The Federal Government has substantially changed the Information Statement to be provided to prospective franchisees as part of the pre-disclosure process. It has also clarified that the Information Statement must be given before the other documents given to a prospective franchisee (14 days before a prospective franchisee enters into a franchise agreement).
When is an Information Statement to be Provided?
Under clause 9 of the Franchising Code a franchisor must give to a prospective franchisee (at least 14 days before the prospective franchisee enters into a franchise agreement or pays a non-refundable deposit):
- a copy of the franchise agreement in the form in which it is to be executed;
- a copy of the disclosure document relating to the franchise,
- a copy of the key facts sheet,
- a copy of the Franchising Code, and
- a copy of the lease or other occupancy right (if applicable).
Clause 11 of the Franchising Code now makes in clear that the Information Statement must be given to a franchisee as soon as practicable after the franchisee applies or expresses an interest in acquiring a franchise and before the documents set out above are given.
contents of New Information Statement
The new Information Statement is a more user friendly document than it's predecessor.
Previously, the Information Statement was annexed to the Franchising Code and was in the same form as the Franchising Code.
The Information Statement is now published on the ACCC's website.
In addition to the information which was previously provided in the Information Statement, the new Information Statement sets out a number of questions for a prospective franchisee to ask or consider, including:
- How long has the franchise system been operating?
- What success has it had and where?
- How much working capital or extra funds will you need to get the business established?
- How long will it take you to break even after paying the costs of setting up the business?
- Can you only get products from an approved supplier?
- Does the franchisor receive rebates from suppliers and how is that rebate used?
- Will you pay franchise fees even if you are not making a profit?
- Will you make enough money to pay yourself as well as any staff?
- Have any profit or earning promises been made to you?
- Will you be able to renew the agreement if you want to?
- When the franchise term ends, what are you entitled to (such as paid market value for your equipment or for goodwill) and what happens if you are in debt?
- Are there any restrictions on you starting a similar business if the agreement is not renewed?
- If the franchise ends unexpectedly, how would this impact you?
background
The Federal Government in its response to the Fairness in Franchising Report indicated that it would amend the Information Statement which was previously provided to franchisees to:
- include reference to the ACCC’s franchisee manual to emphasise key rights and information;
- include advice to warn and educate prospective franchisees about the risks associated with estimating labour costs, particularly for greenfield (new) sites;
- advise prospective franchisees that their obligations include obtaining information about employment matters and compliance with relevant laws;
- advise prospective franchisees that if the franchisor becomes insolvent, franchisees may lose the benefit of shared funds such as marketing funds;
- warn prospective franchisees of the need to obtain advice about restraint of trade clauses before entering into the franchise agreement;
- emphasise the importance of prospective franchisees understanding the requirements of the Franchising Code of Conduct before entering into a franchise agreement;
- draw prospective franchisee's attention to the risk of practices of “churning” and “burning”;
- educate franchisees on the operation of “no agent’ and “entire agreement” clauses in a franchise agreement.
The new Information Statement includes the amendments foreshadowed by the Federal Government in its response to the Fairness in Franchising Report.
Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.
