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Are you a current franchisor, or looking to franchise your business? With the arrival of the new Franchising Code of Conduct (the Code), it is important for franchisors to understand any changes in the Code that may affect franchisor rebates.

Before we look at franchisor rebates and how the new Code regulates them, lets define what a rebate actually is.

Interestingly, the regulations of the Code fail to define ‘rebate’. A ‘supplier rebate’ is normally credit or money that is paid by a supplier to its distributor, which is the franchisor in this case. This arrangement is based on the agreed terms of the supply agreement between the parties. These rebates impact the gross margins by lowering the price paid for a good.

Rebates in Franchising

Typically, following negotiations, the franchisor will benefit from the rebate. This means that franchisees, unless otherwise agreed upon, will not benefit from any of the rebate and will continue paying the full wholesale price for the products.

This results in the franchisor having an additional source of revenue, while the franchisee continues to make very small profit margins because of the competitiveness of the industry/market.

Has the Code changed?

Under the new Code, supplier rebates that benefit franchisors are still legal. The new Code and old Code are similar in the following ways:

  • Both require franchisors to disclose if they will receive a rebate (or some other financial benefit) for supplying goods or services to franchisees. Additionally, they must disclose which business is providing the rebate/benefit; and
  • Both require franchisors to disclose whether the rebate will be shared amongst the franchisees.

Having said that, there is still no formal requirement on franchisors to share the benefits of the rebate with the franchisee.

Under the new Code, there is no requirement for franchisors to disclose the true value of the rebate. This may come as a surprise, given the heightened disclosure requirements with respect to lease incentives or benefits, which requires disclosure of “details of any incentive or financial benefit”.

Approved Suppliers

The reason rebates are an important issue is because franchisees are required to buy their products from pre-approved suppliers with whom the franchisor has previously negotiated rebates. When the franchisee believes they can purchase the goods at a cheaper price from different suppliers, disputes can sometimes arise. Franchisors also have added requirements to act in good faith throughout the franchise relationship. If you are unsure whether your conduct as a franchisor breaches these good faith obligations, you should discuss the matter with your franchise solicitor.

What is a lease incentive/financial benefit?

A rebate is not the same thing as a lease incentive or financial benefit from a landlord. It is a common concern amongst franchisees that there has been negotiations between the landlord and the franchisor for some form of lease incentive or other benefit, such as a fit-out/rental concession. If you are a franchisee that wishes to have your documents reviewed to determine whether this has occurred, contact your franchise solicitor to arrange a review of the lease and/or franchise documents.

Under clause 13 of the new Code, franchisors are required to disclose any financial incentives that it or its associates receives in exchange for agreeing to lease or entering into a lease. Civil penalties apply to franchisors that fail to disclose this type of information.

Conclusion

With new disclosure requirements and the added good faith obligations, it is important that, upon receiving a rebate or other financial benefit, you are sure about whether or not you are required to disclose details of the benefit. Contact LegalVision on 1300 544 755 for an obligation-free consultation with one of our experienced franchise lawyers.

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