Disclosure Document Obligations for Franchisors

The Franchising Code of Conduct (the Code), requires franchisors to disclose specific information to both prospective and existing franchisees. The required information includes details about the franchisor, the franchise network, and the costs associated with the franchised business and is subject to legislative changes. Below we highlight the key disclosure obligations under the Code. Note: the below is a summary only of the Franchisor’s disclosure obligations and is not intended to provide an exhaustive list of requirements under the Code.

Understanding the Franchising Code of Conduct: Key Disclosure Obligations

1. Corporate Structure and Management:

• Franchisors must provide details about their corporate structure, associates, and the background of directors and management. Associates include shareholders with at least 15% of shares, partners, and related entities involved in the franchise system.

2. Legal Proceedings and Judgments:

• Information on any current legal proceedings involving the franchisor, particularly those related to breaches of franchise agreements, trade practices, the Corporations Act 2001, unconscionable conduct, misconduct, or dishonesty offenses. Judgments from the past five years and serious convictions or bankruptcies within the last ten years must also be disclosed.

3. Details of other franchisees in the network and corporate owned operations:

• Franchisors must provide information about current and former franchisees in the network, as well as corporate-owned operations. This includes details of franchisees who have transferred, ceased operations, or been terminated.

4. Details of Intellectual Property:

• A description of the intellectual property material to the franchise system, ownership details, and the franchisee’s rights and obligations regarding its use.

5. Franchise Site or History:

• Information on whether the franchise is for an exclusive or non-exclusive territory and whether similar businesses can operate within the territory. Site history, including why any previous franchisee ceased operations, must also be provided.

6. Supply of Goods and Services to franchisees and Rebates:

• Requirements for the supply of goods and services, including inventory levels and any restrictions on sourcing from other suppliers. Disclosure of any interests in suppliers and whether the franchisor receives rebates or financial benefits is also required.

7. Financial Information:

• All initial and ongoing payments required from franchisees, including costs for establishing the franchise and any financial benefits or rebates received by the franchisor. Financial reports for the last two years or an auditor’s report confirming solvency must be provided, along with a statement of marketing fund expenditures for the previous financial year.

8. Lease Details:

• If the franchisor or an associated company intends to hold and sublease the property a franchise operates, this must be disclosed. Any incentives or benefits the franchisor receives as lessee should also be shared, along with a copy of the lease.

9. End of Term Arrangements:

• The process for terminating or renewing the franchise agreement, including early termination rights, term extensions, and options for asset buyback by the franchisor.

Issuing the Disclosure Document

Franchisors are required to provide prospective franchisees with a fourteen (14) day disclosure period to review the franchising documents prior to signing them.

A Franchisor also must provide existing franchisees with the updated Disclosure Document within fourteen (14) days of their request, with a maximum of one request per year.

Conclusion

Compliance with the Franchising Code of Conduct is crucial for building a trustworthy and successful franchise. By adhering to these disclosure requirements, franchisors can foster transparency and trust. Failure to comply can result in significant fines and penalties.

For further assistance in navigating the Code, please contact us.