News & Insights

Having kick-started a new financial year, franchisors are reminded of their obligations under the  Franchising Code of Conduct (Code).

The two core obligations we refer to include updating your Disclosure Documents and preparing your marketing fund documents by 31 October each year.

Disclosure Documents

The trap some franchisors fall into, is thinking this is a document only required to be given to a franchisee before they enter into a Franchise Agreement. In reality, the Disclosure Document is designed to also be given to a franchisee who is proposing to renew or extend the term or scope of a Franchise Agreement. This makes it a more onerous requirement, and demands careful thought from franchisors.

What must be provided?

An updated Disclosure Document signed by a director of the franchisor.

Franchisors should keep in mind the following issues when preparing the statement:

1. Any significant information that has changed in the past year, including changes in personnel (associates or officers), commencement of litigation, intellectual property changes
2. Financial health of the franchisor, including a statement of solvency signed by the franchisor’s directors
3. Details of existing franchisees, and a list of former franchisees from the previous three years.

When must it be provided?

For franchisors who operate on the standard financial year, you must provide it by 31 October each year. For franchisors who operate on a different financial year, you must comply within four months of the end of your financial year.

Are there any exceptions?

A franchisor does not need to update their Disclosure Document if they entered into no more than one Franchise Agreement in the preceding year, and the franchisor does not intend to enter into another Franchise Agreement in the following financial year. This appears to be quite a narrow exception.

It is also a timely opportunity to remind franchisors that franchisees are, at any time, entitled to request a disclosure statement and receive it within 14 days of the request.

Marketing fund documents

A marketing fund is crucial to the operating ability of the franchise as a whole, in return franchisors must be accountable for the way in which they use the fund.

What must be provided?

Franchisors must prepare a financial statement outlining the fund’s income and expenses for the past financial year. Franchisors should be aware the ACCC expects this statement to be detailed, and must include meaningful information about sources of income and items of expenditure. In addition, the statement must be audited by a registered company auditor.

When must it be provided?

The statement and auditor’s report must be prepared within four months of the end of your financial year. This must then be provided to franchisees within 30 days of the preparation of the documents.

Are there any exceptions?

If a franchisor requests franchisees to contribute to a marketing fund, then under no circumstances are they excluded from having to prepare the detailed financial statement. However, franchisors can avoid the auditing requirement if 75 percent of the franchisor’s franchisees in Australia agree not to audit the statement.

Unfair terms

Legislation has been passed to extend unfair contract terms protections to small business standard form contracts. These apply to new contracts entered into on or after 12 November 2016 or, current contracts renewed or varied on or after this date. If a term in the contract is found to be unfair, it will be void and treated as if it never existed. The contract will continue to bind parties whilst excluding the unfair term.

The ACCC’s view is that Franchise Agreements are standard form contracts and as such you may be affected by the unfair terms provisions. For further information on unfair terms, see our earlier Hot Topics on Unfair Contract Terms, here and here.

Key reminders

In recent communications, the ACCC reminded us they are actively investigating unfair terms and conduct regular checks to assess whether franchisors are complying with the Code. There are penalties for non-compliance, which may be in the form of infringement notices or in more serious circumstances, the commencement of court proceedings.

We invite franchisors to contact us to review their Disclosure Documents and Franchise Agreements to ensure compliance with the Code and unfair terms provisions. We also invite prospective franchisors and franchisees to contact us for an initial discussion on what’s involved in setting up a franchise.