Menace of law to nail pyramid swindlers
A new law designed to tighten the controls on pyramid selling and multi-level marketing schemes threatens to make many franchises unworkable. The Trading Schemes Act 1996, which comes into effect in August, casts its net so wide almost all businesses, including franchises, are effected. Anyone breaking the law could be committing any of the four criminal offences and be liable to fines or even jail.
Having begun with a catch-all law, the DTI, whose aim is to deter swindlers went on to write exemptions in the Act designed to exclude legitimate businesses. But franchise lawyer David Bigmore says the exclusions are not wide enough and many franchises might still find themselves trapped.
The first type of exclusion states that single-tier trading schemes are exempt. But Bigmore claims the way the law is worded means franchisors who use self-employed salesmen or independent contractors, or whose franchisees employ independent contractors, may find themselves subjected to the Act.
Tips for Franchisors
David Bigmore & Co, a solicitor specialising in the industry, offers the following tips for the would-be franchisors:
SEEK expert help. See a franchise consultant, who will be able to develop your business experience into a customised system, an experienced accountant, who will work out the profitability for you and your franchisees, and a specialist lawyer who will advise on legal requirements.
CHOOSE the name of the franchised operation carefully and register it at the Trade Marks Registry.
DEVELOP a profile of an acceptable franchisee. Many of the problems
Trading Schemes Bill
Some get-rich-quick schemes operate on the same basis as chain letters, with each member recruiting further members. Members pay out large sums in the expectation of a high return. Those payments are nearly always based on unrealistic forecasts of earnings from recruitment.The forecasts are derived from what I described during an earlier stage of the Bill's consideration as the principle of geometric progression, leading to theoretical levels of recruitment reward which, in reality, are impossible to achieve.
The House will recall from Second Reading that the intention behind the Bill is to deal with a weakness in the legislation that controls trading schemes. On Second Reading and in Committee there was almost universal support for the principles set out in the Bill.
I acknowledge that, in essence, this is an enabling Bill. The guts of the proposed legislation will appear in regulations that will be introduced by the
A Master Franchise Agreement (MFA) is basically an arrangement whereby a Master Franchisee is appointed by the franchisor to grant individual franchises to franchisees in the target country. The franchisor will require the Master Franchisee to pay an initial fee of an appropriate amount for the grant of the MFA. In addition, the franchisor is likely to receive a share of each initial fee received by the Master Franchisee from individual franchisees. The franchisor will also wish to be paid some of the continuing management fees payable to the Master Franchisee by its franchisees. This becomes the Master Franchise Service Fee (i.e. for continuing support by the franchisor).
The MFA should stipulate the form of Franchise Agreement (FA) to be used. The FA should be governed by the law in the target country for obvious reasons. It will assist the development of the franchise if a local form of FA is used. Adapted forms of overseas FAs are not usually very good sales tools.
Benjys 'vanchisees' pile on pressure
Master Franchising Agreement