The Franchising Code of Conduct (the Code) is the primary instrument that governs the disclosure obligations of franchisors in Australia. One obligation is to disclose the franchisor’s financial information to potential franchisees, found in Item 21 of the Disclosure Document.
The Item states that a franchisor must provide:
- a statement that provides whether the Franchisor entity will be able to pay its debts as and when they fall due to (i.e. is the Franchisor solvent?) (item 21.1); and
- financial reports for the past two financial years (prepared by a registered auditor) (item 21.2) or an auditor’s statement that supports the director’s statement and that has been prepared by a registered auditor (item 21.4). As a quick reminder, auditors are different to accountants, and it is worthwhile therefore to ask your accountant if they are also a registered auditor.
In our experience, most franchisors are hesitant to provide financial reports and, therefore, satisfy their financial disclosure obligations by providing the auditor’s statement. The Auditing and Assurance Standards Board of Australia guides auditors via a Guidance Note to assist auditors in understanding their obligations on this obligation.
What if I have not been operating for more than two financial years?
If you have not been operating for more than two financial years then instead of providing the financial information set out at point 2 above, the Code provides that franchisors must instead (at item 21.5) provide (in summary):
- a statutory declaration of the Franchisor entity’s solvency (executed by a director of the Franchisor); and
- an independent auditor’s report on the Franchisor entity’s solvency as at the date of the statutory declaration.
The obligation to provide financial disclosure is an ongoing obligation. In the leading case of SPAR Licensing Pty Ltd v MIS QLD Pty Ltd  FCAFC 50, it was held that a Franchisor’s financial disclosure obligations do not end with the provision to a prospective franchisee of a Disclosure Document and the items set out in item 21. In the SPAR case, it was held that if at any time an event was to occur so as to affect the financial position of the Franchisor, then the Franchisor is under an obligation to notify the prospective franchisee and in any event before the prospective franchisee entered into the franchise agreement.
What are my other financial disclosure obligations apart from item 21?
Other disclosure obligations related to the financial disclosure obligation set out in item 21 include the requirement:
- to disclose how potential earnings information has been calculated if potential earnings information is provided (item 20 of the Disclosure Document);
- to provide a franchisee with a financial statement on the marketing (or other cooperative) fund (clause 15 of the Code);
- to disclose whether the Franchisor receives any rebates from a supplier (item 10 of the Disclosure Document); and
- to disclose all potential fees and expenses that can and could be incurred by a franchisee (clause 30 of the Code and Item 14 of the Disclosure Document).
Franchisors must comply with a number of financial disclosure obligations as set out by the Code. We can assist you to ensure you are compliant with these obligations. Our team of franchising lawyers would be delighted to assist.