As a franchisor, it is essential for franchisees to know your business’s financial circumstances. Franchisees must understand this to determine whether they can afford your business’s financial costs and risks. Consequently, the Franchising Code of Conduct (the Code) requires franchisors to inform prospective and existing franchisees with financial information.
There are several situations where you are required to provide information regarding your financial circumstances, such as:
- before a prospective franchisee signs the franchise agreement;
- before a current franchisee renews or extends their franchise agreement; or
- if a franchisee requests an updated copy of the disclosure document.
This article will discuss the documents you need to include financial information and your obligations to provide correct details about your financial circumstances.
What Financial Documents Do You Need to Provide Franchisees?
Financial information and warranties regarding your business may be required in various forms.
1. Disclosure Document
The Code requires that you provide financial details to your franchisee in your disclosure document. Under the Code, your disclosure document should be accompanied by:
- a solvency statement that reflects the franchisor’s position;
- financial reports for the last two financial years; or
- an independent auditor’s report to reflect the franchisor’s position.
In accordance with the code, you must update your disclosure document within four months of the end of the financial year. However, you may be exempt from updating it if you:
- did not sign any new agreements in the year;
- only entered into one agreement; or
- have no intention to enter into any new agreement in the following year.
Nevertheless, if your franchisee requests an update, then you must update the documents to reflect your position at the end of the previous financial year.
2. Solvency Statement
As part of the disclosure document, you will need to provide a solvency statement. Solvency refers to your company’s ability to meet its financial obligations and pay any debts. Therefore, a solvency statement confirms that a franchisor, such as yourself, is in a stable financial position.
You must provide a solvency statement at the end of the financial year. If your company did not exist at the end of the financial year, you must provide a solvency statement at the date of the statement. At least one director of your franchise network must sign the statement. They must also give their opinion on whether your company will be able to pay any debts when they are due.
3. Financial Reports
In certain circumstances, the Disclosure Document may require you to provide financial reports for the past two financial years. These reports need to be prepared in accordance with the Corporations Act 2001. Suppose your company is a corporate entity required to furnish audited financial reports under the Corporations Act or a foreign equivalent, and your franchisee seeks these reports. In that case, these additional financial documents may be necessary.
However, you are not always required to provide a financial report to franchisees. This is the case if a registered company auditor audits the solvency statement within four months after the end of the financial year. Accordingly, you would provide a solvency statement and auditor’s report instead of a financial report.
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4. Independent Auditor’s Report and Statutory Declaration
Where your franchise business has not existed for the previous two financial years, you must supply an independent audit report by a registered Company auditor. This report must audit the business’s solvency. Specifically, it must report at the date of a statutory declaration provided by the franchisor’s directors, affirming that the company is solvent.
5. Materially Relevant Facts
Franchisors must tell franchisees about “materially relevant facts” in writing. This must be completed within a reasonable period of becoming aware of the event. It must not exceed 14 days. If this event happens before updating the disclosure document, then franchisors should include the facts in the disclosure document.
Materially relevant facts include a number of different events, including:
- your business goes into administration;
- your business goes into liquidation;
- you execute a deed of company arrangement;
- certain Court proceedings and Court judgments; and
- non-payment of certain Court judgments above the prescribed thresholds.
Can I Provide False Information About My Financial Circumstances?
Unsurprisingly, you must provide accurate information about your financial circumstances.
The information you provide must be accurate and substantiated, and you cannot omit important details. As a franchisor, you cannot make false or misleading representations about your financial circumstances to franchisees.
The Code requires you to provide information about your company that could impact its financial solvency. This includes any Court judgments or public proceedings against you.
The ACCC can fine you for not providing accurate information or including the required financial disclosures, so you should be aware of these requirements.
Continue reading this article below the formKey Takeaways
Franchisors are required to provide accurate financial information to their franchisees. The Code offers many avenues to furnish these details. In the disclosure document, you may need to provide solvency statements, financial reports and potentially an independent audit report. Additionally, if any materially relevant facts occur, you must update your franchisees in writing within 14 days of the event.
If you require help navigating your financial disclosure obligations, 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.
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