Legal Insights

Franchisors, it’s time to update your disclosure documents

By Greg Hipwell

• 17 September 2020 • 5 min read

It is hard to believe that we are in September, and for most franchise networks in Australia, the challenges and uncertainty presented by the COVID-19 crisis are ongoing. While many networks continue to grapple with ever changing restrictions and lockdowns, it is important for franchisors not to lose sight of run of the mill regulatory compliance requirements.

Under the Franchising Code of Conduct (Code), franchisors are required to update their franchising disclosure documents on an annual basis. For franchisors operating on a 30 June financial year, their updates need to be completed by 31 October 2020.

For some networks, this may be the first dislcosure document update following the release of the Australian Competition and Consumer Commission’s model franchising disclosure document, as well as changes to the Code specific to the automotive sector that came into effect on 1 June 2020 (Automotive Amendments) and the Government’s response to The Parliamentary Joint Committee’s Fairness in Franchising report that was released on 20 August 2020.

With that landscape in mind, here are our top picks for the key areas of disclosure that you should pay particular attention to this year.

Don'tDo
1. Be specific about supply chain details and supply restrictions
  • fail to specify amounts for payments or costs that will be incurred by the franchisee, just because they are difficult to calculate or estimate
  • avoid disclosing potential categories of payments and costs to artificially paint a better financial picture for prospective franchisees
  • explain how your supply chain operates in practise
  • disclose the names of key nominated or approved suppliers and the key goods or services that franchisees must obtain from those suppliers
  • explain the process that would apply if a key supplier or requirement to acquire key goods or services were to change
  • disclose the names of all suppliers that provide you with a rebate or other financial benefit from the supply of goods or services to franchisees
2. Bolster disclosures around payments and costs that may be incurred by the franchisee
  • fail to specify amounts for payments or costs that will be incurred by the franchisee, just because they are difficult to calculate or estimate
  • avoid disclosing potential categories of payments and costs to artificially paint a better financial picture for prospective franchisees
  • conduct research and due diligence to establish the relevant costs that are being incurred by your franchisees on a day to day basis, including the amount, timing and nature of the costs
  • use disclaimers to explain the basis upon which estimates of costs are given
  • flag potential future capital expenditure that may be incurred by a franchisee, even if you are uncertain if that expenditure will be incurred
  • if you are in the automotive sector, pay particular attention to significant capital expenditure disclosures and consider if you need to discuss any capital expenditure with your prospective franchisees as a result of the Automotive Amendments to the Code
3. Give meaningful information in relation to marketing fund expenditure
  • forget that a separate requirement to prepare and distribute an annual marketing fund financial statement applies
  • forget that you only have 3 months from the end of the financial year to have franchisees vote as to whether or not they want to get the annual marketing fund financial statement audited
  • drill down on specific details relating to the sources of marketing fund income
  • include specific details of how marketing fund income has been spent (for example, TV campaign in April 2020 relating to x product) – generic and high level descriptions of categories of expenditure will not be sufficient
4. Revisit your disclosures in relation to end of term arrangements
  • provide generic responses if your end of term arrangements vary from franchisee to franchisee
  • forget to use size 12 bold font when responding to items 18.3, 18.4 and 18.5
  • revisit your end of term disclosures if you operate in the automotive industry to address the Automotive Amendments to the Code
  • if relevant, ensure that you accurately describe whether a franchisee has the right to ‘extend’ or ‘renew’ a franchise agreement, by reference to the definitions of those terms in the Code
5. Consider specific disclosures in relation to COVID-19 impacts
  • tailor your whole disclosure document so that it only reflects temporary network changes arising as a result of COVID-19

  • consider providing disclosures (possibly via a separate covering letter) that explain the impacts of COVID-19 on your network, including any temporary changes to the way your network operates, that may be relevant to a franchisee's decision to enter into a new or extend or renew a franchise agreement

Need to discuss your compliance requirements in further detail?

Get in touch with the Consumer Markets & Franchising team.

Consumer Markets & Franchising

By Greg Hipwell

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