Franchisor Disclosure Under the New Code

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.

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. 

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