What Are the Rules Around Franchisor Rebates?

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Table of Contents

• Approved Suppliers
• Rebates in Franchising
• What Does the Code Say?
• Acting in Good Fath
• What About a Lease Incentive or Financial Benefit?
• Key Takeaways

Are you a current franchisor or exploring the possibility of franchising your business? If so, you may be contemplating approved suppliers for your franchisees’ supplies. If you nominate approved suppliers, you may want to consider the potential for receiving rebates from them in return for purchases from your franchisees. While receiving a franchisor rebate is common and generally unproblematic, it is crucial to be aware of your legislative requirements. You must particularly understand your obligations under the Franchising Code of Conduct (the Code). This article will highlight the rules around franchisor rebates and provide guidance on ensuring your compliance. 

Approved Suppliers

As a franchisor, you must actively control the quality of the goods or services provided by your franchisees to uphold the overall reputation of your franchise network. If you have established relationships with suppliers you know and trust for high-quality supplies, consider including certain terms in your franchise agreement. These terms should mandate that franchisees exclusively buy supplies from your approved suppliers. Likewise, this helps maintain consistency and control throughout your franchise network. 

However, if your franchisee believes they can secure goods at a cheaper price from different suppliers, a dispute may arise. These disputes can intensify in situations where you, as the franchisor, may be compelling the franchisee to pay premium prices for purchases from certain suppliers. This is especially true if you can obtain a financial benefit through a rebate.

Rebates in Franchising

Interestingly, the concept of a “rebate” is not expressly defined in the Code. It only specifies that a rebate will not include any payment made by a franchisee to the franchisor, master franchisor, or their associates for goods or services. It also excludes lease incentives or financial benefits received by the franchisor related to the franchise premises (if applicable). 

A “supplier rebate” is typically credit or money that is paid by a supplier to its distributor. In this case, the distributor is you, the franchisor. This arrangement is based on the agreed terms of the supply agreement between the parties. These rebates may affect gross margins by lowering the price paid for a good. 

Keep in mind that unless specified, your franchisees will not benefit from rebates and will continue to pay the full wholesale price. This discrepancy may lead to conflict. Therefore, as a franchisor planning on receiving rebates, ensure compliance with the necessary rules to protect yourself in case of disagreements.

What Does the Code Say?

Under the Code, you can legally gain from supplier rebates as a franchisor, and there is no obligation for you to share these benefits with your franchisee.

Under the Code, you must include specific details about rebates received from approved suppliers in your disclosure document. It is essential that you provide this document to franchisees during their initial sign-up to the franchise network and whenever existing franchisees request a copy.

In particular, if you do receive a rebate or financial benefit, then some of the information you must provide includes:

1. the nature of the rebate;
2. the name of the supplier providing you with the rebate;
3. whether the financial benefits of the rebate will be shared with franchisees, either directly or indirectly; and
4. if the rebate is shared with the franchisee, then:
   1. what proportion of the rebate will be retained by the franchisor; and 
   2. what proportion will be shared with the franchisee and descriptions of each benefit received by the franchisee (for example, if part of the rebate is used to contribute to the franchise’s marketing fund)?

It is crucial to disclose these details to avoid breaching the Code and potential violations of the Australian Consumer Law, such as misleading or unconscionable conduct. This is especially important if you receive rebates without your franchisee’s knowledge. Notably, if franchisees are allowed to purchase supplies from sources other than those mandated by you for rebates, disclosure may not be necessary. For instance, this applies if the suppliers are optional rather than mandated by you. 

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Similarly, disclosure is not required if the entire rebate is returned directly to you through a cooperative fund controlled by the franchisor. 

Acting in Good Fath

As a franchisor, you should always act in good faith when dealing with your franchisees. If you force franchisees to pay premium prices from certain suppliers to qualify for a rebate, even when they could purchase supplies of equal or greater quality for cheaper, you may be failing to act in good faith. This action poses a risk of violating the Code. 

What About a Lease Incentive or Financial Benefit?

Rebates differ from lease incentives or financial benefits from a landlord, and the Code treats them differently. As a franchisee, the Code obligates you to disclose any incentives or benefits received in exchange for leasing franchise premises. 

Where the franchisee is leasing the premises directly from you as the landlord, the details of the incentive must be given to them within a month of both parties agreeing or signing the lease. Otherwise, if you provide the franchisee a licence to occupy the premises as a tenant, you must disclose any incentives tied to the lease or the franchisee’s right to occupy the premises. 

You must provide these details within a month of the franchisee’s occupation of the premises commencing. You must also include your details, as the landlord, as the business providing the incentive. 

Key Takeaways

As a franchisor, you may negotiate to receive rebates from approved suppliers when your franchisees purchase supplies from them. In doing so, it is important that you are mindful of your obligations under the Code and comply with them. In particular, you need to:

1. determine whether or not franchisees will be able to choose which suppliers to purchase supplies from;
2. if not, you must include all the necessary details of any rebate or financial benefit you receive from suppliers in the disclosure document; and
3. if these details change, ensure you update them in your yearly disclosure document update.

For more information about franchisor rebates, 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.