It’s time to update your disclosure document

Brisbane expo postponed
Brisbane expo postponed

Inside Franchise Business: you might need to update your disclosure document soonDon’t get caught out by all the fuss on workplace legislation and overlook your disclosure document.

If you are a franchisor whose financial year ends 30 June, the time has again come for to review and update your disclosure document for the financial year ending 30 June 2017.

The Franchising Code of Conduct requires franchisors to update their disclosure documents within four months of the end of their financial year.

Increasing importance of a current disclosure document

With the introduction of penalties and infringement notices under the Code in 2015 and the ACCC now actively exercising its powers to impose infringement notices and to seek civil penalties in the Federal Court for breaches of the Code, it is more important than ever before to ensure that your disclosure document and processes comply with the Code, in particular that the annual update of the disclosure document is completed on time and that your disclosure document is accurate and not misleading.

The provisions of the Code which attract a penalty for non-compliance include obligations of franchisors to:

  • create a compliant disclosure document and
  • update their disclosure document within 4 months after the end of each financial year

Updates you can make

Because many of the changes required for the purposes of the annual update will be factual, you can save yourself legal costs and do a lot of the disclosure document update yourself, including updating the following:

  • details of the number of existing franchisees and franchised businesses (Items 6.1 to 6.3);
  • details of the following key events for each of the last three completed financial years (Item 6.4):
    • franchises transferred;
    • franchised businesses that ceased operating;
    • franchise agreements that either the franchisor or franchisee terminated;
    • franchise agreements that were not extended (as defined in the Code);
    • franchised businesses that the franchisor bought back;
    • franchise agreements that ended when the franchisor acquired the franchised business.
  • the name, location and contact details for franchisees involved in any of the above key events, unless the franchisees have specifically asked that their details remain undisclosed (Item 6.5);
  • changes to payments (Item 14); and
  • marketing or other co-operative fund expenditure for the 2017 financial year (Item 15.1(g)).

How your lawyer should assist in your update

The following sections of the disclosure document involve legal rather than factual updates, accordingly, and given franchise networks evolve and change overtime, you should review these sections and speak to your lawyer about updating them if they do not accurately reflect what occurs in your network:

  • Items 9 and 13 (franchise sites or territories);
  • Item 10 (supply of goods and services to franchisees);
  • Item 11 (franchisee’s supply of goods or services);
  • Item 12 (supply of goods or services – online sales);
  • Item 16 (financing);
  • Item 18 (arrangements to apply at the end of the franchise agreement).

Importantly, if you provide earnings information or intend to do so, you need to update Item 20.  It is critical to have a lawyer complete this section, as it is an area that can expose franchisors to claims by franchisees of misleading or deceptive conduct and misrepresentation.

What you need to do now

You need to include in your disclosure document:

  • a solvency statement signed by at least one franchisor director; and
  • the franchisor’s financial reports for the last two financial years or an independent audit report for the 2017 financial year.

If you operate a marketing fund or other co-operative fund you must before 31 October prepare a statement that shows the fund’s receipts and expenses for the 2017 financial year. You must provide the statement to each of your franchisees within 30 days of its preparation. Further, you must have the statement audited before 31 October, unless 75 per cent of your Australian franchisees who contribute to the fund vote to agree that an audit is not required.

Please note the vote must be held by 30 September 2017.

A disclosure document is more than an annual update

You should treat the formal requirement in the Code that franchisors update their disclosure document annually within four months of the end of their financial year as an absolute minimum requirement.

Before a disclosure document is handed out to a prospective franchisee, you should review it to ensure that it is still up to date and does not give a franchisee a false impression about the franchisor or the system.