Staying on top of your ongoing obligations as a franchisor can seem confusing at times. You’re trying to keep up-to-date with changing rules while simultaneously overseeing a network of businesses. This can be exhausting for franchisors looking to stay on the right side of the law. We’ve prepared a checklist to help you with your ongoing compliance and run your network as a model franchisor.
1. Annual Updates
Every year, you need to update your disclosure document. This must happen within four months of the end of your financial year.
Section 4 of the Franchising Code of Conduct (Code) defines a ‘financial year’ as a 12-month period in which financial statements relating to the franchise are prepared for you (as the franchisor). This means that you must update your disclosure document by 31 October each year. If you are an international franchisor, these key dates may differ.
There is one exception to this requirement. Franchisors don’t need to update the disclosure document if they:
- didn’t enter into more than one franchise agreement (or didn’t enter into any at all); and
- don’t intend on entering into a franchise agreement with a franchisee in the coming year.
However, if a franchisee asks you for an updated disclosure document, this exception will not apply, and you will need to comply with the franchisee’s request. Failure to update your disclosure document as required under the Code may expose you to a possible fine of up to $54,000. We advise that you begin reviewing your disclosure document towards the end of the financial year and identify any information that is no longer current (e.g. the list of existing franchisees). Ensure that you clearly record the date of the last update on the first page of the disclosure document.
2. Financial Information
As part of the annual update to your disclosure document, you will need to update the financial details at Item 21. This typically involves updating the following:
- statement of solvency and financial reports;
- statement of solvency and the independent audit report; or
- statutory declaration of solvency and the independent audit report (if the franchisor company is less than two years old).
Different requirements apply if you were insolvent in the last two financial years.
Under section 15 of the Code, you must also prepare an audited financial statement each year if you have a marketing fund or operate another type of cooperative fund. A registered company auditor must audit the statement. You do not need to prepare this statement if 75% of franchisees that contribute to the fund vote not to audit the statement, and that vote took place within three months after the end of the financial year.
Regardless of whether the fund is externally audited or not, the franchisor must prepare this financial information within four months after the end of the financial year and distribute to franchisees within 30 days of preparing the marketing statement.
The financial statement should include meaningful information about the expenses (especially in relation to advertising and marketing) and receipts for the marketing fund. Again, failing to comply with your financial obligations in relation to any marketing fund may leave you facing fines of up to $54,000.
3. Dispute Resolution
If a dispute arises in relation to one or more franchisees, you should follow the procedure set out in Part 4 of the Code. Essentially, you have to issue a written notice, and provide the franchisee with a reasonable period in which to remedy the breach. You have the right to request mediation, and can also refer the dispute to a court. In approaching the dispute, although tempers might flare, you should ensure that you observe the proper process, and comply with your obligation of good faith (discussed below).
4. Good Faith
The obligation of good faith applies from when you begin negotiating with prospective franchisees, to when you execute the documents right until the end of the franchise relationship. You should seek to be honest, co-operate and make decisions within a reasonable timeframe in your dealings with franchisees. Ensure that you discuss any changes that you propose to make to the franchise system (particularly where any changes would affect the fundamental rights of your franchisees).
5. Franchise Agreement
Outside of the Code, you should also be aware of the terms of each of your franchise agreements. These contracts typically contain clauses relating to the initial and ongoing training and support you provide for franchisees. Your franchise agreements may also include clauses about the notice you are required to provide the franchisees in certain situations. If you are unsure about your obligations in respect of a specific franchise, you should have a franchise lawyer review the agreement.
In many cases, franchise agreements provide franchisors with various levels of discretion to change certain obligations (such as amending the operations manuals). Remember your obligation of ‘good faith’ as this statutory obligation can imply certain requirements, even if your franchise agreement is silent on exactly how you should exercise your discretion.
Key Takeaways
Franchisors commonly neglect preparing the marketing financial statement (and having that audited if required) and not attaching financial statements (or an audit report) to the disclosure document.
However, failure to comply with your ongoing legal obligations is no small issue – particularly when you take into account the potential fines identified above.
If you are concerned about a particular aspect of your franchise relationships, or are interested in implementing systems and processes to better manage your legal responsibilities, get in touch with our specialist franchise lawyers on 1300 544 755.
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