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As a Franchisor, you are required to disclose particular information about the franchise network to new and existing franchisees in accordance with the Franchising Code of Conduct. This information must be provided in a disclosure document. The purpose of this information is to allow current and prospective franchisees to make informed decisions about the franchise business. Subsequently, the accuracy of the information provided in the disclosure document is critical. Failure to update and provide a current version of the disclosure document to prospective franchisees is taken very seriously.
If you are a franchisor, you are required to update your disclosure documents every year by 31 October. The update should primarily address changes from the previous financial year ending on 30 June. This article will explore some of the main considerations to think about before updating your franchise disclosure document.
Key Sections That Will Require Updating
When the time comes to update your disclosure document, there are specific sections that frequently require updating. A number of these key sections that require attention are as follows:
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Item No. |
Changes |
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Item 2 and 3 |
These sections provide critical information on:
If there have been changes since the previous financial year, these sections must be updated. This can include changes in company directors and secretaries, or change of registered address. |
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Item 4 |
This section details the litigious history of your franchise and the company directors. This must include any criminal or civil proceedings, bankruptcy or insolvency filings. If there have been any proceedings commenced, or are ongoing since the disclosure document was last updated, you need to provide details. |
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Item 6 |
This section will outline the number of current franchisees in the network, as well as provide information on any:
It must include the details of all current franchisees, as well as contact details of previous franchisees. |
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Items 9 and 13 |
These sections relate to franchising sites and territories. If there has been a change in how you determine the proposed sites or territories in which your franchisees operate, you will need to provide accurate details in this section. |
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Items 10, 11 and 12 |
These sections provide critical information on your supply of goods and services to the franchisees, and their supply to customers. You must make sure this information remains correct. |
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Item 14 |
This section will state the payments and costs of franchisees that are required to start up and run the franchise. It must include fees and payments to third parties. You should review this section and ensure that the estimated costs are in line with the current establishment and operating costs. |
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Item 15 |
If there is a marketing fund for the franchise, this section must be completed. You are also required to provide an audited financial statement providing details of the fund’s receipts and expenditures for the last financial year. The financial statement does not need to be audited if 75% of your franchisees have voted that an audit is not required. In this case, you must still provide an unaudited financial statement. |
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Item 16 |
This section will need to be updated if you have changed your policy and procedure in relation to any finance arrangements that you offer to franchisees. |
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Item 17 |
This section must be completed if you have made any unilateral variations to existing franchise agreements. |
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Item 18 |
This section sets out the processes at the end of the franchise agreement and whether franchisees have made significant expenditures, and should be amended if you have changed your policy and procedure since the disclosure document was last updated. |
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Item 21 |
Requirement to provide the franchisor’s financial statements for the previous two financial years, or an auditor’s statement for the most recently completed financial year. |
While these key sections may require changes, one of the primary purposes of updating your disclosure document is to ensure that the financial information provided to prospective franchisees is current, based on the previous financial year.
Documents to Provide
When updating your disclosure document, you must also provide the following documents:
- a director’s statement. This statement must be completed by one of the franchisor company’s directors. It must confirm that the director believes that the company is solvent; and
- the financial statements for the franchisor company. You must provide the financial statements for the previous two financial years; or
- an independent audit report. You may obtain a report from a registered company auditor to show your franchising company is solvent. This option, while more expensive, can be used to ensure the franchises financial information is kept confidential; and
- If applicable, the (audited) marketing fund financial statement for the previous year.
If you have been franchisor company has not existed for two or more years, you will need to provide a statutory declaration as to the franchising company’s solvency and and must obtain an independent auditor’s report on the franchisor company. Ultimately, the purpose of this information is to demonstrate that the franchisor company is solvent and able to pay its debts.
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When You Do Not Need to Update Your Disclosure Document
You may not be required to update your disclosure document under certain circumstances.
If you did not enter into more than one franchise agreement in the previous financial year, you may not need to update your disclosure document. However, if you transferred, renewed or extended any of your existing franchise agreements, you will need to update your disclosure document.
If one of your franchisees requests a copy of the disclosure document, you will need to provide them with an updated copy within 14 days. Franchisees are allowed to request an updated copy of the disclosure document once per year. As a franchisor, you will need to ensure that your disclosure document has been updated and comply with this request in the stipulated time frame.
Penalties for Failing to Update Disclosure Document
Franchisors should take note that if a prospective franchisee is issued with a disclosure document that has not been updated and is not current, the franchise agreement may be unenforceable.
Also, the franchisee could report a franchisor’s failure to comply with the Franchising Code of Conduct to the Australian Competition and Consumer Commission (ACCC). The ACCC can bring court proceedings against franchisors and issue penalty notices, currently up to $66,600 , and there is a proposal to increase this amount to $133,200.
Seek Professional Advice From a Franchising Lawyer
To avoid any errors and the risk of penalties, you should seek professional legal and accounting advice. While you may be able to complete some of the updates yourself without assistance, there are more complex aspects that you should seek guidance on.
LegalVision’s franchising team can assist you and streamline the update process by reviewing your existing disclosure document to ensure that it complies with all legal requirements and the Franchising Code of Conduct.
Key Takeaways
The purpose of the disclosure document is to enable prospective franchisees to make informed decisions based on the information provided. You must update your disclosure document by 31 October each year. The main purpose of updating your disclosure document is to ensure that the information is current based on the previous financial year.
The Directors Statement and Financial Reports are used to show that your company is solvent and capable of paying its debts. There are penalties for failure to update. If you have any questions about your franchise disclosure document, contact LegalVision’s franchising lawyers on 1300 544 755 or fill out the form on this page.
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