In franchise relationships, concern often arises about who owns the goodwill of a franchised business.
On the one hand, you have a Dealer who has put many years (or even decades) of blood, sweat and tears into building up the dealership from scratch. That includes substantial investment into the facilities and people involved in the business. It also involves the Dealer risking all of their personal assets by means of personal guarantees made in favour of banks.
Then on the other hand, you have a manufacturer who has not only made the product through decades of investment in R&D, but also invested millions of dollars in developing and building a brand from which Dealers benefit.
How do you allocate the ownership of goodwill between these two competing interests?
In the automotive and franchise industries, one should consider that there are two types of goodwill.
First, there is the goodwill that attaches to the branding/trademarks. That is commonly understood and recognised as belonging to the manufacturer.
Secondly, there is the goodwill that attaches to the franchised business. That goodwill arises for accounting purposes when a sale of a business takes place at a price which exceeds the value of its net assets. That excess is called ‘goodwill’ and it is commonly understood and recognised as belonging to the Dealer.
Many Dealer agreements specifically state that the manufacturer retains ownership of the goodwill attaching to the brand. In most cases, this is a reference to the goodwill of the brand and the franchise system, as opposed to the franchised business. In some cases, the manufacturer will go further and assert that a Dealer only has a custodial role over the franchised business and the Dealer is required to return the franchised business to the manufacturer at the end of term. A manufacturer cannot have any degree of confidence in the latter statement in light of some of the legal commentary referred to below.
There are a number of cases in Australia, the United Kingdom and the United States that have discussed the issue of who owns the goodwill in a franchised business. In most instances, the discussion supports the notion that the franchisee owns the goodwill in the franchised business.
For example, one judge stated:
‘Goodwill is inseparable from the conduct of a business’ implying the franchisee owns the goodwill.
‘However, the franchisee has an interest in protecting the goodwill of its business. The customers are customers of the franchisee’s business’.
Those statements made by judges in the course of handing down judgements offer a useful insight and reminder about who owns the goodwill in a dealership.
When it comes to protecting the goodwill of their businesses, Dealers ought to adopt a somewhat confident attitude in relation to their rights. Manufacturers would be well-advised to be aware of these rights when developing operational or commercial policies that affect the goodwill of a dealership and when considering exit arrangements for a Dealer.
For more information, or if you’ve any questions about this article, you can contact Vinesh George by emailing firstname.lastname@example.org
Company Secretary and Legal Counsel, AADA