Franchising Code of Conduct: Disclosure Obligations
Franchisors and franchisees maintain an obligation to comply with the Franchising Code of Conduct. However, long awaited changes to the Code on 1 July 2021 have impacted disclosure obligations. While franchisors always had to provide a Disclosure Document, more steps in the disclosure process have been added. From 1 November 2021, the Disclosure Document must include more extensive commercial details, such as supplier rebates and other financial benefits that the franchisor, associates of the franchisor, and master franchisor. Since 1 July, a new information statement and a key facts statement must also be provided.
Franchising Code of Conduct: Information Statement
When a franchisor is looking to engage with a potential franchisee, an information statement must first be provided. The new version of the information statement must be given to potential franchisees prior to engaging in any further disclosures.
The information statement provides some basic advice to potential franchisees, including reminders to learn about franchising, conduct due diligence, obtain professional advice, and consider options other than franchising. At high-level and in an easily-digestible format, it outlines some benefits and risks of franchising, provides some sample questions to ask the franchisor, and includes information about cooling off periods and dispute resolution avenues.
Franchising Code of Conduct: Key Facts Sheet
After the potential franchisee has received the information statement, a key facts sheet must be provided to them. This must be provided at least 14 days prior to signing a franchise agreement or making a non-refundable payment. If this is not provided, a penalty may apply. The key facts sheet highlights important commercial information, including:
- financial details of the franchisor;
- any major disputes;
- a list of current and former franchisees for ease of research;
- details about the business site;
- financial benefits to the franchisor;
- operating costs of the franchise;
- marketing fund contributions;
- any unilateral contract variation terms;
- historical and projected earnings data; and
- processes at expiry or termination of the franchise.
In addition to highlighting this important information, the key facts sheet directs franchisees to the item numbers of the disclosure document where more information can be found.
Best Practice for Franchisors
The abovementioned changes operate to empower potential franchisees with information, while increasing the obligations on franchisors. It also operates in such a way to mandate clear communication between the franchisor and potential franchisee. While this may mean that more discussions and negotiations take place in the early stages of a new franchise, this can have benefits for a strong franchisor-franchisee relationship.
For franchisors looking to ensure that their existing contracts are in compliance with changes to the Franchising Code of Conduct, best practice is to review franchise agreements and franchise processes to ensure that necessary changes are made. Compliant processes and agreements should be used for any new franchise agreements from 1 July 2021. Franchisors should also begin to organize the Disclosure Document used in their franchise agreements to meet the 1 November 2021 requirements. This will require more information on supply rebates and other financial benefits.
To ensure that you comply with the changes in the Franchising Code of Conduct, talk to an experienced franchise lawyer today. Contact our team online, on (02) 4929 7002, or email us at enquires@butlers.net.au for personalised legal advice.