Setting up a franchise requires the franchisor take the appropriate time to manage and administer their financial information. There may be a significant portion of administrative work involved in setting up a franchise which needs to be factored into your decision to move to the franchising model. There are also specific financial details that need to be disclosed to the franchisee according to the franchisor’s obligations under the Franchising Code of Conduct (Code). This article will run through two areas the franchisor needs to consider to comply with the Code.
Not all franchises operate with a marketing or cooperative fund. In fact, it is not actually a compulsory requirement to have one. If you do have one, you should know that there are duties that you need to comply with, including:
- You will need to prepare a financial statement of the marketing fund annually. This means that you need to monitor all of the fund’s receipts and expenses throughout the year. The financial statement needs to be ready within 4 months following the end of a financial year.
- The marketing or cooperative fund needs to be kept in a separate bank account. This means separate from your company bank accounts as well as, of course, your personal bank accounts.
- In some circumstances, a registered company auditor will need to audit the financial statement. This requirement can be waived if at least 75% of your franchisees have waived the requirement.
- The franchisor should provide the franchisee with a copy of the annual financial statement.
You may notice while reviewing the Code that there are certain financial disclosure obligations that you need to provide to potential franchisees even before they enter into the franchise network. The documents you need to disclose will depend on how long the franchise has been in operation.
All franchisors will need to provide a “franchisor statement” which is basically a declaration that the franchisor believes that they are in good financial standing and can pay back any debts when they fall due. At least one director of the franchisor company will need to provide this statement.
The franchisor will also require these documents:
- If the franchisor has been operating for more than two financial years: financial reports for the last two financial years or an independent audit report provided by a registered company auditor.
- If the franchisor has been operating for less than two financial years: a statutory declaration confirming the franchisor’s solvency and an independent audit report provided by a registered company auditor.
The franchisor to ensure compliance with the Code needs to perform these compulsory financial obligations. If the franchisor fails to comply, there are mechanisms in place that could require a franchisor to pay pecuniary penalties.
If you are a franchisor, make sure you understand the basic financial details you will need to prepare and disclose to franchisees and potential franchisees. Importantly, if you have any questions about preparing these financial documents, speak with your accountant and a franchise lawyer – you can get in touch with our franchise team on 1300 544 755.