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Franchisors should be aware that the Franchising Code of Conduct imposes a number of disclosure requirements on franchisors. Therefore, if franchisors choose to include a marketing fund as part of their model, they must comply with additional disclosure obligations. This article will discuss the disclosure obligations of franchisors’ specifically in relation to the marketing fund.
What Is a Disclosure Document?
A disclosure document is a standard form document prescribed by the Franchising Code of Conduct (Franchising Code). For example, the Franchising Code requires that all franchisors must maintain a disclosure document and provide this to:
- prospective franchisees before entering into a franchise agreement with the franchisor; and
- existing franchisees, if requested.
In addition, the disclosure document provides critical information about the:
- franchise network; and
- initial and ongoing costs of operating the franchise business.
Moreover, the Franchising Code imposes specific obligations concerning the disclosure document and franchise marketing funds.
What Is a Marketing Fund?
A marketing fund is an account that the franchisor holds and controls, into which the franchisees pay on a regular basis. Franchisors use the funds to pay for marketing campaigns, and associated expenses, to promote the franchise network and attract more customers.
The franchisor must open a separate bank account for the marketing fund. Further, they must deposit payments made by franchisees into that account. As a franchisor, you can use the marketing fund for the following:
- expenses disclosed in the disclosure document;
- marketing or advertising expenses;
- expenses that franchisees have agreed to; and
- the reasonable costs of use and administration of the fund.
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What Do I Need to Disclose?
A franchisor must disclose specific details about the marketing fund in the disclosure document, including how:
- they control it;
- they administer it; and
- much money franchisees must contribute.
When updating the disclosure document, franchisors must also provide the financial statement in relation to the marketing fund for the previous financial year. This statement must provide information on all the fund’s receipts and expenses. For example, the information might include:
- sources of income;
- advertising services; and
- the geographical scope of any marketing campaigns.
A registered company auditor must audit the statement, unless 75% of the current franchisees vote against an audit requirement. In this case, franchisors must still provide an unaudited financial statement.
The financial statement must also provide a detailed record of all the marketing fund’s receipts and expenditures. In addition, the record must set out meaningful information about these transactions, outlining the fund’s sources of income and expense items. This obligation allows franchisees to assess whether the franchisor has spent the marketing funds for legitimate marketing or advertising purposes.
The purpose of providing a detailed financial statement to current and prospective franchisees is to ensure transparency of how the franchisor is spending marketing contributions.
What Are the Penalties for Failure to Disclose?
The Franchising Code provides that there are penalties for failure to comply with the disclosure requirements concerning marketing funds and provision of the financial statements. Regulatory bodies, such as the Australian Competition and Consumer Commission (ACCC), have brought proceedings against franchisors for failure to issue the audited marketing fund financial statement. For example, currently, the ACCC can issue fines of $66,600 for failing to provide the audited marketing fund financial statement.
Ultra Tune Case Study
In 2019, the ACCC brought proceedings against Ultra Tune Australia Pty Ltd. The court issued a penalty of $2.6 million for a number of breaches in relation to the Franchising Code. A significant amount of this penalty was awarded in relation to failure to disclose marketing fund information to a prospective franchisee appropriately. The franchisor, in this case, had a separate marketing fund account for a number of franchise territories. They were penalised for failure to disclose the financial statements for each account. The court also reprimanded Ultra Tune for failure to prepare the financial statement with sufficient detail in the required time frame. The detail required needed to be such that the franchisees could gain meaningful information about the income and expenses of the marketing fund.
Domino’s Pizza Case Study
In 2017, Domino’s Pizza Enterprises Ltd was penalised for failure to comply with the Franchising Code. The ACCC issued the infringement notice on the basis that the franchisor did not provide the annual marketing fund financial statement and auditor’s report to franchisees within the relevant time frames. Consequently, the franchisor paid a fine of $18,000. While there were no formal proceedings, this example demonstrates that the protection of franchisees and upholding the Franchising Code is a priority for regulatory bodies, and failure to comply with the Franchising Code has consequences.
The Franchising Code imposes specific obligations in relation to the disclosure document and marketing fund operated by franchisors. Franchisors must prepare the financial statement and auditor’s report by 31 October each year. Additionally, a copy of the statement and report must be provided to all franchisees who contribute money to the fund within 30 days of preparation.
The purpose of providing the information in the marketing fund financial statement is to show existing and prospective franchisees how the franchisor is spending the marketing fund. Moreover, there are significant penalties for failure to update.
For advice regarding your disclosure obligations in relation to the marketing fund as a franchisor, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1800 532 904 or visit our membership page.
Frequently Asked Questions
It is a standard form document prescribed by the Franchising Code. For example, a disclosure document provides critical information about the franchisor, the franchise network, and the initial and ongoing costs of operating the franchise business.
It is an account held and controlled by the franchisor, into which the franchisees pay on a regular basis. The funds pay for marketing campaigns and associated expenses, to promote the franchise network.
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