The new Franchising Code of Conduct includes a new form of the disclosure document and the previous short form disclosure document has been removed.
What are the main changes to the new disclosure document?
In addition to some format changes, and the consolidation or removal of some items, there are some significant differences in the new disclosure document.
1. Franchisor details (items 2.4 and 2.6)
Franchisors must now disclose:
- the number of years the franchise or franchise system has operated in Australia; and
- the relationship between each associate and the franchisor (and the relevance of the relationship to the franchise system and the franchise).
The definition of “associate” under the Code has been broadened to encompass persons whose relationship with the franchisor is relevant to the franchise system.
2. Business experience (item 3.1)
The summary of business experience must now include experience working for the franchise system and franchisor.
3. Litigation (item 4.1)
The disclosure requirements have been expanded to include associates and directors of associates.
4. Existing franchisees (item 6.1(c))
This has been expanded to include associates, so that franchisors must now disclose businesses owned and operated by the franchisor and by an associate of the franchisor that are substantially the same as the franchised business.
5. Master franchisee details (item 7)
This is a new item of disclosure that was introduced to effectively replace the obligation under the previous Code for a master franchisor to provide a disclosure document to a sub-franchisee. The new item provides sub-franchisees with information regarding the master franchise arrangements in a single disclosure document. This process should reduce compliance costs for master franchise arrangements.
6. Supply of goods or services to a franchisee (item 10.1(j))
The Code now requires that franchisors disclose to franchisees whether the franchisor, or an associate of the franchisor, is entitled to receive an incentive or financial benefit as a result of a lease of premises or agreement to lease premises (including the name of the business providing the benefit). This may include financial benefits such as rent-free periods and fit out contributions. Depending on the structure of the leasing arrangement, this information is likely to fall within the scope of item 10.1(j) of the disclosure document, although this may pose practical difficulties.
7. Online sales (item 12)
There is a now a specific obligation regarding the disclosure of goods and services sold online. The intent is to provide prospective franchisees with information to allow them to assess the impact online sales could have on the franchised business. Franchisors must disclose whether online sales ‘may’ be made, which would indicate a requirement to include potential as well as actual online sales. The provisions extend to information regarding the franchisor’s arrangements with third parties, some of which may not be readily available.
8. Other payments (item 14)
The disclosure document now makes it clear that this item covers a payment of significant capital expenditure. Additionally, franchisors are now prohibited under the Code from requiring a franchisee to undertake significant capital expenditure unless that expenditure falls within the exceptions set out in the Code. One exception is that the expenditure was disclosed to the franchisee in the disclosure document.
9. Marketing fund (item 15)
Franchisors should ensure that the information provided aligns with the Code provisions:
- requiring franchisors to maintain a separate bank account; and
- pay marketing fees on behalf of any franchisor operated units on the same basis as franchisees
Additionally, franchisors would be wise to include all potential marketing or advertising expenses at item 15, given the new parameters for allowable marketing or advertising expenses under the Code.
10. Arrangements at end of franchise agreement (item 18)
The provisions now relate to ‘compensation’, rather than an ‘exit payment’, which reflects the change in terminology under the Code.
11. Statement required when there is no option to renew (item 18.3)
The franchisor must now make full disclosure if the franchisee does not have an option to renew or extend the franchise agreement for a further term.
12. Earnings information (item 20)
The definition of ‘earnings information’ has been expanded to specifically include historical data for the particular franchised business, as well as historical earnings data for any other franchises in the system. It also includes projected earnings, and assumptions on which those are based.
13. Financial details (item 21)
- Franchisors are now subject to more stringent disclosure obligations in providing solvency statements and financial reports.
- Franchisors must now provide a statement of the franchisor’s solvency that reflects the franchisor’s position at the end of the last financial year or, if the franchisor did not exist at the end of the last financial year, at the date of the statement. Additionally, if a new franchisor does not have two years of financial reports it must instead provide a statutory declaration of the entity’s solvency, together with an independent audit report.
- Additional obligations apply to franchisors who have been insolvent at any time during the prior two completed financial years.
- The definition of ‘financial year’ has been changed in the Code to be the franchisor’s financial year.
Do I need to update my disclosure document now?
You have until 31 October 2015 to update your disclosure documents but there are a number of benefits to updating your disclosure document now.
Whether or not you update your disclosure document to the new form, some obligations under the Code apply from 1 January 2015. Unless you specifically disclose certain practices you may not be able to continue with them, or they may become more difficult. For example, as discussed above the changes to the marketing fund provisions in the Code make it desirable to include all types of possible marketing or advertising expenses in the disclosure document.
Similarly, as noted above one of the exceptions to the prohibition on franchisors requiring a franchisee to undertake significant capital is that the expenditure was disclosed to the franchisee in the disclosure document. Franchisors must also now provide the new Information Statement to prospective franchisees.
With increased ACCC activity and the new penalty regime in the Code, savvy franchisors will seek advice sooner rather than later to ensure they are complying with their obligations.
- The content of this article is intended to provide a general overview of the subject matter and is not to be relied upon as giving legal advice. Specialist advice should be sought about your specific circumstances.