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Setting up a franchise as a franchisor requires that you take the appropriate time to manage and administer your financial information. There may be a significant portion of administrative work necessary to set up a franchise. There are also specific financial details that you must disclose to franchisees in accordance with your obligations under the Franchising Code of Conduct (the Code). This article will unpack the financial information franchisors need to provide to franchisees to comply with the Code.
Marketing Fund
As a franchisor, you may wish to operate a centralised marketing fund. This means your franchisees contribute to a pooled fund, and you use that fund to market the entire franchise network. It is a way to avoid leaving your franchisees to conduct all of their own marketing.
Not all franchises operate with a marketing or cooperative fund. In fact, it is not a compulsory requirement to have one. However, if you do have one, there are duties you need to comply with under the Code, including:
Duties |
Description |
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Preparing a Financial Statement |
You will need to prepare a financial statement of the marketing fund annually. Accordingly, you must monitor all of the fund’s receipts and expenses throughout the year. Ensure you are clear and specific about marketing expenses so franchisees can understand how their contributions are used effectively. The financial statement needs to be ready within four months following the end of a financial year. |
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Engaging an Auditor |
The financial statement will generally need to be audited by a registered company auditor within four months of the end of the financial year. However, this requirement can be waived if 75% or more of your contributing franchisees to the marketing fund agree and vote that an audit is not required. You should conduct this vote within three months of the end of the financial year. |
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Maintaining Separate Bank Accounts |
The marketing or cooperative fund must be kept in an independent bank account. This means separate from your company bank account as well as, of course, your personal bank accounts. |
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Providing a Copy |
You must provide your franchisees with a copy of the annual financial statement within 30 days of its preparation. |
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Updating the Disclosure Document |
Other details about the marketing fund must be included in your disclosure document, including: + how much franchisees must contribute to the fund; + whether all franchisees contribute equally; + who controls the administration of the fund; + and the types of expenses the fund can be used for. |
Disclosure Obligations
As a franchisor, one of your most important obligations is ensuring that you disclose all information to your franchisees required by the Code. Typically, this key information will be in the disclosure document you provide to franchisees which you should update annually.
Additionally, there are certain financial disclosure obligations that you must give potential franchisees even before they enter into the franchise network. You must also update these financial obligations as part of your annual disclosure document update. The documents you need to disclose will depend on how long your business has been in operation.
All franchisors will need to provide a statement of the franchisor’s solvency. This is essentially a declaration by at least one of your directors affirming that the business is in good financial standing. It indicates their confidence that the business can pay any debts as and when they fall due.
Continue reading this article below the formFinancial Statements
You also need to provide further financial documents, depending on how long your business has been in operation.
- If your business has been operating for more than two financial years, you can either provide financial reports for the last two financial years or an independent audit report from a registered company auditor confirming solvency. The independent audit report must be provided within four months of the end of the financial year.
- If your business has been operating for less than two financial years, you must submit a statutory declaration confirming your financial stability. Additionally, an independent audit report on the business’ solvency, conducted by a registered company auditor, must be provided within four months of the end of the financial year.
To comply with the Code, you will need to perform these compulsory financial obligations. It is also essential to include the necessary financial details in your disclosure document that you provide to franchisees. If you fail to comply, mechanisms under the Code could require you to pay penalties.
This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.
Key Takeaways
As a franchisor, you need to ensure you comply with your financial disclosure obligations under the Code, in particular:
- if you operate a marketing fund, you will need to prepare an annual financial statement setting out the fund’s expenses for the previous financial year. A registered company auditor should conduct this statement; and
- provide a statement of solvency signed by one of your directors and further financial information. This will depend on how long you have been operating your business.
If you are a franchisor, make sure you know your basic financial obligations as you prepare and disclose to franchisees and potential franchisees.
If you need help understanding and preparing these financial 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.
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