INTHEBLACK June/July 2024 - Magazine - Page 43
Misunderstanding of the legal versus
accounting concept of goodwill adds to
the confusion, says Derek Sutherland,
consulting principal at Keypoint Law.
Sutherland highlights the example
of 38 Mercedes-Benz dealers who, in
2021, filed a claim in the Federal Court
of Australia (AHG WA(2015) Pty Ltd v
Mercedes-Benz Australia/Pacific Pty Ltd
& Ors [2023]FCA 1022]) against the
car manufacturer for an alleged loss
of A$650 million in goodwill after they
received notice of non-renewal of their dealer
agreements. Though they were ultimately
unsuccessful in their claim at trial, they have
recently appealed that decision.
“Justice Beach made it clear in the
primary case that the claimants’ confused
the accounting definition of goodwill with
the legal definition of goodwill, and they
are not the same,” Sutherland says.
Under a franchise agreement, Sutherland
adds, goodwill in law is property because
it is the legal right or privilege to conduct
a business “in the same manner and by
the same means that attracted custom
to it” (Commissioner of Taxation (Cth) v
Murry 193 CLR 605 (1998)). That right
may arise from the franchise agreement.
In this scenario, goodwill is an asset
of the business because it is a valuable
right or privilege to use the other assets
of the business to produce income.
“When the right to conduct the
franchised business ends, by termination
or expiration of the franchise agreement,
then the goodwill also comes to an end,”
Sutherland says.
Schaper adds that enhancements
to education and advice delivered by
government would be beneficial in this
and many other aspects of franchising
that tend to give rise to disputes and
financial harm.
INNOVATION AND
PROFITABILI-TEA
Since launching in Taiwan in 2003, bubble tea brand Chatime has
opened more than 2000 stores worldwide, including about 165
outlets (or “T-Breweries”) across Australia.
The Chatime Franchise Agreement is typically a five-year
contract with an option to extend for another five years, during
which time franchisees have access to support teams in business
development, marketing, IT, finance, leasing, supply chain and
project management.
According to Carlos Antonius, CEO of Chatime Group Australia
and Chatime Global USA, the franchisor’s success can be
attributed to a range of factors, including strong brand disciplines,
product innovation, franchisee selection criteria, a multi-unit
franchise focus and ongoing reviews of all datasets, including
cost of entry.
In addition, he says the company undertakes ongoing reviews
of franchisee profitability, which is formally updated every quarter.
“As a result of this, we have and continue to make changes to
the variables we can influence such as cost of goods sold (COGS)
and some services to help maintain a profitable operational model.”
Two areas where he believes franchisees could benefit
from accounting support relate to pre-trade expenses and
end-of-lease refurbishments.
“Franchisees get very absorbed in the value of the initial capital
investment and either fail to consider or underestimate how much
they need to set aside for pre-opening expenses and working
capital,” he says. “A small delay in a project proceeding can
result in extra wages to hold team members, or extra rent.”
Further along in the contract, Antonius recommends franchisees
put aside a “sinking fund” or cash equivalent to their depreciation
to cover a refurbishment at the end of lease and/or potentially
their franchise term.
Especially in a bricks-and-mortar franchise, he says most retail
landlords will require a refurbishment at lease renewal, which is
a good opportunity for franchisees to “freshen up” their premises.
“There is evidence that this generally provides a top-line sales
improvement,” he adds. “Often the best time for a franchisee
to exit and maximise the value of their investment is just after
the retail lease and refurbishment is complete, but they need
to have reserves put aside to enable it to happen quickly.”
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