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Reminder to Franchisors

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That time of the year has arrived again.

As you are aware, the Franchising Code of Conduct (Code) requires you to update your Disclosure Document within 4 months of the end of each financial year. Assuming your financial year runs from 1 July to 30 June, your Disclosure Document needs to be updated by no later than 31 October 2011.

A review of your Franchise Agreement may also be appropriate, especially if it has been some time since you last reviewed your Franchise Agreement.

What you can do yourself

Much of the updating of the Disclosure Document is statistical in nature and/or requires you to record factual changes which have occurred since your Disclosure Document was last updated. These include:

  • Details of any litigation (Item 4).
  • Details of existing franchisees and franchised businesses, including their business address, business telephone number and the year they started to operate the franchised business (Items 6.1 to 6.3).
  • Details of the following key events for each of the last three completed financial years (2009, 2010 and 2011)
    (Item 6.4):

    1. Franchises transferred.
    2. Franchised Businesses which ceased to operate.
    3. Franchise Agreements which were terminated by the Franchisor.
    4. Franchise Agreements which were terminated by the Franchisee.
    5. Franchise Agreements which were not renewed when they expired.
    6. Franchised Businesses which were bought back by the Franchisor.
    7. Franchise Agreements which were terminated with the Franchised Business being acquired by the Franchisor.
  • You must also disclose the contact details of the franchisees for which a key event has occurred, unless the franchisee in question has specifically requested that his/her details not be disclosed.
  • Details of any changes to your intellectual property (Item 7).
  • Details of marketing fund expenditure for the financial year ending 30 June 2011 (Item 12).
  • Details of payments (Item 13), including payments to third parties (Item 13.6A).

The Code changes which came into effect on 1 July 2010 now require that certain additional information be included in your Disclosure Document from 1 July 2011:

  • If, since 1 July 2010, you have made unilateral variations to your franchise agreement or operations manuals, the details of such variations must be included in your Disclosure Document from 1 July 2011 (Item 17A); and
  • If, since 1 July 2010, you have considered any significant capital expenditure undertaken by franchisees in determining the arrangements to apply at the end of the franchise agreement, details of the consideration given must be included in your Disclosure Document from 1 July 2011 (Item 17C).

Largely, the above can be done by you, although we would recommend that you have us check the amendments to ensure you have completed all the details as required by the Code.

What MST should do for you

Conduct company searches of the franchisor and its related entities and also conduct bankruptcy searches of all directors.

If you have made any changes to your Franchise Agreement or have changed any of your policies or procedures further amendments may be required to the following sections of the Disclosure Document:

  • Items 8 and 11 (franchise sites or territories);
  • Item 9 (supply of goods and services to franchisees);
  • Item 10 (supply of goods or services by franchisees);
  • Item 14 (finance);
  • Items 15, 16 and 17 (which cross reference provisions in your Franchise Agreement).

As these sections involve more of a legal rather than factual update, we recommend that you instruct us to update these sections or check your amendments to these sections.

If, since your Disclosure Document was last updated, you require additional agreements to be signed by Franchisees, Item 18 will need to be updated.

If you now provide earnings information or intend doing so, you will need to update this information in Item 19. It is critical to have a lawyer complete this section of your Disclosure Document because it is an area fraught with the risk of claims of misleading or deceptive conduct and misrepresentation by franchisees.

Remember also:

  • Before 31 October 2011 you will need to prepare a financial statement showing the receipts and expenses of the marketing fund for the financial year ending 30 June 2011. This statement must be provides to each of your franchisees within 30 days of its preparation.
  • You will also need to have your marketing fund audited before 31 October 2011, unless 75% of your Australian franchisees who contribute to the fund vote to agree that an audit is not required. Note that any vote must be taken by no later than 30 September 2011 and will then be valid for three years. If your franchisees vote not to require the audit of the marketing fund you will not be required to provide an audit report this financial year.
  • For the purpose of Item 20 of the Disclosure Document, you will need to include in your updated Disclosure Document:
  1. a solvency statement as at 30 June 2011 signed by at least one director of the Franchisor stating that in that directors’ opinion there are reasonable grounds to believe that the Franchisor will be able to pay its debts as and when they fall due; and
  2. either:
    (a)  financial reports for each of the last two completed financial years (2010 and 2011); or
    (b)  a copy of an independent audit certificate and report of your accounts for the financial
    year ending 30 June 2011.

Please feel free to contact John Sier, Raynia Theodore, or Esther Gutnick in our Franchising team should you have any queries in relation to the above.