Reading time: 5 minutes

The Franchising Code of Conduct (the Code) requires franchisors to maintain a disclosure document. This document sets out details of the franchise network and the establishment and ongoing costs of the franchised business. As a franchisor, you will become very familiar with the initial steps of the franchisee recruitment process, where you will provide a copy of your disclosure document to the prospective franchisee for their consideration. You will also have an ongoing obligation to update the disclosure document each year. Therefore, as a franchisor you must understand how these continuing disclosure obligations apply to your existing franchisees, who have the right to request current information about the network each year. 

This article will summarise your general obligation to prepare and provide a disclosure document to prospective franchisees. It will also outline your continuing obligations to existing franchisees regarding:

  • maintaining up to date information about the network generally; and
  • if applicable, accounting for marketing fund expenditure. 

Obligation to Disclose Information to Franchisees

It is essential to issue a disclosure document to the prospective franchisee during the recruitment process. The Code requires this to promote transparency and allow a prospective franchisee to make an informed decision before proceeding with a franchise opportunity. It allows franchisees to consider:

  • if the franchisor owns the intellectual property of the network;
  • if the franchisor has any interest in the lease (where a premises is required to operate the franchise);
  • how the network performed in the last financial year;
  • whether there is current litigation against the franchisor; and
  • whether there have been any criminal convictions against one of the directors or shareholders of the franchise.

The Ultimate Guide to Setting Up a Franchise

Making the decision to franchise your business can be difficult. This Franchisor Toolkit covers all the essential topics you need to know about franchising your business.

This Toolkit also contains case studies from leading franchisors including leading Australian franchises including Just Cuts, FlipOut and Fibonacci Coffee.

Download Now

Obligation to Maintain Currency of Information

If requested by an existing franchisee, you must provide them with the most recent version of the disclosure document within 14 days. An existing franchisee may request this information to determine whether:

  •  there have been changes to the supply, leasing and finance arrangements in the network;
  • there has been a significant change to the network (e.g. terminated franchises) in the last year;
  • the franchisor had any legal claims made against them in the last year;
  • the network performed better in the most recent financial year in comparison with past figures; and
  • the marketing contributions have been spent in the last financial year and, if so, how and where.

For example, suppose you introduce a new supplier to the network or receive any financial benefits concerning an existing supplier. In that case, you must include this information in the disclosure document, and it may be of interest to your existing franchisees.

As a counterbalance to the franchisee’s interests, the Code limits the number of times a franchisee may request updated information each year. Following the end of the financial year, a franchisee may only request an updated disclosure document for the previous year a maximum of one time. 

Obligation to Account for Marketing Fund Expenditure

Not all franchise networks operate a marketing fund. However, if you currently collect marketing contributions from your franchisees, you should already be keeping clear records of the receipts and expenditure into and from the dedicated bank account. The Code requires you to comply with the following steps each year: 

  • prepare a financial statement for the marketing fund; and 
  • obtain an audit of the marketing fund financial statement. 

The Code allows the audit requirement to be waived if, within three months from the end of the financial year, 75% of franchisees vote against obtaining an audit. You can pay the cost of conducting the audit from the marketing fund. However, you could spend money on additional promotional activities for the network. Accordingly, you may choose to keep franchisees updated on key marketing expenditures for the network regularly throughout the year. This promotes a culture where franchisees are satisfied with the transparency and happy to vote against having an audit conducted.  

Key Takeaways

You increase your risk of non-compliance with the Code by failing to implement internal processes. You should note the deadline for updating the disclosure document, and keep clear records of all financial activities and marketing expenditure throughout the year. Both of these administrative habits will assist you in meeting your continuing obligations to the franchisee and complying with the Code.

If you have any questions about your disclosure document, our specialist franchise lawyers can assist you 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.

Frequently Asked Questions

What is the importance of a franchise disclosure document?

A franchise disclosure document will help potential franchisees to make an informed decision before proceeding with a franchise opportunity.

What do I do if a franchisee requests an updated disclosure document?

In this case, you must provide them with the updated disclosure document. However, a franchisee can only request an updated disclosure document for the previous financial year one time.

Webinars

New Kid on the Blockchain: Understanding the Proposed Laws for Crypto, NFT and Blockchain Projects

Wednesday 25 May | 10:00 - 10:45am

Online
If you operate in the crypto space, ensure you understand the Federal Government’s proposed licensing and regulation changes. Register today for our free webinar.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Online
Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

Day in Court: What Happens When Your Business Goes to Court

Thursday 2 June | 11:00 - 11:45am

Online
If your business is going to court, then you need to understand the process. Our free webinar will explain.
Register Now

How to Manage a Construction Dispute

Thursday 9 June | 11:00 - 11:45am

Online
Protect your construction firm from disputes. To understand how, join our free webinar.
Register Now

Startup Financing: Venture Debt 101

Thursday 23 June | 11:00 - 11:45am

Online
Learn how venture debt can help take your startup to the next level. Register for our free webinar today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards