Under the Franchising Code of Conduct (the Code), there are certain franchisor disclosure obligations that franchisors are required to meet in relation to their franchise networks. This involves the franchisor providing specific information and documentation to franchisees:
- before the franchisee signs the franchise agreement; and
- throughout the term of the franchise, where appropriate.
On 1 July 2021, the Code was updated with some disclosure obligations changing. This article discusses what franchisors need to know about their disclosure obligations in light of the changes.
Disclosure Before Entry into a Franchise Agreement
Disclosure before entry into a franchise agreement involves the franchisor providing specific documentation to franchisees at least 14 days prior to them signing the franchise agreement. It also requires the franchisor to provide specific information within those documents.
The table below summarises what pre-entry documents a franchisor should provide to prospective franchisees under the new Code.
Document |
What is it? |
Is it new / does it need updating? |
Disclosure Document |
It is a prescribed document under the Code, which is a summary of information about the franchise, the franchisor, the franchise network and relevant financial information. | The disclosure document is in the same form as usual. However, you will need to add some additional information to the disclosure document by 1 November. |
Key Facts Sheet |
It is a document summarising some of the information provided in the disclosure document. |
This is a new document added under the Code update. You can prepare it here or ask your lawyer to prepare it when they are updating your disclosure document. |
Information Statement |
It is a government prescribed form that summarises the risks of franchising and provides educational resources for franchisees looking to buy a franchise. | The old form of information statement is now gone, and a new one has been introduced. You must provide this at the earliest possible point in time when meeting with prospective franchisees. |
Franchise Agreement |
It is the actual contract signed by the franchisor and franchisee. It contains all the commercial details agreed between the parties. | While this is not new, some of the terms in the franchise agreement should now be updated to comply with the new Code. You must provide the updated version of the franchise agreement to the franchisee with all other pre-entry documentation. |
Financial Documentation | You must provide several financial reports or audits as part of the disclosure bundle. What is provided depends on how long the franchisor has been operating and whether the franchisor operates a marketing fund. |
These are not new and only need to be updated by 1 November as part of the usual yearly disclosure update. |
Lease Documentation |
If a premises is leased to the franchisor or its associate and the franchisor is subleasing the premises to a franchisee, the franchisor must provide all relevant lease documents, including:
| This is a new obligation added by the Code. You must now provide these documents at least 14 days prior to the execution of the franchise agreement.If these documents are amended or changed, the 14-day cooling-off period provided to a franchisee will restart. |
The Code |
This is a copy of the current franchise legislation. | While this is not new, you must provide the most recent version of the Code. |
Other Documentation |
Any other documents relevant to the purchase of the franchise should also be provided. Examples include:
|
These obligations are not new. |
New Information That Franchisors Must Add to the Disclosure Document
Under the new Code, franchisors will need to add additional information into the disclosure document itself. For example, this new information includes:
- disclosing the percentage of franchisees in a franchise system that have been a party to an alternative dispute resolution procedure in the last financial year;
- details of whether the franchise agreement provides for arbitration of disputes;
- details of how the parties may end the franchise agreement early;
- the term of the franchise agreement;
- whether the franchisee has any rights relating to the goodwill generated by the franchisee;
- whether the franchise agreement includes a restraint or similar;
- some new statements around earnings information provided by the franchisor;
- additional disclosure regarding significant capital expenditure that the franchisee may incur, including details such as the rationale for its calculation, the amount expected, when it is expected to be incurred, any risks associated with the expenditure and what the outcome of the expenditure means for the franchisee;
- additional disclosure around rebates or financial benefits the franchisor or its associate may receive from suppliers of the franchise network; and
- details of whether the franchisor has an interest in a lease that will be used for the operation of the business.
Disclosure During the Franchise Relationship
Once a franchisor has a working disclosure document, they must continue to update the disclosure document yearly by no later than 1 November.
However, the only situation where this is not required is if the franchisor does not:
- enter into more than one franchise agreement in the prior year; and
- intend to enter into another agreement in the following year.
Disclosure Obligations Regarding the Marketing Fund
If you operate a marketing fund, you must additionally prepare a financial statement detailing all of the fund’s receipts and expenses for the past financial year. This statement must be accompanied by an auditors report unless 75% of your franchisees agree not to audit the fund. You must provide this information no later than 1 November of each year. Additionally, you must provide it to franchisees within 30 days of the preparation of the report/audit.
Key Takeaways
Franchisors have many disclosure obligations under the Code. Therefore, with recent updates to the Code, franchisors should update their disclosure documents and provide new and additional documentation to franchisees throughout the disclosure process. If you are a franchisor and require advice on this, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
Frequently Asked Questions
It is a new document added under the Code. The key facts sheet summarises some of the information that a franchisor provides in the disclosure document.
Once a franchisor has a working disclosure document, they must continue to update the disclosure document yearly by no later than 1 November.
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