Five things to look out for during the annual franchise disclosure document update time

As a franchisor in Australia, you must update your Disclosure Document annually to comply with the Franchising Code of Conduct (the Code). This ensures your franchisees have the latest information about the franchise network and its performance. To avoid penalties, the updated document must be submitted by 31 October each year. As we edge closer to the deadline, it is advisable to begin the update process at the start of the new financial year. This article highlights five key points you must consider during the annual update of the Disclosure Document.

What is a Disclosure Document?

Your Disclosure Document is a prescribed document defined by the Code, providing a 'snapshot' of your franchise network and business model. It summarises the terms of your standard franchise agreement, excluding any special conditions or unique features of individual franchises. Key inclusions in a Disclosure Document are:

• details of any related entities or people involved in the franchise;
• a summary of your experience operating the business, your qualifications or any other relevant franchise;
• litigation history over the past 10 years;
• the number of franchisees in the franchise network and the number of (and contact details for) any franchisees who have left the network in the last 3 financial years;
• the costs incurred by franchisees to establish and operate the franchise;
• details of any rebates you receive from suppliers of the franchise network;
• financial reports or audit reports on your business; and
• other specific information required under the Code.

1. Financial Information

For your annual disclosure document update, you must include your franchise's current financial information by 31 October. This ensures potential franchisees have accurate, current data to make informed investment decisions.

Your Company's Financial Position

Whether you are a new or established franchisor, you must disclose certain financial information to franchisees, including an annual statement of solvency.

For franchisors operating over two years, you have the option to provide financial reports or an independent audit report for the past two financial years by 31 October. New franchisors (less than two years in operation) must obtain an audit report and provide a statutory declaration regarding solvency, regardless of trading activity.

The Franchisees' Costs of Operating a Franchised Business

Ensure all upfront and ongoing costs a franchisee must pay while operating their franchised business are up-to-date. In section 14 of your Disclosure Document, you must include:

• a description;
• the amount (or method of calculation);
• the recipient;
• when the payment is due; and
• whether the amount is refundable (and if so, under what conditions).

Review and update these costs annually to reflect current expenses incurred by your franchise network. This ensures transparency with franchisees and reduces the risk of engaging in misleading and deceptive conduct. This is crucial, especially when costs for supplies, rent, and employees fluctuate due to market trends and legal changes.

Earnings Information for Franchisees

You are not required to provide earnings information to prospective franchisees, but you can elect to do so. You may do this to give them an idea of the business's earning potential.

If you opt out, your Disclosure Document must include a statement regarding this per the Code. However, if you include earnings information, your Disclosure Document must include a statement and discuss:

• the facts and assumptions you have based the projection or forecast on; and
• why you chose the period covered by the projection.

2. Events Relating to Franchisees

Franchisors must update their Disclosure Document to specify details regarding existing franchisees and franchised businesses, including:

• the number of existing franchises within the network;
• all franchisees' addresses;
• all franchisees' telephone numbers; and
• the year each franchisee commenced operations.

You must also update the details of critical events for the past three financial years, including:

• franchises transferred;
• franchised businesses that ceased operating;
• franchise agreements that either you or the franchisee terminated;
• franchise agreements that were not extended;
• franchised businesses that you bought back; and
• franchise agreements that ended when you acquired the franchised business.

You must monitor events throughout the financial year to keep the Disclosure Document accurate. This will also enable prospective franchisees to contact current and former members for insights into their experiences whilst part of the franchise network.

3. Information on the Franchisor, Company Officers and Associated Entities

Prospective franchisees need a clear understanding of the following:

• your background;
• the company officers; and
• any associated entities

By providing detailed information, prospective franchisees can assess potential risks associated with you and your key personnel, including:

• your track record;
• financial health; and
• any previous issues that may impact the franchise relationship.

Additionally, any new entities incorporated, such as suppliers, must be detailed in the Disclosure Document. Further, updates to your company details, including changes in directors or shareholders, must be reflected to ensure accuracy.

4. Any Legal Proceedings Underway Against the Franchisor or Company Directors

Business and legal situations can change quickly, necessitating annual updates to keep your franchisees informed and accurate. As a franchisor, you must provide details of any litigation from the past ten years in your annual Disclosure Document update. You must also detail any mediation or alternative dispute resolution procedures from the previous financial year.

Including legal proceedings and dispute resolution details is crucial for several reasons:

• it allows potential franchisees to assess the risk of partnering with you, indicating any financial instability or unethical practices;
• transparency about legal issues builds trust between you and franchisees, preventing distrust and relationship breakdowns; and
• it enables prospective franchisees to perform due diligence, ensuring they make informed decisions based on your current legal status.

5. Marketing Fund

A marketing fund is a pool of money held by franchisors for the national marketing of their franchise networks. If you operate a marketing fund, you must update the annual Disclosure Document with any new details or add information if the fund is newly introduced.

Specify the fund's expenses for the last financial year, including the percentage spent on:

• production;
• marketing;
• administration; or
• other stated expenses.

Importantly, by 31 October, prepare an annual financial statement detailing the fund's receipts and expenses. This must have sufficient detail to provide 'meaningful information'.

Additionally, an audit of the fund is necessary unless 75% of franchisees agree to waive it. If required, the audit must also be completed by 31 October. Provide the financial statements and audit report (if applicable) to all franchisees within 30 days of preparation. Ensure these obligations are met promptly to avoid missing deadlines.

Key Takeaways

Franchisors must review their Disclosure Document annually to ensure accuracy and compliance and avoid giving franchisees false impressions. To ensure you do not miss deadlines set out in the Code, start this process as early as possible. This will avoid disputes with franchisees and potential imposition of penalties under the Code.

If you need help with the annual update of your Disclosure Document, our experienced franchising lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.