4 Ways for a Franchisor to Ensure Compliance with the Franchising Code of Conduct

The Franchising Code of Conduct (the Code) requires a level of ongoing compliance from every franchisor. It can be challenging to keep track of your compliance obligations each financial year. If you are not mindful of these obligations, the administrative process for updating your documents may be unnecessarily difficult. Further, you may miss key deadlines or, even worse, breach the Code, rendering you liable to a penalty.

This article goes through four key obligations you should monitor on an ongoing basis to assist you with complying with the Code, namely the:

1. good faith obligation;
2. financial record keeping and audit obligation;
3. annual document update obligation; and 
4. dispute resolution obligation. 

1. Good Faith Obligation

Franchisors are under an obligation to act in good faith, which involves acting honestly and reasonably towards franchisees. This applies from the earliest interactions with your prospective franchisees, throughout the franchise agreement term, and even after termination. You, as a franchisor, can comply with this obligation by: 

1. monitoring your interactions with franchisees; and
2. seeking franchisee feedback on proposed changes to the franchise system, before you implement them.

Monitoring Interactions 

On the first recommendation, you should be across the communications that are exchanged between yourself (or your representative) and franchisees. Further, it is helpful to review a selection of such communications from time to time to ensure the communication is fair and reasonable. This ensures that you are treating all franchisees consistently across the network. 

Seeking Feedback

As to the second recommendation, prior to making a material change to the network (including by update to the operations manual) you should ensure that you give all franchisees notice of the proposed change. Moreover, you should invite them to provide any feedback within a set period of time (usually, two or three weeks). This way, you will receive notification of any potential issues before they become a problem.

2. Financial Record Keeping and Audit Obligation

Where a franchisor elects to annex an audit to their disclosure document, as opposed to financial statements (as the vast majority of franchisors do), having up to date financial information to provide to the auditor is essential. Where the audit is required to be annexed to the disclosure document, instructing an auditor (so it is complete before the updated disclosure document is to be finalised) is critical to ensure franchisor compliance. Generally, you should start this process by early September each year, after completing your annual financial statements. 

If you operate a marketing fund, you should also keep a clear record of expenses over the year to assist with preparing your financial statement for the following year. The financial statement should include: 

• meaningful information about the expenses (especially concerning advertising and marketing); and 
• receipts for the marketing fund. 

Franchisor Financial Disclosure Factsheet

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

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3. Annual Document Update Obligation

The Code requires you to update your disclosure document each financial year by 31 October in the same year. Throughout the course of the year, you should ensure that you keep clear records of the operational information such as:

• how many existing franchisees are there are in the network;
• how many franchisees have transferred (or sold) their franchise; 
• whether you have offered ‘earnings information’ about a franchise to prospective franchisees, including for specific circumstances (i.e. where a franchised business is sold);
• how many franchise agreements were terminated and the relevant circumstances; 
• any additional expenditure required by franchisees or changes in fee structures; and
• whether you have received any new financial benefit or rebates from suppliers.

Suppose you are an international franchise network operating in Australia. In that case, the Code makes an allowance for the circumstance that you prepare your financial reports for a different 12 month period (other than 30 June – 31 July, which is the standard financial year for most businesses in Australia). In these circumstances, you must simply update your documents within four months from the end of the relevant reporting period.

Additionally, the Code does not require a franchisor to update the disclosure document in any given year where they do not plan to recruit more franchisees. However, be aware that a franchisee can ask you for an updated disclosure document once each year and the Code requires you to provide the updated version within two months of the franchisee’s request.

4. Dispute Resolution Obligation

Often a franchisor can avoid conflict with franchisees by being responsive to feedback and setting reasonable expectations and timeframes for a franchisee. However, whenever a dispute arises in your dealings with a franchisee, it is important to be aware that the Code prescribes the process you must follow to manage the dispute. Therefore, franchisors should consult the Code and the applicable franchise agreement each and every time a dispute arises. Doing so will help ensure that you follow the mandatory process. 

Franchisors should also be cautious in issuing breach notices. They must ensure the formal requirements set out in the Code are satisfied concerning each notice issued. At a minimum, you must give the franchisee:

• reasonable notice in writing that you intend to terminate the agreement for the breach; 
• a clear outline of what is required to remedy the breach; and
• reasonable time to remedy the breach, which is usually (but not always) 30 days. 

Key Takeaway

From an operational perspective, a franchisor can benefit from understanding how the obligation of good faith will apply from the earliest interactions with a prospective franchisee and will remain a relevant consideration throughout the lifetime of their relationship with every franchisee. From a franchisor financial compliance perspective, it is easy to underestimate the importance of keeping clear records throughout the year. The process for updating documents can realistically take a couple of weeks. Therefore, you can avoid unnecessary delays to your recruitment plans by being organised and mindful of the deadlines. 

If you require assistance updating your documents or wish to understand your ongoing franchisor compliance obligations better, LegalVision’s experienced franchise 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.

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