Do I have to update my disclosure document?

The Franchising Code of Conduct provides stringent obligations for franchisors on how to maintain the disclosure document.

The Code requires you to update your disclosure document annually within four months after the end of the financial year. As most companies adopt a financial year which runs from 1 July to 30 June, disclosure documents must be updated before 31 October each year.

The Code only limits the obligation to update the disclosure documents if, during the previous year, only one franchise agreement was entered into and it is intended not to enter into any further franchise agreements in the following financial year.

However, if a franchisee requests an updated disclosure document, you must still comply with the requirements to prepare and provide an updated disclosure document.

If you fail to prepare and provide an updated disclosure document you may face a civil penalty of $54,000.

Similarly, incorrect information in the disclosure document may result in a claim for misleading or deceptive conduct from your franchisees if such information later appears to be inaccurate or incomplete. It is therefore extremely important to take your obligations seriously and to act timely so that the disclosure document can be prepared in accordance with the Code and that it accurately reflects the true status of the franchise network.

The main areas of the disclosure document that require annual updating include:

  • Details of existing franchisees and franchised businesses which are currently operating in Australia
  • The number of franchised businesses that were transferred, ceased to operate, were terminated by either the franchisor or franchisee, did not extend their agreement or were bought back by the franchisor
  • Updates in relation to litigation in respect of the franchise network or intellectual property under which the franchise operates
  • Details of whether rebates or other financial benefits are received from the supply of goods or services to franchisees, including the name of the rebate provider
  • Any updates on the amounts in relation to franchise establishment costs and other ongoing payments whilst the franchised business is operated by the franchisee. The Code provides clear rules around the disclosure of such costs, including the description of the cost, the formula of calculation, to whom the payment is made and whether it is refundable. It is important to note that costs may increase over time. As such, it is prudent that any amounts and other payment details are revisited frequently.

Most importantly, your updated disclosure document must contain updated financial records of the franchisor entity. This either includes a financial report for the last two financial years or a current independent auditors report prepared by a registered company auditor confirming the financial position of the franchisor company.

Both these documents must be accompanied by a director’s solvency statement.

It is important that you give your company auditor enough time to prepare these documents as must be attached to the updated disclosure document.

If your franchise operates a marketing fund, the fund’s expenses for the last financial year, including the percentage spent on production, advertising, administration and other expenses, must be audited by your company auditor. The audited amounts must be annexed to the updated disclosure document.

The fund does not have to be audited if 75 percent of your franchisees in Australia, who contribute to the fund, have voted to agree that no audit is required.

As you may face significant civil penalties or legal action from your franchisees for failing to comply with your updating requirements for your disclosure document, it is imperative to take timely action so that the document can be amended to reflect any updates. Both your solicitor and your company auditor can assist you with complying with these strict requirements.