Amendments to the Franchising Code: what do they mean for you?

On 6 February 2007, Fran Bailey (Federal Minister for Tourism and Small Business) announced the Federal Government’s response to a review conducted last year in relation to the disclosure provisions of the Franchising Code of Conduct. After a series of consultations with interested parties (including Clayton Utz and the Franchise Council of Australia), amendments have now been made to the Code. These amendments take effect from 1 March 2008.

The amendments to the Code – the first changes since 2001 – will increase the disclosure burden on franchisors in their dealings with franchisees and potential franchisees. Outlined below are some of the key changes and a brief summary of their implications.

Content of Disclosure Document

A number of changes have been made to the Code in relation to the required content of a Disclosure Document. Franchisors will need to ensure that Disclosure Documents which are distributed on or after 1 March 2008 comply with the Code as amended.

One of the more significant changes is that franchisors will now need to state in their Disclosure Documents where rebates or other financial benefits are given in connection with the supply of goods or services to the franchisor, and also the names of all parties who provide them. It is not necessary to quantify the value of rebates received or to provide the method by which such rebates are calculated.

This change means that franchisors have an increased level of transparency and accountability to franchisees, although it may also impose a significant administrative burden on franchisors as these arrangements will vary from time to time.

More detail must now be disclosed about a franchisor’s officers, past franchisees and financial information where the franchisor is part of a consolidated entity.

Foreign franchisors with single franchise

Current law: At present, foreign franchisors that grant only one franchise or master franchise to be operated in Australia are exempt from compliance with the Code.

New law: The amendments to the Code will remove this exemption. This is a major change which affects not only new entrants to the market, but also existing foreign franchisors. All franchisors (domestic and foreign) will need to comply with the Code’s requirements, including the onerous ongoing disclosure obligations and the mandated dispute resolution process.

Faster disclosure of materially relevant facts

Current law: Disclosure of prescribed matters under clause 18 of the Code (including matters such as a change in the majority ownership or control of the franchisor, the commencement of certain civil proceedings, and the appointment of an external administrator) must be disclosed to franchisees and prospective franchisees within a reasonable time, being not more than 60 days.

New law: Disclosure of these matters is now required within a reasonable time, being not more than 14 days. In cases where a franchisor has many franchisees, this reduced timeframe could impose a serious administrative burden and may require a franchisor to employ additional dedicated staff to ensure the information is disseminated to franchisees within 14 days.

Disclosure to prospective franchisees

Current law: Currently, a franchisor is required to give prospective franchisees a copy of the Code and a Disclosure Document at least 14 days prior to entering into or renewing or extending a franchise agreement or the payment of a non-refundable fee to the franchisor.

New law: The changes mean that a franchisor will additionally need to provide the franchisee or prospective franchisee with a copy of the franchise agreement "in the form in which it is to be executed". This requirement will pose practical difficulties for franchisors. Initially, the Government had proposed to use the words "...in the form in which it is intended to be executed".

The new wording would appear to require franchisors to provide prospective franchisees with the franchise agreement in is final form. In order to ensure compliance, the franchise agreement will need to be negotiated and the execution version sent to the franchisee and there will then be a 14 day waiting period before the franchisee can execute the franchise agreement. Combined with the existing seven day cooling off period, this 14 day delay may cause delays in the recruitment of franchisees.

Reporting requirements of marketing funds

The changes to the Code will increase the regulations around marketing funds:

• Franchisors will have four months to prepare the financial statement detailing the marketing fund’s receipts and expenses and to finalise any audits. (Currently such statements need to be prepared and audited within three months.)
• Franchisors will be required to provide a copy of the marketing fund statement, along with a copy of any auditor’s report, to every franchisee within 30 days of preparing the report. (Currently such statements only need to be provided on written request.)
• It is will be possible to opt out of the audit requirements if 75% of franchisees contributing to the marketing fund agree and the agreement is reached by a vote taken either within five months of the end of the financial year or within two years of a previous vote. (This means that franchisors will need to have regular votes of franchisees in order to continue an opt out of the requirement for auditing of the marketing fund statement.)

These more prescriptive guidelines will again increase the administrative burden on franchisors, especially in terms of ensuring that statements (and, where applicable, audit reports) are provided to all franchisees within the assigned time period.