Disclosure Document Obligations for Franchisors

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Table of Contents

• Collating the Required Information
• Issuing Your Disclosure Document to a Franchisee
• Key Takeaways

The Franchising Code of Conduct (the Code) requires all franchisors to provide a franchisee with specific information about the franchisor, the franchise network generally, and the establishment and operating costs of the franchised business. A franchisor must present this information to a prospective franchisee in a specific format. Also, if requested, they have an obligation to provide the same to existing franchisees of the network. Be aware that the specific information you must disclose is not ‘set in stone’ and is subject to legislative changes. This article will outline some key details a franchisor must disclose to the franchisee and a franchisor’s general disclosure obligations under the Code.

Collating the Required Information

The disclosure document must outline the key details relating to the corporate structure of the franchisor and the background of directors and management personnel. In particular, you will need to provide details relating to:

• the associates of the franchise; 
• current and past legal proceedings and judgements (if any);
• financial information; 
• the lease; and 
• end of term arrangements.

Associates of the Franchise

The Code requires you to provide information about the franchisor and any ‘associates’ of the franchisor, a term that is widely defined to include: 

• a shareholder (directly or indirectly) that holds or controls at least 15% of the shares in the franchisor entity;
• a partner of the franchisor; and
• any party (being a person or company) with a relation that is “relevant to the franchise system”.

In practice, you should consider identifying any related companies (in your group structure). These might include:

• businesses that provide goods or services to the franchise network; 
• any party who owns the intellectual property used by the franchise system; and 
• any person involved in the training, management, operations or marketing of the franchise network 

Proceedings and Judgements

The Code requires you to identify whether there are any current proceedings brought against a franchisor and provide details of these where the proceedings relate to:

• breach of a franchise agreement;
• non-compliance with trade practices law;
• non-compliance with the Corporations Act 2001;
• unconscionable conduct;
• misconduct; or
• an offence of dishonesty.

You must also consider any judgements made against the franchisor or a director of the franchisor in the past five years. Be aware that your obligation to disclose these judgements applies to both judgements that were made against or in favour of the franchisor.  Furthermore, if you were convicted of a serious offence or filed for bankruptcy in the last 10 years, you must disclose the names of all parties to the proceedings in the Disclosure Document.

Moreover, you must also disclose if either you or a franchisee in your network initiated any mediation, conciliation or arbitration process. 

Financial Information

The disclosure document must outline the financial information of the network, including:

• all initial payments a franchisee must make before entering the franchise agreement; 
• any other payments the franchisee must make on signing the franchise agreement; 
• an estimate of any ongoing or isolated payments a franchisee can anticipate; 
• any rebates or financial benefits received by the franchisor; and
• any finance arrangements offered by the franchisor to the franchisee.

The initial franchise fee payable by a franchisee should be clear to all parties and stated in the franchise agreement. Still, there are likely to be additional costs for establishing the franchise that a franchisee will need to be informed about in approximate terms. These include costs:

• of bank guarantee for lease;
• for fitting out the premises, acquiring equipment or initial supplies;
• of registering a business name or setting up a company;
• related to hiring staff; or
• for seeking additional training.

Where the network operates a marketing fund, you must also provide a statement of the funds expenditure over the previous financial year. Unless at least 75% of the franchisees who contribute to the fund vote against conducting an audit of the fund, you will need to have the financial statements audited by a registered auditor.

Franchisor Financial Disclosure Factsheet

This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.

Download Now

Lease

Since July 2021, amendments to the Code require you to disclose details if you, or a related company to the franchisor company, intend to hold the lease to a franchise business and sublease to a particular franchisee. In these circumstances, you will need to provide details of any incentive or financial benefit you receive as the head tenant and must also provide the franchisee with a copy of the lease. 

End of Term Arrangements 

Your franchise agreement will likely set out the process and arrangements that apply on termination or expiry of the franchise term. Nevertheless, as a result of recent amendments to the Code, a franchisor must now also clarify the following information in the disclosure document: 

• the franchisee’s right to end the franchise agreement early by providing reasonable notice subject to the franchisor’s approval of the provided reason for early termination;
• the term of the franchise agreement;
• whether the franchisee has the option to extend the term on a monthly holding over basis;
• whether the franchisee has the option to renew for a further term;
• whether the franchisor can buy back any equipment or assets from the franchisee. 

Issuing Your Disclosure Document to a Franchisee

A prospective franchisee is entitled to a pre-entry disclosure period to consider the franchise documents before making a legal commitment to join the franchise network. The pre-entry disclosure period is a 14-day window that commences when you provide them with franchise documents in an ‘executable’ form. Importantly, this window of time is non-negotiable, and parties cannot waive this time.

You also must promptly respond within 14 days to an existing franchisee’s request for an updated copy of the disclosure document, provided they make a maximum of one request each year.

Key Takeaways

A franchisor has continuing disclosure obligations to provide franchisees with a degree of transparency regarding:

• the franchise network’s historical data; 
• any ongoing payments a franchisee can anticipate; and 
• the arrangements that are to apply when the term ends. 

A failure to disclose the latter details may result in non-compliance with the Franchising Code of Conduct. 

For more information about your disclosure obligations as a franchisor, our experienced franchising lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.