The Franchising Code of Conduct (‘the Code’) sets out strict requirements for disclosing relevant information to current and potential franchisees. As a franchisor, you must let current and prospective franchisees know of any changes to the franchise system that are ‘materially relevant’ to franchisees within 14 days of becoming aware of the change. If you fail to comply with your disclosure obligations, you could face financial penalties from the Australian Competition and Consumer Commission. To help you fulfil your obligations, this article explains:
- what might be a change to ‘materially relevant facts’ in your franchise;
- how to disclose such change; and
- your disclosure obligations more broadly.
Changes to Materially Relevant Facts
Under the Code, you have an ongoing obligation to disclose any changes to materially relevant facts to prospective franchisees. Materially relevant facts include:
- financial details, which you must include in your disclosure document; and
- information that you do not otherwise have to include in your disclosure document.
Financial Details
From the day you provide the disclosure document to your prospective franchisee, but before they enter into the franchise agreement, you must notify them of any changes to the:
- director solvency declaration;
- financial statement of the franchise; or
- audit report.
Other Information
Materially relevant facts also include certain events that affect the franchise. Changes to materially relevant facts in a franchise system cover many events. In the Code, changes to materially relevant facts can include, but are not limited to:
- a change in majority ownership or control of the franchisor or the franchise system;
- legal proceedings involving the franchisor, such as where a franchisor breaches the franchise agreement;
- a change in the intellectual property, or ownership or control of the intellectual property, that is material to the franchise system;
- any insolvency events; and
- instances where the franchisor is going into receivership or administration.
How to Disclose Changes to Materially Relevant Facts
Once you become aware of a change to a materially relevant fact, you have 14 days to disclose the change in writing to current and prospective franchisees. Your disclosure obligation is especially critical if the information is not in the disclosure document.
Additionally, the change might relate to an amendment or the creation of new financial documents. These are financial documents that you must annex to your disclosure document under the Code. Before a prospective franchisee signs a franchise agreement, you must give them a copy of the new statement, declaration or document as soon as possible before they enter into the franchise agreement.
Continue reading this article below the formGeneral Disclosure Requirements
The Code also sets out strict requirements related to the disclosure of relevant information that you must provide to prospective franchisees before entering into a franchise agreement. Providing this information in a timely fashion is crucial. It ensures that the franchisee can make an informed decision about signing the franchise agreement.
The documents you must provide include a:
- disclosure document;
- key facts sheet;
- information statement;
- franchise agreement;
- a copy of the Code; and
- lease documents if franchisees will occupy or lease premises for their franchise from you or an associate.
You can find explanations of some of these documents below.
Disclosure Document
A disclosure document helps potential franchisees make a reasonably informed decision about entering the franchise agreement. For this reason, it must include details about your franchise system, including:
- supply arrangements that allow you to control who a franchisee can get their supplies from, what they can sell, or who they can sell to;
- future capital expenditure that franchisees may have to pay for;
- the costs of setting up and running the franchise;
- whether you are solvent;
- the contact details of current and former franchisees; and
- any legal action against you that is related to the franchise system.
This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.
Key Facts Sheet
The key facts sheet provides a summary of some of the key terms contained in your disclosure document to help franchisees navigate the disclosure document.
You must ensure that your key fact sheet is in the form prescribed by the ACCC. Since the key facts sheet highlights information in your disclosure document, you must update the sheet at the same time you update your disclosure document.
Leasing Information
You may also be required to provide lease documents in the final form to the franchisee as part of the disclosure process. This is only applicable where franchisees will occupy or lease premises for their franchise from you or an associate.
The relevant lease information includes the following:
- a copy of the lease and occupancy agreement (if applicable);
- information that the lessor must give to a lessee under the relevant state or territory retail tenancy laws; and
- information about any incentive or financial benefit you or your associate will retain because of the lease or occupancy arrangement.
Key Takeaways
Under the Franchising Code of Conduct, you must disclose any changes to materially relevant facts in writing to current and prospective franchisees. You have 14 days to make the disclosure once you become aware of the change. A change to a materially relevant fact can include:
- change in majority ownership or control of the franchisor or the franchise system;
- legal proceedings involving the franchisor, such as where a franchisor breaches the franchise agreement;
- a change in the intellectual property, or ownership or control of the intellectual property, that is material to the franchise system;
- any insolvency events; and
- instances where the franchisor is going into receivership or administration.
If you have questions about your disclosure obligations, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
You have 14 days to disclose the change to a materially relevant fact in writing to current and prospective franchisees.
A franchisor’s disclosure document includes relevant information about the franchise system to help potential franchisees make an informed decision before signing a franchise agreement.
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