Franchise Disclosure Document

By Centre Contributor

Franchise Due Diligence

 

Most countries with some form of franchise regulations or legislation often require disclosure by the franchisor to potential and current franchisees.

One of the three key elements of the Australian Franchising Code of Conduct when it was introduced in July 1998 was the requirement for franchisors to provide disclosure information to new and renewing franchisees.
The Australian disclosure requirement is mandated under Part 2 of the Franchising Code which details how and when information should be disclosed.
The information to be disclosed and the manner in which the information needs to be presented varies from country to country, but generally centres around the same principles. 
Australian disclosure requirements are outlined in two pro-forma annexures to the Franchising Code of Conduct, which effectively form templates for all franchisors to follow in the preparation of their franchise disclosure documents.
There are two types of disclosure possible under the Australian Franchising Code of Conduct:
Annexure 1 disclosure applies to those businesses with an expected annual turnover of $50,000 or more at any time during the term of the franchise, and requires franchisors to provide extensive and detailed information about their business and the franchise arrangement proposed.

 

Annexure 2 disclosure applies to those businesses with an expected annual turnover less than $50,000 at any time during the term of the franchise. Annexure 2 is also known as short-form disclosure. In essence, it is a cut-down version of the disclosure template provided in Annexure 1, the idea being that the shorter version would be easier and more cost-effective for franchisors of very small businesses to prepare.

However a franchisee who has been provided with Annexure 2 (short form) disclosure can request the long form (Annexure 1) disclosure at any time, so there is little practical benefit in issuing short form disclosure (in addition to which the $50,000 turnover limit may also be impractically low for most franchise businesses).

Australian Franchise Disclosure Requirements

Irrespective of whether short (Annexure 2) or long form (Annexure 1) disclosure is to be used, all franchisors (including master franchisees, which are referred to in the Code as sub-franchisors) are required to comply with the following under the Code:
  • The franchise disclosure document must be signed by a director or other officer of the franchisor
  • Franchise disclosure documents must be updated annually within four months of the end of the financial year (ie. by the end of October each year)
  • Franchise disclosure documents must be given to potential new franchisees and to existing franchisees proposing to renew their agreements, or to an existing franchisee on request
  • The franchise disclosure document must be provided at least 14 days before the potential franchisee signs their franchisee agreement
  • The franchise disclosure document must be accompanied by the franchise agreement in the form in which it is to be signed, as well as a copy of the Franchising Code of Conduct itself
  • The franchisor must receive a written statement or receipt from a franchisee to say that they have received, read and had the chance to understand the franchise disclosure document before the franchisee can sign a franchise agreement
  • The franchisor must also receive signed statements that the franchisee has had advice from any or all of a lawyer, accountant or business advisor, or provides a statement that they have received that type of advice or have decided not to seek such advice 
Additionally, there exists a continuous franchise disclosure provision in the Code which requires franchisors to notify franchisees within 14 days of any materially relevant facts, which, among others, include details of:
  • A change of ownership or control of the franchisor or intellectual property of the franchise business
  • Investigations, judgements or arbitration awards against the franchisor or franchisor director
  • Proceedings against the franchisor or franchisor director by 10% or 10 (whichever is the lesser) franchisees
  • The franchisor becoming externally administered or making any court-enforceable undertakings  
Irrespective of the size or scope of a franchise business network’s operations, a franchisor’s franchise disclosure document must contain the following (among other information):
  • A mandatory warning statement on the front page encourages prospective franchisees to take their time and seek advice
  • Contact details of the franchisor, a description of the type of business, names of office holders, their qualifications and business experience
  • Business experience of the franchisor in the last 10 years
  • Details of criminal, civil, or insolvency proceedings against the franchisor or a franchisor director
  • Whether an agent will receive a commission from the sale of the franchise
  • A list of current franchisees and their contact details, as well as a list of ex-franchisees for the last three years, and their contact details, and whether they were bought back, terminated, sold, etc
  • Details of the franchisor’s ownership or rights to use the intellectual property which is being grated to the franchisee 
  • Details of the franchise site or territory
  • Details of the supply of goods or services by the franchisor or its associates to franchisees
  • Details of the supply of goods or services by the franchisee
  • The site or territory selection policy, as well as any previous operations that have been conducted in those locations
  • Details of how the marketing fund for the franchise operate and are audited
  • A summary of payment costs and timings required of the franchisee buying into the franchise
  • Financing requirements of the franchisor
  • A summary of the obligations of the franchisor to the franchisee, and in turn, summary of the obligations of the franchisee to the franchisor
  • A summary of any other related agreements that need to be signed along with the franchise agreement (eg. lease, etc)
  • Details of the assumptions behind any earnings information provided, or if no information provided, a prescribed statement to this effect
  • A signed statement certifying that the franchisor can pay their bills as and when they fall due is required to be provided, as well as financial details of the franchisor either as a set of financial statements for the last two years, or as registered company audit

The franchise disclosure document must be accompanied by a copy of the proposed franchise agreement, and a copy of the Franchising Code of Conduct itself.

A receipt should be included at the back of the franchise disclosure document, and this should be signed and returned by the franchisee to whom the document was issued.
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