line reconciliation items as required
  2. Provision of services/customer relations
  3. Full time & attention, full time attention and best efforts in the running of the

franchise business, hours to be specified

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  1. No other business, Franchisee must not operate another business, other than the co-located business without the approval of FRANCHISOR
  2. Compliance with System, Franchisee must operate the franchise business in accordance with the operations manual and the franchise agreement
  3. Contracts with customers, Franchisee to contract with customers as an agent of FRANCHISOR and use standard approved business stationery always
  4. Person in effective control, the Franchisee being a company, must nominate a Franchise Principal approved in writing by FRANCHISOR to be responsible for the management of the franchise business and to ensure the Franchisee’s compliance with the franchise agreement and the operations manual
  5. Complaints, all customer and third-party complaints and issues that could potentially harm the brand must be immediately communicated to FRANCHISOR according to a specified process as detailed in the operations manual

12.Licenses, Franchisee’s responsibility to obtain all permits, licenses, and local government authorisations to be able to conduct the franchise business, including any licensing obligations of its staff

  1. Performance criteria
  2. Minimum sales required of the Franchisee during the term, budgets to be

prepared with 3 monthly targets, with structured reviews, coaching and training

  1. First failure to achieve minimum sales target, consequences of not achieving sales target, meeting with FRANCHISOR, may involve such things as

mentoring, coaching, external consultants

  1. Subsequent failure to achieve minimum sales target, may include breach

notice, may include further training, may include replacement of staff, and may

include termination

  1. Records
  2. Requirement to keep up to date and accurate records in a manner specified by FRANCHISOR at Franchisee’s own cost, failure to do so may cause FRANCHISOR to appoint an agent to carry out this task on its behalf and at the Franchisee’s cost
  3. Monthly trading statements due to FRANCHISOR by the 10th day of each calendar month, comprising profit & loss statement, balance sheet and target to actual performance analysis in a format specified by FRANCHISOR for the hub and each spoke
  4. Inspection rights of records and audit is granted to FRANCHISOR or its agents at any time, FRANCHISOR has irrevocable license to enter premises, FRANCHISOR may copy and keep any business record
  5. Surveys & Questionnaires issued by FRANCHISOR must be complied with accurately and promptly by Franchisee
  6. Computer equipment and records must be maintained always in a manner specified by FRANCHISOR
  7. Use of information by FRANCHISOR or its related corporations, information gathered by FRANCHISOR about the franchise business of a Franchisee can be centrally compiled and used and distributed publicly throughout the franchise system for benchmarking and business evaluation purposes
  8. Insurance
  9. Requirement to insure the franchise business always with an approved insurer,

comprising public liability, professional indemnity, fidelity guarantee and other

insurances required by statute such as workers’ compensation

  1. Proof of currency of insurance must be provided on signing of the agreement

and annually within 5 days of expiry thereafter

  1. Failure to insure, FRANCHISOR has power of attorney to execute on behalf of

the Franchisee any documents to effect appropriate insurance cover and

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Franchisee is liable for all costs associated with this process 16. Training & Meetings

  1. Requirement to attend training, Franchisee and staff (where required) must attend all training sessions
  2. Meetings & Conferences must be attended by Franchisee and staff (where required) at least 80% of the time at Franchisee’s cost
  3. Promotions & Marketing
  4. Requirement to conduct local marketing must be delivered in line with the

operations manual

  1. Participation in pricing and catalogue campaigns is mandatory
  2. Business stationery used in the conduct of the franchise business must those

approved by FRANCHISOR

  1. Personnel
  2. Engagement of staff, Franchisee must ensure that staff are fully trained and qualified for the job, engaged on a formal contract of employment approved by FRANCHISOR, all employees and contractors are to be employed by the Franchisee in its own right and not as Agent for FRANCHISOR, Franchisee must ensure that its staff end contractors abide by the operations manual and the franchise agreement
  3. Uniforms and corporate attire specified by FRANCHISOR must be worn by all employees of the Franchisee, Franchisee responsible for the cost of uniforms and their upkeep
  4. Death or incapacity of the Franchise Principal, must be immediately advised to FRANCHISOR, a replacement must be found and approved by FRANCHISOR, FRANCHISOR has the right to aid by providing a member of its own staff in a caretaking capacity until a suitable replacement is found
  5. Caretaking role will allow FRANCHISOR to manage the franchise business and recoup its cost from the income of the business
  6. Products, Franchisee must only market, promote and sell FRANCHISOR approved and supplied products at prices recommended by FRANCHISOR as specified from time to time
  7. Payments
  8. Trade creditors must be paid promptly
  9. FRANCHISOR dues must be paid promptly and can be deducted from monies

due to the Franchisee from FRANCHISOR

  1. Hub & Spoke management
  2. Franchisee must observe it obligations about the management of the hub as well as designated spokes to the hub
  3. Spoke management is specified in the operations manual
  4. Must promote cross pollination of

FRANCHISOR’S OBLIGATIONS

  1. Support assistance
  2. Ensure the continuity of supply of products at competitive prices in all markets
  3. Advice & assistance in relation to business management, local area marketing,

advertising (brand and product), business process, technology, site selection, site maintenance, business image, call centre referrals, customer education, technical product and technology support, computerised accounting packages, e-commerce, product training, and industry knowledge

  1. Provide all regulatory and AFR licensing compliance
  2. National marketing fund
  3. Establishment of fund to market and advertise the franchise business on a state basis, manage the production, creative, administration and research
  4. Operation of the fund is in line with the operations manual
  5. Contributions to the fund must be separately managed in an account and

externally audited annually

  1. Accumulation of reserves in the fund do not necessarily need to be spent in

any given financial or calendar year and any expenditure from the fund, though

accountable to the Franchisees, is at the entire discretion of FRANCHISOR

  1. Books of account of the national marketing fund to be kept by FRANCHISOR, available to Franchisees for inspection and monthly statements provided to the

Franchisees

  1. Annual financial statements
  2. Winding up of fund is at the entire discretion of FRANCHISOR, any amount

remaining in the fund on winding up will be distributed on a pro rata basis to all

Franchisees based on cumulative contributions made during the term

  1. State advisory council
  2. Charter, the state advisory council shall conduct its affairs in line with its charter (as documented by FRANCHISOR)
  3. Representations on the council will comprise of Franchisees, FRANCHISOR executives and an external consultant
  4. The council is a consultative body only and FRANCHISOR is not bound by its decisions or directives
  5. Supply of insurance and related products
  6. Franchisee is required to only offer for sale the range of FRANCHISOR

products as set out in the product manual, at competitive prices, and delivered

on time

  1. Range variations about technical attributes, functionality, and pricing must be

communicated to Franchisee within a reasonable period by FRANCHISOR. Indemnity is provided to Franchisee by FRANCHISOR for any losses to Franchisees arising out failure to do so

  1. Unavailability of products may justify Franchisees from sourcing elsewhere but not only after FRANCHISOR has been notified
  2. Ordering and fulfilment process, procedures, whether manual or electronic are to be managed and owned by FRANCHISOR
  3. Product pricing
  4. Pricing of insurance and other products purchased from the FRANCHISOR

shall be published by FRANCHISOR as often as required so that to allow

Franchisees to properly represent the range of product offerings

  1. Recommended resale prices may be set by FRANCHISOR and may vary

according to markets, seasons, and prevailing commercial circumstances

  1. Advertised selling prices by FRANCHISOR must be communicated to Franchisees at least 10 days prior to going live and must be observed by all

Franchisees

  1. Payments to Franchisees
  2. FRANCHISOR will pay the Franchisee the agreed percentage of revenues as detailed in the franchise agreement on a fortnightly basis by electronic transfer to a nominated bank account
  3. FRANCHISOR will promptly pay the Franchisee the agreed retainer, comprising salary, BSC rewards
  4. FRANCHISOR will promptly and directly pay occupancy, insurance, and administration expenses of the franchise business
  5. Termination
  6. Cooling off provisions apply, Franchisee may terminate the franchise

agreement within seven days of signing it, FRANCHISOR must then refund the Franchisee all payments made to date less any substantiated and reasonable

Page 20 of 22

 

expenses

  1. Termination for breach must be given in writing by FRANCHISOR
  2. Immediate termination by FRANCHISOR must be in accordance with the

Franchising Code of Conduct see below

  1. Upon termination
  2. In the event of termination or expiration of this agreement, Franchisee must cease to exercise any rights granted under the franchise agreement, pay all trade creditors, notify all trade suppliers, cease to use all confidential information, return all intellectual property items, return all unused branded stationery, appoints FRANCHISOR as the attorney to execute all documents to efficiently effect the transfers of any intellectual property items and other business-related issues
  3. Not to be considered as a renewal or waiver if after termination the Franchisee refers business to FRANCHISOR
  4. Non-competition
  5. During the term, non-compete and confidentiality covenants must be jointly and

severally observed by the Franchisee, the Franchise Principal, directors,

shareholders, and senior staff

  1. After termination or expiration non-compete and confidentiality covenants must

be jointly and severally observed by the Franchisee, the Franchise Principal,

directors, shareholders, and senior staff for a predetermined period

  1. Transfer
  2. Assignment of the franchise agreement by FRANCHISOR may occur without the consent of the Franchisee but Franchisee must be notified
  3. Assignment by Franchisee or sale, transfer, mortgage, or charge over the franchise agreement cannot occur in whole or in part without first obtaining FRANCHISOR’s written permission, which cannot be unreasonably withheld. Franchisee can only obtain a commercial benefit for the unexpired portion of the franchise term
  4. Surrender of franchise agreement by Franchisee may occur under certain conditions such as ill health, death of director, shareholder, Franchise Principal, FRANCHISOR may compensate the Franchisee for the unexpired portion of the franchise term according to a pre-agreed formula
  5. Conditions of transfer, consent to transfer or assign may be withheld by FRANCHISOR
  6. FRANCHISOR must have the first right of refusal to buy business assets of the franchise business.
  7. Change in ownership and control of the Franchisee must be with the consent of FRANCHISOR or otherwise will be deemed to be a transfer
  8. Renewals of franchise agreement, may be approved by FRANCHISOR under certain conditions, no breach, payment of fees, entering a new agreement, and business image upgrade
  9. Guarantors, comprise the directors of the Franchisee and the Franchise Principal 34. Dispute resolution, FRANCHISOR has rights to injunctive relief if the brand is at risk,

dispute resolution process as laid down by the Code applies.

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