As a franchisor, you must comply with the obligations set out by the Franchising Code of Conduct (the Code). Further, you must ensure you remain up-to-date with the frequent amendments to the Code. One of the more critical requirements is to maintain a disclosure document. Often, you may include information about capital expenditure in it. This article will outline what significant capital expenditure is and your disclosure obligations as a franchisor in relation it.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
What is a Capital Expenditure?
The Franchising Code does not explicitly define the term ‘capital expenditure’. Therefore, its ordinary meaning is monies spent on acquiring or improving fixed assets, such as premises and equipment.
As a franchisor, you should ensure that your business is up to date with consumer trends. This could lead to you requiring franchisees to purchase new equipment and developing their franchised businesses with expensive refurbishments. This scenario is an excellent example of operational expenses that qualify as capital expenditures.
Further, some key examples of significant capital expenditures include:
- the fit-out or renovations of premises; and
- upgrading equipment or hardware to better benefit the franchise business.
However, consider a franchisor chooses to change its logo and brand colour scheme. This will require refurbishment to update the signage and the store fit-out of all the franchises in the network. This update would likely be capital expenditure.
What Are My Obligations?
On 12 January 2021, the Code was amended to address the power imbalance between the franchisors and franchisees. One of the amendments was a minor change to the disclosure obligations regarding capital expenditure.
Franchisors are now prohibited from requiring their franchisees to incur significant capital expenditure unless the expenditure is:
- disclosed in the disclosure document;
- incurred by all or majority of the franchisees in the franchise network following a vote;
- incurred by the franchisee is to comply with legislative obligations; or
- expressly agreed upon by the franchisee.
Limiting capital expenditure ensures the franchisor and their franchisee share the risk and reward of franchise agreements. Additionally, it limits the exploitation of your franchisees and enables them to review financial statements before signing the franchise agreement.
Continue reading this article below the formDisclosing the Expenditure in the Disclosure Document
You may require franchisees to undertake significant capital expenditure if you have disclosed this previously in the disclosure document. As most franchisors know, a disclosure document outlines essential information a prospective franchisee needs to know before entering or renewing their franchise agreement.
However, it is impossible to understand how the trends will change and how that could affect your franchise business. Neverthless, it is still essential to include what expenditure you might require the franchisees to undertake when drafting your disclosure document.
This is all to say that you should err on the side of caution, and include potential expenses, even when they are only a ‘maybe’ expense. Further, you may not mandate significant expenditure if the final costs to the franchisees exceed the estimated cost you provided in your disclosure document.
Ultimately, when referring to capital expenditure, your disclosure document must include the:
- rationale for the expenditure;
- amount, timing and nature of the expenditure;
- anticipated outcomes and benefits of the expenditure; and
- expected risks associated with the expenditure.
Key Takeaways
It is important to disclose your capital expenditure correctly when providing your disclosure document to the franchisees. If you do not do so in the disclosure document, you will have to follow other means to implement the change. For instance, you may gather the members of your franchise network and run a vote to see whether the majority agrees to the significant capital expenditure. Alternatively, you would have to get express consent from the franchisees. However, this can be highly time-consuming.
If you need assistance preparing the disclosure documents or trying to implement significant capital expenditures, our experienced franchise lawyers can help. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
It is when a business or an organisation like your franchise business spends money undertaking changes to develop the business. This might include adopting new projects, developing physical assets or altering business operations.
One way is to disclose the capital expenditure in the disclosure document.
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