An important legal obligations for all franchisors is the requirement to annually update their Disclosure Document. The purpose of updating the Disclosure Document is to ensure existing and potential franchisees are kept up to date about the franchise. Franchisors cannot recruit franchisees without an updated Disclosure Document – so it’s important to start this process now.
Updating Your Disclosure Document
The Franchising Code of Conduct (the Code) states that the Disclosure Document must be updated within four months of the end of the financial year.
This means all Australian franchisors must update their Disclosure Document before 31 October 2017.
Any information that is no longer current in the Disclosure Document will need to be updated. This means the franchisor will need to update:
- their list of existing franchisees and provide details of any transfers and terminations etc;
- the audited financial statements for their marketing fund; and
- their financial information.
When updating your disclosure document, you must annex either:
- your franchisor company’s financial statements for the last two completed financial years; or
- a report from an independent auditor stating that the franchisor is solvent as of 30 June 2017.
Exceptions to Updating the Disclosure Document
No New Franchisees
A franchisor may waive their obligations for updating Disclosure Document if the franchisor:
- has not taken on any new franchisees in past financial year; or
- does not plan to take on any new franchisees in the next financial year.
Nevertheless, if a franchisee requests for a copy of the Disclosure Document from a franchisor, the franchisor must update their Disclosure Document and provide the updated Document to the franchisee within 2 months of the franchisee’s request.
Accordingly, it’s worthwhile to update the Disclosure Document even if the franchisor falls within the above exceptions.
Election by Franchisees
Franchisors can be exempted from needing to undertake an audit of their marketing fund’s financial statement if:
75% of current franchisees vote that the franchisor does not have to comply with the audit requirement. The vote must occur within 3 months of the end of the financial year.
Commonly, franchisees will vote to waive the audit requirement if the marketing fund is relatively small – it allows the marketing fund to keep the (potentially) thousands of dollars that would otherwise be spent on conducting the audit.
Note that this does not however mean that the franchisor’s obligation to prepare a financial statement for the marketing fund is waived. It is only the requirement for the financial statement to be audited that is waived.
Franchises are subject to obligations that must be fulfilled to avoid legal action. Franchisees are also kept informed with the disclosure document. If you’d like more information about your obligations under the Code, please contact LegalVision’s franchise lawyers on 1300 544 755, or fill our the form on this page. Our lawyers can review and update your disclosure documents or refer you to an auditor.
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