How to update your Franchise Disclosure Document

The Trade Practices (Industry Codes – Franchising) Regulations 1998 provides at section 6 that –
“A franchisor must, before entering into a franchise agreement, and within 4 months after the end of each financial year after entering into a franchise agreement create a document (a disclosure document) for the franchise in accordance with (the code)”
The effect of section 6 is that all franchisors must update their disclosure document no later than 31 October each year.
We strongly recommend that franchisors obtain advice from usbefore issuing an updated disclosure document. It is however possible for franchisors to consider for themselves what amendments might be necessary. By going through this process before seeing a lawyer it should be possible to save legal costs.
Step 1 – Have there been any changes to the Franchising Code of Conduct? It is important to again realise that the content of the disclosure document is driven by the requirements of Annexure 1 of the Franchising Code of Conduct. Before you make any changes to the disclosure it is essential to check the current version of the code to ensure that changes have not been made to the requirements of the code. Most franchisors will know that in 2010 changes were made to the Franchising Code and the Annexure. These changes had the effect of requiring franchisors to amend their disclosure documents in July and October. If in any year the code requires additional information, then a careful note should be made of the required amendments.

Step 2 – Consider a list of the parts of the annexure that are most likely to have changed during the course of the year. When the task of considering these obvious sections is complete then the remaining parts of the code should also be considered. We have listed below the areas of the disclosure that are most likely to vary from year to year. These sections should be considered most carefully.
Sections of the Disclosure Document most likely to Change
1. Section 2 – Details of the Franchisor
a. Has the name and address for any franchisor or an associate changed?
b. Has the name position or qualification of any officer of the franchisor changed?

2. Section 3 – Business experience
Make any changes to the details of experience of the franchisor, if most things have remained constant then the franchisor may have one year more experience.

3. Section 4 – Litigation
Are there any current proceedings against the franchisor or a director of the kind referred to in the code?

4. Section 5 – Payments to Agents
Have you set up any agreements with suppliers agents where you make a payment for recruitment of franchisees.

5. Section 6 – Existing Franchisees
If any of the following have happened in relation to any franchise then the details must be noted:
a. Transfers.
b. Closures.
c. Terminations by franchisor.
d. Terminations by franchisee.
e. Expiration.
f. Purchase by Franchisor of a franchised business.
g. Franchise agreement was terminated and the franchised business was acquired by the franchisor.

6. Section 7 Intellectual Property
Any changes to intellectual property should be noted.

7. Section 11 – Sites
If you have changed your policies in relation to site selection you must provide notice.
If any territory or site has been subject to a franchised business operated by a previous franchisee, granted by the franchisor, then you must provide detail of the franchised business including the circumstances in which the previous franchisee ceased to operate. This is to be provided in a separate document.

8. Section 12 – Marketing or other cooperative fund
If there have been changes in relation to the fund then they may need to be mentioned for example, how much franchisees must contribute.

9. Section 13 – Payments
This is an area where there are frequently changes. If there have been changes in the amount the franchisor or others charge for services associated with the franchise system then these changes may need to be noted.

10. Section 15, 16 and 17 Franchisee and Franchisor obligations and other conditions
If you have made any changes to the terms and conditions of the franchise agreement during the course of the year then it is quite possible that these changes may need to be reflected in one or more of these parts of the disclosure document.

11. Section 17A Unilateral Variation
If a franchise agreement is entered into in a financial year commencing on 1 July 2011 or later, the circumstances in which the franchisor has unilaterally varied a franchise agreement since 1 July 2010 must be disclosed.
There are circumstances where this may happen! For instance when there is a sale of a franchise and the new franchise agreement is not on the same terms or when a change is introduced across the system.

12. Section 17C.2
Have you and will you consider any significant capital expenditure undertaken by a franchisee in determining what arrangements will be made at the end of the franchise agreement?

13. Section 20 Financial Information
Directors statement must be renewed.
Financial reports must be prepared and attached for the last 2 financial years or alternatively, an auditors report must be attached.

14. Section 21 Disclosure of materially relevant facts.
Check clause 18 of the code and disclose any matters that need to be disclosed under that section.

15. Section 22
Make sure that the franchise agreement attached to the disclosure is up to date.
Make sure that the copy of the code attached to the disclosure is up to date.
This is not intended to be an exhaustive list of every change that might need to be made to a disclosure document each year, however, it is hoped that it provides a good starting point. We suggest that you use this list to prepare for that yearly meeting with your lawyer to review the disclosure. If you have considered each of these matters you will be well advanced before the lawyer’s clock starts to tick.
J J Riba and Company can provide you with a fixed quote for the yearly review of your disclosure.
Step 3 – Keep a copy of each disclosure document going back at least 10 years. If a claim is made against the franchisor it may be necessary to identify what your franchise agreement looked like in each year of its operation. The old disclosure cannot be disgarded.

If you need help please contact us.