What are the Changes to the Franchising Code Changes to Disclosure Documents?
The recent amendments to the Franchising Code of Conduct set out that a number of changes will be required to Disclosure Documents that are given to franchisees or prospective franchisees on or after 1 November 2021. If you’re a franchisor, it is essential that you are aware of these changes and get your Disclosure Document amended before these come into effect. We’ve summarised the changes in this article for you. Please also see our earlier article on changes to the Franchising Code of Conduct that are in effect from 1 July 2021, and make sure you engage with your franchise lawyer to get your pro forma Franchise Agreement amended to take into account these changes.
Disputes/Litigation (Item 4)
There is a new section that requires franchisors to disclose the percentage of franchisees in the franchise system that was a party to a mediation, conciliation, or arbitration process that was conducted, or was pending, in the previous financial year (whether the disputes to which the mediation, conciliation or arbitration processes relate were initiated by the franchisor or one or more franchisees). This will be a simple section to fill in if you haven’t been involved in any dispute resolution processes during the last financial year, but if you have, then you’ll need to gather the data internally so that you can accurately disclose the appropriate percentage.
Rebates and Financial Benefits (Item 10)
If you receive a lot of rebates or financial benefits from suppliers in your network, the new requirements in this section may be the most burdensome for you to complete. First, you have to disclose whether you will receive a rebate or other financial benefit from a supplier of goods or services to the franchisee (pretty straightforward so far, however, this is a forward-looking requirement), and then if you will, you also need to disclose:
- The nature of the rebate or other financial benefit received from each supplier – the term ‘nature’ here is quite broad but we’d expect some detail to be included regarding how you receive the rebate or financial benefit (e.g., direct payment or discount on goods, etc), why you receive it (e.g., for purchasing a certain quantity of goods, etc), and when you receive it (e.g. is it annual, quarterly, etc);
- The names of each business providing the rebate or other financial benefit – this could be a lengthy list of you have a number of suppliers that fall into this category;
- The total amount of rebates or other financial benefits received in the previous financial year from each supplier, expressed as a single aggregate percentage of total group purchases from that supplier (not including any purchases made by units of the franchised business operated by the franchisor, master franchisor or associate) – you may not have collected this data previously, so it is something you and your team will need to calculate as a percentage, and it needs to be done for every relevant supplier;
- Whether the rebate or other financial benefit is shared directly or indirectly, with the franchisee – this should be pretty straightforward to complete;
- If it is shared with the franchisee, then you also have to disclose the method for working out how much of the rebate or other financial benefit is retained by the franchisor, master franchisor or associate, and how much is shared, directly or indirectly, with the franchisee, described by reference to a percentage of the rebate or other financial benefit, or another method for working out how much is retained, and how much is shared with the franchisee – again, this may not be data that you’ve been collecting to date, so you’ll need to work with your team to figure out the appropriate percentage/method to include. The terms of your franchise agreement may be a helpful starting point if they have any reference to how a franchisee is entitled to share in the rebate (e.g., via the purchase of a certain quantity of goods, etc); and
- A description of each direct and indirect benefit received by the franchisee – this is also quite broad, but we’d expect some information regarding how the benefit is received (e.g., is it a direct payment, a discount off royalty fees, etc).
There are some exclusions to the new disclosure required by this section, as follows:
- A rebate or other financial benefit required to be disclosed does not include: The price paid by the franchisee, or a part of that price, for the supply of goods or services by the franchisor, master franchisor or associate; or any incentive or other financial benefit that the franchisor, master franchisor or associate is entitled to receive in connection with a lease of premises or the franchisee’s right to occupy premises.
- You also don’t need to disclose the details in item 10.1(k)(iii) of the Disclosure Document for a supplier (which is the aggregate percentage of group purchases requirement) if: the franchisee is permitted to acquire goods or services from sources other than the franchisor without the franchisor’s approval; or the whole of the rebate or other financial benefit that will be received by the franchisor, master franchisor or associate from that supplier is to be returned to the franchisee directly as a payment into a cooperative fund controlled or administered by or for the franchisor.
History of Site and Territory (Item 13.3)
Item 13.3 has been replaced with an item requiring disclosure of whether the franchisor or its associate has an interest in the lease of the premises the franchisee will occupy whether as a landlord, head lessee or another interest. The details in items 13.2 and new 13.3 must be contained in a separate document attached to the Disclosure Document. Your franchise lawyer should be able to assist you with adding in a new annexure to your Disclosure Document for this, so that you can easily amend it for each franchisee.
Arbitration of disputes (Item 17A)
Item 17A has been added to require disclosure of whether the Franchise Agreement provides for arbitration of disputes in a manner consistent with the new changes (Subdivision C of Division 3 of Part 4). You should obtain advice from your franchise lawyer about whether including an arbitration requirement in your Franchise Agreement is suitable for your franchise system.
Ways of Ending the Franchise Agreement early (Item 17B)
This section has been added to require disclosure of a summary of the rights both the franchisor and the franchisee have under the Franchise Agreement to terminate the Franchise Agreement before it expires, and the circumstances in which those rights may be exercised. Your franchise lawyer will be able to help you with identifying the appropriate termination rights in your Franchise Agreement (both for you and the franchisee) so that they can be included in this section.
Term of Agreement and Arrangements to Apply at End of Franchise Agreement (Item 18)
Item 18 has been amended to require disclosure of the term of the Franchise Agreement, the franchisee’s rights relating to the goodwill generated by the franchisee (including a statement to the effect if the franchisee does not have any right to goodwill), and whether the Franchise Agreement contains a restraint of trade or similar clause. This is another section that your franchise lawyer will be well equipped to help you complete, as they can identify and include references to the appropriate clauses in your Franchise Agreement for you.
Earnings Information (Item 20)
If you plan on giving any earnings information, it must be given with the Disclosure Document (either within the document itself or in a separate document attached to it). If you give out a Disclosure Document and then send the franchisee earnings information separately, the Franchising Code will deem you not to have complied with the disclosure requirements in the Code. As a consequence, before entering into the Franchise Agreement, you would be required to re-disclose and re-start the 14 day disclosure period.
If you will give out earnings information in your Disclosure Document or an attachment to it—the following statement must be included:
To the best of the franchisor’s knowledge, the earnings information given is accurate (other than particular earnings information specified in the document as earnings information that the franchisor knows is not accurate).
Significant capital expenditure
If the franchisee is required to expend significant capital expenditure, this must be set out in the Disclosure Document (which isn’t a new requirement), however, the new obligation is to include as much information as possible about the expenditure, effectively the business justification for it, to discuss it with the franchisee and the circumstances under which they are likely to recoup the expenditure having regard to the geographical area of operations of the franchisee. This is in effect from 1 July 2021, so if you have not yet updated your Disclosure Document to include this level of detail for any significant capital expenditure, make sure you ask your franchise lawyer to assist you with this as part of your update for the November changes.
If you are a franchisor and need some help updating your Disclosure Document to reflect the changes that are in effect from 1 November 2021, please reach out.