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Disclosure Update Window Opens

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by: Raynia Theodore, Principal of Franchising, Mason Sier Turnbull

Reminder to Franchisors: The four-month window to update your Disclosure Document is about to open.

If your financial year ends on 30 June, the Franchising Code of Conduct (Code) gives you until 31 October 2012 to update your Disclosure Document. And if it’s been a while since you last looked at it, now is also a good time to review your Franchise Agreement.

Updates You Can Make

Because many of your changes will be factual, you can do a lot of the Disclosure Document update yourself, including:

  • details of any litigation (Item 4);
  • details of existing franchisees and franchised businesses, including their addresses, telephone numbers and start-up years (Items 6.1 to 6.3);
  • any changes to your intellectual property (Item 7);
  • marketing fund expenditure for the financial year (Item 12);
  • payments (Item 13), including to third parties (Item 13.6A); and
  • details of the following key events for each of the last three completed financial years (Item 6.4):
    • Franchises transferred.
    • Franchised businesses that finished.
    • Franchise agreements that either the franchisor or franchisee ended.
    • Franchise agreements that expired and were not renewed.
    • Franchised businesses the franchisor bought back.
    • Franchise agreements that ended when the franchisor acquired the franchised business.

You must disclose contact details for franchisees involved in any of these key events, unless they have specifically asked that their details remain undisclosed.

Don’t forget Code changes that came into effect on 1 July 2010 also now require you to provide details of:

  • any unilateral variations to your franchise agreement or operations manuals (Item 17A);
  • whether, in deciding what arrangements will apply at the end of the franchise agreement, you have considered any significant capital expenditure undertaken by franchisees (Item 17C)

As mentioned, you can make all these changes yourself. We do recommend, however, that you ask us to check your changes against Code requirements.

MST’s Role in Your Update
If you made changes to your Franchise Agreement in the financial year, or changed your policies or procedures, we will need to assist. The following sections of the Disclosure Document involve legal rather than factual updates, so we recommend you have us make them (or check any amendments you make):

  • Items 8 and 11 (franchise sites or territories);
  • Item 9 (supply of goods and services to franchisees);
  • Item 10 (franchisees’ supply of goods or services);
  • Item 14 (finance);
  • Items 15-17 cross referencing to the Franchise Agreement); and
  • Item 18 (only if since your last Disclosure Document update you require franchisees to sign certain agreements)

Importantly, if you provide earnings information or intend to, you need to update Item 19. It is critical that a lawyer completes this, as it is an area that can expose franchisors to claims by franchisees of misleading or deceptive conduct, and misrepresentation.

We can also conduct company searches of the franchisor and its related entities, including bankruptcy searches of all directors.

Final Reminders
You need to include in your Disclosure Document a solvency statement signed by at least one franchisor director and financial reports for the last two financial years or an independent audit prepared by a registered company auditor.

Before 31 October, you must also prepare a statement that shows your marketing fund’s receipts and expenses for the financial year. You must provide the statement to each of your franchisees within 30 days of its preparation.

You must also have your marketing fund audited before 31 October, unless 75 per cent of your Australian franchisees who contribute to the fund vote that an audit is not required. Note: the vote must be held by 30 September 2012 and is then valid for three years. If your franchisees vote that your marketing fund doesn’t require an audit, there’s no need to obtain an audit report for the financial year.

If you have any queries about the above, please feel free to contact John Sier or Raynia Theodore in our Franchising Team on 03 8540 0200