22nd December, 2015 · Feature

Is your goodwill under threat?

2 minutes to read

In this article

End of term arrangements

The accountancy practice BDO recently commented in Automotive Dealer that “Dealership businesses are invested in, operated, traded and financed on the assumption that there is a value attached to goodwill, regardless of whether that value is notional or reflects an actual transaction”.

Disclosure

The Code attempts to reduce the financial impact of a ‘non-renewal’ by requiring franchisors to disclose the arrangements to apply at the end of the franchise agreement (item 18 of the Disclosure Document).

End of term policies

The only way to mitigate the threat of a ‘non-renewal’ is to attempt to discuss, negotiate and agree end-of-term policies and procedures with the franchisor/manufacturer.

In the previous edition of Automotive Dealer I discussed who owns the goodwill in your Dealership and one way of protecting goodwill. In this article I will discuss the biggest threat to goodwill and how to mitigate that threat.

End of term arrangements

The accountancy practice BDO recently commented in Automotive Dealer that “Dealership businesses are invested in, operated, traded and financed on the assumption that there is a value attached to goodwill, regardless of whether that value is notional or reflects an actual transaction”.

BDO go on to say, “Recently, we have observed manufacturers terminate franchise agreements, as is their right under many franchise agreements, when a Dealership business is subject to external appointment such as receivership. In these circumstances any notional or actual value which might have attached to goodwill is immediately diminished to nil.”

I entirely agree with BDO’s comments; however manufacturers terminate or do not renew Dealer agreements in many circumstances, not just limited to when a Dealership business is subject to an external appointment such as receivership. In each case and at the stroke of a pen, the goodwill of the Dealership is immediately diminished to nil. In some cases there may be very good reasons for a termination or ‘non-renewal’, but it is questionable whether a Dealer should forfeit millions of dollars in goodwill built up over many years.

One of the biggest weaknesses of the Franchising Code of Conduct (‘the Code’) for franchisees/Dealers is that it tacitly permits conduct that can lead to the immediate loss of goodwill through ‘non-renewals’.

Disclosure

The Code attempts to reduce the financial impact of a ‘non-renewal’ by requiring franchisors to disclose the arrangements to apply at the end of the franchise agreement (item 18 of the Disclosure Document).

Specific disclosures include whether a franchisor will pay compensation if a franchisee is not renewed, and whether a franchisee will have the right to sell the business at the end of the franchise agreement. I am yet to see a Disclosure Document by a franchisor in any franchise in any industry provide for either compensation or the right to sell.

End of term policies

The only way to mitigate the threat of a ‘non-renewal’ is to attempt to discuss, negotiate and agree end-of-term policies and procedures with the franchisor/manufacturer. Some Dealer Councils may have an opportunity to discuss the issue when the Dealer Agreements are reviewed.

Many franchisors/manufacturers already adopt best practice in relation to end-of-term arrangements. Those franchisors/manufacturers understand that the threat of dispute and litigation are reduced significantly when fair procedures and policies allow a Dealer to recoup some of the goodwill value of that particular Dealership by selling the business to the franchisor’s/manufacturer’s preferred new Dealer.

For more information, or if you have any questions about this series of articles on goodwill, you can contact Vinesh George by emailing vinesh@vsgeorge.com.au.

Vinesh George
Company Secretary and Legal Counsel, AADA