As a franchisor, you are required to disclose particular information about the franchise network to new and existing franchisees. This is required under the Franchising Code of Conduct. Such information should 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 and currency of this document is critical and failing to update is taken very seriously.

If you are a franchisor, you must 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:

Item No.
Changes
Item 2 and 3
These sections provide critical information on:

 

  • the franchisor;
  • its associated companies; and 
  • the current company officers.

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.

Item 4
This section details the litigious history of your franchise and the company directors. This must include any criminal convictions or bankruptcy findings. If there have been any proceedings commenced, or are ongoing since the disclosure document was last updated, you need to provide details.
Item 6
This section will outline the number of current franchisees in the network, as well as provide information on any:

 

  • franchises terminated;
  • bought back by you; or 
  • transfers and changes in ownership.

It must include the details of all current franchisees, as well as contact details of previous franchisees.

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. 
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.
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.
Item 15

If there is a marketing fund for the franchise, this section must describe how that money was spent. There are specific disclosure and audit requirements for updating this section.

You are also required to provide an audited financial statement providing details of the funds 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.

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.
Item 17
This section must be completed if you have made any unilateral variations to existing franchise agreements.
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.
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 your franchising company’s directors and outline reasons that your company is currently solvent; and
  • an updated financial report. You must also provide a financial report 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.

If you have been operating as a franchisor for less than two years, you may need to provide a statutory declaration as to your franchising company’s solvency. You will be unable to provide financial reports because you have not traded long enough, and must obtain an independent auditor’s report on your franchising company. Ultimately, the purpose of this information is to demonstrate that your franchise company is solvent and able to pay its debts.

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 need to provide them an updated copy. 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. You must also comply with this request in the stipulated time frame.

Penalties for Failing to Update Disclosure Document

Franchisors should be warned that failure to comply with the Franchising Code and update your disclosure document will draw the attention of regulatory authorities, including the Australian Competition and Consumer Commission (ACCC).

These regulatory bodies can bring court proceedings against franchisors and issue penalty notices as punishment for failure to comply with the Franchising Code. Currently, the ACCC can issue fines of $66,600  for failing to update your disclosure document, 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 disclosure document is designed to enable prospective franchisees to make informed decisions based on the franchises financial information. 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 and 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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