Preparing for the changes to the Franchising Code

• foreign franchisors must now prepare a disclosure document and have it ready for 1 March 2008, and
• your franchise relationship with your franchisees will, from 1 March 2008, be considered ‘sub-franchises’ for the purposes of the Code. This changes your disclosure requirements under the Code. Under section 6B of the Code, you must provide your franchisees and prospective franchisees with both your disclosure document and the disclosure document of your foreign franchisor (this disclosure can be provided in a joint disclosure document).

Therefore, you should inform your foreign franchisor of its new obligations under the Code and, most importantly, ensure they prepare a disclosure document for 1 March 2008.

2 Check your franchise agreement for waivers

The changes to the Code include a prohibition on franchise agreements containing a waiver of any verbal or written representations made by the franchisor. A ‘waiver’ is a voluntary relinquishment or abandonment of a legal right. Waiver clauses in franchise agreements do not always appear obvious. Franchisors should carefully check their franchise agreements for any waivers and ensure they are removed.

3 Do your franchisees pay money into a marketing or other co-operative fund?

The amended Code includes a new financial reporting requirement for franchisors with marketing or other co-operative funds. The previous requirement for franchisors to provide a copy of the financial statement to franchisees only upon request has been removed from the Code. From 1 March 2008, once the annual financial statement and, if necessary, audit of the statement is prepared, franchisors must give a copy of the statement (and audit) to all their franchisees within 30 days of preparing the statement and audit respectively.

4 Review your disclosure timing and procedures

Most franchisors are already aware that from 1 March 2008 they will need to attach to their disclosure document a copy of the franchise agreement ‘in the form in which it is to be executed’ by the franchisee. This means that from 1 March 2008 franchisors must attach the specific franchise agreement (prepared for each franchisee) to each individual disclosure document. If the terms of the franchise agreement are subsequently negotiated after the disclosure, the franchisor must provide a further disclosure document with that amended franchise agreement attached to it.

This will obviously delay the franchisee recruitment and sign-up procedures of some franchise systems. It will also affect a franchisors ability to accept non-refundable payments from franchisees until the correct disclosure is provided and the franchisor receives signed s11 certificates relating to that correct disclosure. It is therefore important that franchisors review their recruitment procedures insofar as they relate to the timing of disclosure, receipt of payments and signing of the franchise agreement and s11 certificates.

5 Amend your disclosure document

A number of changes are necessary to the disclosure document. These changes include the following additions:

• a further paragraph to the statement on the first page
• disclosure of ‘officers’ of the franchisor (rather than simply those people who are likely to have management responsibilities). ‘Officers’ has the same meaning as in the Corporations Act, which has a wide definition and includes people who participate in making decisions that effect a substantial part of the company
• contact details of past franchisees
• the names of businesses from whom the franchisor receives rebates or financial benefits, and
• a number of other smaller technical changes.

These changes will likely involve franchisors gathering a large amount of additional information, which is a time consuming exercise. Get the ball rolling now before it is too late.

Thomson Playford Cutlers works with franchisors as a strategic partner to improve overall network performance. We manage compliance issues and address the legal considerations that contribute to franchise network efficiency, profitability and expansion.