As the new financial year begins, it is an essential time for franchisors to ensure they are aware of their obligations under the Franchising Code of Conduct (‘Franchising Code’).
The Franchising Code prescribes that franchisors are obligated to disclose important information to franchisees prior to entering a franchise agreement and on an ongoing basis thereafter – a key calendar marker for disclosure being the commencement of a new financial year. As a result, franchisors should consider revising their disclosure documents (which are required under the Franchising Code). Note that if your franchise operates on the standard financial year cycle, you have until 31 October to complete disclosure (otherwise the obligations must be satisfied within four (4) months of the end of your individuated financial year).
It is essential that when disclosure is made appropriate acknowledgement is given to:
- any information that has changed over the past year (such as key personnel, litigation on foot or intellectual property updates);
- financial details (especially a solvency statement); and
- updates to your list of current franchisees.
Furthermore, any documents utilised in support of a disclosure must be kept on file for an additional six (6) years following their use.
Disclosure obligations also extend to the documents pertaining to any marketing fund in which a franchisor participates. These documents must similarly contain financial information, other meaningful information and have been subject to an audit by a registered auditor. In the case of a marketing fund, the statement and auditor’s report must be prepared (as above) within four (4) months of the end of your particular financial year (whether standard or otherwise). A copy of the disclosure document must be made available to other fund participants within thirty (30) days of preparation. Note, however, that there is no requirement to prepare an audit should seventy-five percent (75%) of participants vote against undertaking an audit via an agreement made prior to 30 September (and in any event made within three (3) months after the end of the financial year).
Penalties are administered by the Australian Competition and Consumer Commission and apply for failure to uphold disclosure requirements as a franchisor. Take Domino’s Pizza Enterprises Ltd, for example, which in May 2017 was forced to pay out two (2) infringement notices for a total of $18,000 for failure to provide franchisees with an annual marketing fund financial statement within the allowable window of time under the Franchising Code.
If you are concerned about protecting your rights as a franchisor or franchisee, you should be sure to seek legal advice. Ramsden Lawyers are experts in all aspects of franchise law and regularly assist our corporate and commercial clients with disclosure obligations.