Franchisor Disclosure Obligations

In Short

• Provide a disclosure document: Franchisors must share a disclosure document with potential franchisees to ensure transparency, covering topics like financial performance, legal claims, and intellectual property ownership.
• Update annually: Franchisors must maintain accurate and up-to-date information, providing updated documents to existing franchisees upon request.
• Monitor marketing fund use: Keep clear records of marketing fund contributions and expenditures, with audits required unless waived by franchisees.

Tips for Businesses

Implement processes to manage your disclosure obligations effectively. Update your franchise disclosure document annually and ensure accuracy to comply with the Code. Maintain transparency with franchisees by sharing clear records of marketing fund expenditures and communicating key updates regularly. This fosters trust and reduces disputes about compliance or fund usage.

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Table of Contents

• Obligation to Disclose Information to Franchisees
• Obligation to Maintain Currency of Information
• Obligation to Account for Marketing Fund Expenditure
• Key Takeaways
• Frequently Asked Questions

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.

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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.

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