Franchisors and Master Franchisees
The Code doesn’t change till next year but it may still be time to update your disclosure documen
Franchising is a style of operation that relies heavily on being systematic. One of the important “systems” for Franchisors and Master Franchisees involves planning to review your Disclosure Document at least once a year.
Under the Franchising Code of Conduct ("the Code") franchisors and master franchisees must update their Disclosure Document within 3 months after the end of each financial year. If you have a June financial year-end, that means updating your disclosure document by 30 September 2007.
The Federal Government has just announced changes to the Code which will change the disclosure obligations of franchisors and master franchisees. These will be covered in a separate update, so you can plan ahead. However, as these do not take effect until 1 March 2008, you should still update your disclosure document in accordance with the current format.
What do I need to do?
Here is a list of action items:
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update the date of preparation shown on the front cover;
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update any of your details that may have changed, eg your qualifications, experience, new senior personnel;
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disclose any current legal proceedings or arbitration relevant to the franchise;
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update the number of franchisees and the relevant details of each (if they have changed);
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give details of any franchise that was transferred, ceased to operate, terminated, not renewed, or bought back the last financial year;
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update the information on marketing fund expenditure to show the breakdown in the 2006/2007 financial year;
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update the solvency statement at section 20 of your disclosure document. Where you include your financial statements, you need to update the financial statements to show the financial years ended 30 June 2007 and 2006. Where you provide an auditor’s report instead, you should ensure that you and your auditor will be on track to finalise the report, and the underlying financial statements, in time.
Marketing Fund Housekeeping:
Also, under the Code, where you operate a marketing or other co-operative fund, you must:
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prepare an annual financial statement of the fund’s receipts and expenses for the last financial year, including the amount spent on production, advertising, administration, goods or services supplied by you or an associate of yours and any other stated expense; and
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have the statement audited by a registered company auditor*,
within 3 months after the end of the last financial year.
Do I need to send all my current franchisees a new disclosure document?
No, but they may ask you for a copy during the year if they wish.
Making sure the Disclosure Document truly discloses
The list in this article only covers some of the key issues for updating.
You should take the time to read through your whole disclosure document to ensure that everything is up-to-date. You should also "step back from the details" and make sure that the document is as clear and user-friendly as possible.
It is possible to fill a disclosure document with correct information, complying with the “letter” of the Code, and yet mislead franchisees by omitting important details that they would expect to be told. Even if the Code does not require the information to be disclosed, there may be other important aspects of your business that franchisees need to know in order to make an informed investment decision.
What’s the big deal?
Clear and compliant disclosure documents are part of having a well-run and credible system. Franchisors and master franchisees need to budget the time and resources needed to keep them up-to-date. While there is an element of tedium in this process (even we lawyers find disclosure documents boring at times!) a good disclosure document helps manage the expectations of your franchisees from the earliest stages of your relationships. This reduces the chance of an unhappy franchisee later saying “I didn’t know what I was getting into”.
ACCC releases ‘Franchisee Manual’
On 11 August 2007, the ACCC released a new ‘must read’ for all franchisees – the Franchisee Manual (“the Manual”). A comprehensive document, the Franchisee Manual outlines important franchising issues such as:
what franchising is;
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whether the Code applies to a business;
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the advantages, disadvantages and responsibilities of being a franchisee;
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steps to take before choosing a franchise;
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steps to understand and evaluate a franchise agreement; and
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what to do in case of a dispute with a franchisor.
The Manual even lists the items required in a long form disclosure document and when this needs to be given to franchisees as well as hints on franchise features to look out for (including franchise territory and site selection). AmmendIt aims to assist people thinking about buying a franchise as well as helping existing franchisees better understand and comply with the Franchising Code.
Click here if you would like to access the Manual.
Franchisors should consider providing a copy of this document to prospective franchisees – after all, it is in everyone’s interest for franchisees to make well-informed decisions when committing to a franchise.
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*you do not need the financial statements to be audited if 75% of your franchisees in Australia, who contribute to the fund, agree that the statement does not need to be audited.
