In Short
- Franchisors must provide a disclosure document detailing their business history, intellectual property, franchise network, supply arrangements, costs, marketing funds, and financial information.
- The document ensures transparency, helping prospective franchisees assess the investment risks and obligations.
- Non-compliance with the Franchising Code of Conduct can lead to penalties from the ACCC.
Tips for Businesses
Keep your disclosure document up to date, ensuring it accurately reflects your financial situation, intellectual property rights, and franchise network. Be transparent about costs, marketing funds, and agreements to build trust with franchisees. Seeking legal advice can help ensure compliance with the Code and avoid potential penalties.
Table of Contents
The Franchising Code of Conduct (the Code) requires franchisors like yourself to maintain a disclosure document. You are obligated to provide this document to prospective franchisees or franchisees who are renewing or extending their franchise agreement. Disclosure documents offer your franchisees information about your franchising system and how to run their franchised business. In addition, the Code provides guidelines and templates on how to create a disclosure document. Additionally, it sets out the consequences for not complying with the rules. This article will unpack some of the key terms that the Code requires for your franchise’s disclosure document.
1. Your Franchise’s Details and History
In your disclosure document, you must include:
- your name;
- the address of your registered office;
- the principal place of business in Australia; and
- your ABN.
This will extend to any associates who are involved in your franchise network. Additionally, entities that provide goods or services to your franchisees must be accounted for. As such, you can ensure that your franchisees understand who is involved in the network.
It is essential to provide details on:
- the name under which your franchise carries out business;
- the description of your business; and
- how many years you have been carrying out business.
You are also required to document your business experience for the past ten years. This experience is both within the franchise system and outside the franchise system.
These details are all helpful for franchisees in deciding whether they think you have sufficient industry experience to invest in your franchise.
The information about you will also include details of relevant legal proceedings or disciplinary action against you, your directors and associates. It is essential to review the types of actions that need to be disclosed. This will ensure you comply with the Code’s requirements for transparency.
2. Intellectual Property
Intellectual property (IP) in a franchise typically includes logos, designs, slogans or trade secrets. In your disclosure document, you must record:
- all your IP;
- the franchisee’s rights and obligations concerning the IP;
- whether your IP has registration in Australia;
- any judgements, proceedings or agreements that could affect ownership or use of your IP; and
- whether you do not own the IP.
Your franchisees must know their obligations for the IP as they represent your brand.
Continue reading this article below the form3. Network and Territory Overview
A disclosure document will provide details about your franchise network size, composition and recent events. This will include information about:
- recent transfers;
- surrenders and termination of franchise agreements; and
- contact details for current and past franchisees.
The disclosure document informs franchisees whether they have an exclusive or non-exclusive territory and whether their rights are limited to a particular location.
As a franchisor, you must also provide details regarding the site-selection criteria. You must record if other franchisees have worked in this site or territory in the past ten years.
4. Supply of Goods and Services
The document must include details regarding the supply of goods and services by a franchisee, including any online sales. You must record:
- any restrictions on the goods and services that your franchisees can supply;
- any restrictions on the persons they can supply from; and
- whether your franchisees must supply the whole range of goods and services.
Regarding online sales, your franchisees must be aware of whether the goods are likely to sell online. They should also know any conditions placed on selling the goods online.
Additionally, you are required to provide information about restrictions on suppliers that franchisees can choose from, in your disclosure document. Other details about these supply arrangements must also be provided. The ACCC may require a notification to be submitted regarding any exclusive dealings or third-line forcing if it is likely to lessen the competition in the market substantially.
You are also required to disclose certain rebates or financial benefits that you may receive from suppliers, landlords and agents that are involved in your network.
5. Establishment Costs and Payments
You must record all estimated costs, payments and fees for the operation of a franchised business in the disclosure document. This includes costs to set up the franchisee, payments to you during the operation of the franchise and expected third-party costs, including:
- working capital;
- rent;
- salaries;
- supplies;
- equipment;
- utilities; and
- franchise fees.
Your estimates should be accurate and realistic to avoid misleading a prospective franchisee about the costs of opening and running the business. This allows franchisees to be aware of the financial contributions when investing in a franchise.
The ultimate guide to setting up a franchise.
6. Marketing Funds
A marketing fund is a pool of contributions from franchisees that is used to pay for a variety of marketing-related expenses, activities and services on behalf of your franchise network. A franchisor such as yourself typically controls the marketing funds. Your franchisees will typically contribute weekly or monthly to the fund.
Generally, a marketing fund will cover the advertising and promotional activities for the collective network but not any franchise-specific, local marketing. The disclosure document will inform:
- who contributes;
- how much each franchisee contributes and at what rate;
- who controls the fund;
- whether the fund is audited;
- how the fund is used;
- its expenses in the last two financial years; and
- whether franchisees can inspect the financial statements of the fund.
You should ensure the information about your marketing fund is up-to-date. Additionally, your financial statements must be correct to comply with your obligations to inform franchisees about the marketing fund’s income and expenses.
7. Term of Agreement
Your document must inform your franchisees if they have the option to renew the franchise agreement or whether they can extend the term of the agreement. Your franchisees need to understand the expectations of their investment and what may happen after the initial fixed term comes to an end.
The franchise agreement will confirm what rights a franchisee is entitled to. For instance, it may determine if a franchisee can renew the franchise agreement.
8. Financial Details and Earnings Information
You must provide warranties and information about your company’s financial solvency. Depending on the structure and age of your company, you may need to provide:
- financial reports for the previous two financial years; or
- an independent auditor’s report along with a statutory declaration.
You must comply with both the Corporations Act 2001 and the Code, so it is best to consult a professional to fulfil this obligation.
You may also choose to provide earnings information for prospective franchisees. This typically includes historical earning data and projected earnings based on data available from other similar businesses in your franchise network. In addition, you must detail any critical factors involved in the projection and any assumptions about interest and tax, such as:
- the enquiries and research involved in the projection;
- the period in which the projection accounts for; and
- the salary of your franchisees.
Key Takeaways
Whilst disclosure documents contain many key terms, the ones above carry significant weight in influencing a potential franchisee’s decision to either proceed with or abstain from entering into your franchise agreement. The disclosure document will inform prospective franchisees whether to invest in your business or not. You must ensure you follow the Franchising Code of Conduct in creating the disclosure document and do not put false and misleading information in the document. This is because the ACCC can fine you for having insufficient or incorrect information.
If you need assistance drafting your franchise documents, our 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.
Frequently Asked Questions
You do need to disclose your business’s financial situation. Ultimately, prospective franchisees want to know the financial circumstances of your business before investing their time and money. Therefore, you will need to show evidence of your financial solvency. You can do this by either providing financial statements or procuring an independent auditor’s report (depending on the structure and age of your company).
As a franchisor, you must give your name and contact details. Additionally, you will need to list your business experience. This disclosure helps franchisees to better understand whether you have the experience to be an excellent franchisor to work for.
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