Australia: Deadline approaching for franchisors to update the disclosure document

The Franchising Code of Conduct (the Code) requires a franchisor to update the disclosure document annually, within four months of the end of the financial year. The purpose of this annual update is to ensure new and existing franchisees receive current information about the network. One practical inconvenience of not updating the disclosure document by the deadline is that a franchisor cannot recruit new franchisees. This article will outline the:

• timeframe for attending to required updates;
• required scope of updates; and
• exceptions to the requirement for an annual update. 

What is the Timeframe for Attending to Required Updates? 

A franchisor may attend to the required updates any time after the end of the financial year. The Code allows a franchisor an additional four months from the end of the financial year to update the disclosure document. Therefore, the deadline is 31 October.

How Do the Recent Amendments to the Code Affect Me?

The new amendments to the Code became operative on 1 July 2021.

If you have not had your franchise documents updated following this date, it is important to allow additional time for your lawyer to review and update the legal terms set out in your current disclosure document. This is so that they can comply with the amendments to the Code. The recent amendments introduce greater disclosure requirements, particularly where the franchisor either:

• holds an interest in the lease;
• receives a rebate or financial interest in relation to the supply of products/services; or
• provides earnings information to a franchisee.

In addition, due to the recent Code amendments, a franchisor is now required to prepare a key facts sheet.  At a high level, the key fact sheet summarises the disclosure document. This is a prescribed document that must be provided to an incoming franchisee at least 14 days before they can enter into a franchise agreement. Given the obvious overlap, franchisors commonly prepare the key facts sheet concurrently with updating the disclosure document. 

Can I Update Documents Myself?

Ultimately, any information that is no longer current in the disclosure document will need to be updated. This is in addition to incorporating the new disclosure required as a result of the Code updates. 

To determine where an update is required, a franchisor should review:

• the list of existing franchisees (including any transfers initiated by the franchisee, expiry of franchise agreements, and terminations initiated by the franchisor);
• the audited financial statements for the marketing fund (if applicable); and
• financial information, including the costs and expenses at item 14 of the disclosure document.

Throughout the year, the franchisor should keep a tally of existing franchisees. You should do this alongside any transfers initiated by the franchisee and terminations initiated by the franchisor, or circumstances where a franchise has expired. Additionally, we commonly recommend franchisors cross-check the items and quantums at item 14 against bookkeeping or banking records detailing actual expenditure incurred by franchisees. This will ensure item 14 is accurate. 

What are my Financial Disclosure Requirements Each Year?

More generally, to complete an update of your disclosure document, a franchisor must annex either:

• the franchisor company's financial statements for the last two completed financial years; or
• an auditor's report stating the franchisor is solvent. Together with a statement of solvency signed by a director of the franchisor on which that audit report is premised.

Marketing Fund Financial Disclosure 

If your franchise operates a marketing fund, you are required to annually: 

• prepare a financial statement for the marketing fund; and 
• obtain an audit of the marketing fund. 

A franchisee is often incentivised to seek an audit of the fund for greater transparency over how the franchisor has spent their marketing contributions in various promotional activities. However, the cost of conducting the audit takes away from funds that could be spent on additional promotional activities for the network. Accordingly, in circumstances where the franchise network is relatively small or 'tight knit', the franchisee may already have oversight of the ways in which the marketing funds are spent over the year. Therefore, they may choose to vote against having an audit of the fund.

When is a Franchisor Not Required to Update Their Disclosure Document?

The Code provides carve-outs, which may apply to your franchise network if your growth phase is relatively inactive. For instance, a franchisor is not required to update their disclosure document if the franchisor either:

1. has not taken on any new franchisees in the past financial year; or
2. does not plan to take on any new franchisees in the next financial year.

Where either of the two exceptions apply, it is important to be aware that an existing franchisee is nevertheless entitled to request a copy of the updated and current disclosure document from a franchisor. The Code requires a franchisor to update their disclosure document and provide a copy to the franchisee within two months of the franchisee's request.

Key Takeaways

It is important to allow some time before the deadline for updating your disclosure document. Doing so will avoid delays to your franchisee recruitment plans. Even if your network is in a relatively inactive growth phase, it is still worthwhile updating the disclosure document. This will prepare you, should any of your existing franchisees request an updated copy. If you would like to discuss the requirements for updating your disclosure document in more detail, contact LegalVision's franchise lawyers on 1800 532 904 or fill out the form on this page.