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Franchising Key Facts Sheet

By Stephen on Apr 20, 2021 4:13:58 AM

Updated on 23 June 2021

The Federal Government has released the Key Facts Sheet which from 1 July 2021 must be provided to a prospective franchisee in addition to a disclosure document.

The Key Facts Sheet contains a subset of information which is provided in the disclosure document.

The Key Facts Sheet must be updated each year within 4 months after the end of the financial year (in the same way that the disclosure document must be updated).

Contents
What is the Key Facts Sheet?
What Information does the Key Facts Sheet Contain?
Key Facts Sheet Mock Up 1
Key Facts Sheet Mock Up 2
Key Facts Sheet Mock Up 3
Amended Information Statement

What is the Key Facts Sheet?

The Federal Government proposed in its response to the Fairness in Franchising Report that it would introduce a Key Facts Sheet (previously referred to as the Key Disclosure Document Information Fact Sheet) which would contain information taken from a franchisor’s disclosure document.

In particular it was stated that the Key Facts Sheet would:

  1. provide important information for a franchisee to make an initial assessment about a franchise offer;
  2. include the disclosure of a franchisor’s interests in a leasing arrangement;
  3. improve disclosure of financial information to help franchisees, amongst other things, make an assessment of the time that they would need to commit to the franchise business;
  4. include clarification of a franchisee’s entitlement to goodwill.

In late 2020 the Federal Government released three Mock Up Versions of the Key Facts Sheet for comment. However, the final version of the Key Facts Sheet released in June 2021 differs from each of these mock ups.

 

What Information does the Key Facts Sheet Contain? 

  1. Details about the Franchisor, including a statement about whether the franchisor has reasonable grounds to believe it will be able to pay its debts when they are due.

  2. Details about Major Disputes, including a question which asks the franchisor to disclose the percentage of franchisees in the franchise system that were party to a mediation, conciliation or arbitration process in the last financial year.

  3. Details about Current and Past Franchisees, including details about the following events in the last three financial years:
     
    1. a franchise was transferred;
    2. a franchise ceased to operate;
    3. a franchise was terminated by the franchisor;
    4. a franchise was terminated by the franchisee;
    5. a franchise agreement was not extended;
    6. a franchise was bought back by the franchisor;
    7. a franchise agreement was terminated and the business was acquired by the franchisor.

  4. Details about the Territory or Site for the Business, in particular whether the franchisee can expect to face competition and whether the franchisor has an interest in a lease that will be used for the operation of the franchised business.

  5. Details about the supply of goods and services to the franchisee, including whether the franchisor has an interest in any supplier and whether the franchisor will receive a rebate from supplying goods or services to the franchisee.

  6. Details about what the franchisee has to pay to operate the franchise, including the following tip:
    When considering operating costs, remember to look at how many staff (including you) are needed to operate the business, the average working hours they would work and the costs of hiring staff.

  7. Details about the marketing fund, including the following warning:
    Note that if the franchisor becomes insolvent, you may not get money back that you have given to the franchisor, including contributions to the marketing funds.

  8. Details about the franchisor's ability to change the franchise agreement, specifically whether the franchisor can change the franchise agreement without the franchisee's consent.


  9. Details about Earnings, including whether the disclosure document includes historical or projected earnings and the following statement:
    The Franchising Code requires a franchisor to state that to the best of their knowledge any earnings information provided is accurate unless they specify otherwise. It is important to review this information with your accountant or business adviser.

  10. Details about what happens at the end of the franchise agreement, including whether the franchisee will be subject to any restraint of trade.

 

Key Facts Sheet Mock Up 1

The first mock up of the Key Facts Sheet released in November 2020 contained:

  1. Details about the franchisor, including the following tip:
    "Gaps in work history and a relatively new system could be indications that the franchise system has not been tested or that the franchisor is inexperienced in business or in the franchise system."

  2. Details of litigation against the franchisor, or a director or associate of the franchisor in Australia, including the following tip:
    "If yes to any of the above, you should exercise caution and conduct further research on these instances".

  3. Details of Existing and Previous Franchisees, including the following tip:
    "Exercise caution and conduct more research:
    • if you find most ex-franchisees are unwilling to speak to you or have been told they cannot do;
    • if the franchisor tells you that you can only speak to a set number of ex-franchisees; and/or
    • if the franchisor does not provide mobile phone numbers or personal emails so you cannot easily contact them."

  4. Details of the franchise site or territory;

  5. Details of lease arrangements, including the following tip:
    "Check if the franchisor is negotiating the lease of multiple sites within the same vicinity. If so, how can you be sure you are getting the best terms for your lease."

  6. Details of the supply of goods or services to the franchisee;

  7. Details of the supply of goods or services by the franchisee, including the following tip:
    ".. there may be instances where you may need to stock goods and services that are less profitable and/or do not sell well at your business".

  8. Details of the supply of goods or services online;

  9. Details of payments, including the following tip:
    "Exercise caution and conduct more research if:
    • there are no cost amounts for wages, rent or inventory;
    • you can't work out the cost of setting up and running the business;
    • you are told how much money you can make but there is no solid evidence to support that".

  10. Details of the marketing fund, inlcuding the following tip:
    "Exercise caution and conduct more research if:
    The franchisor does not contribute to the fund on the same basis as other franchisees;
    It is not clear what the marketing fund was used to pay for.
    If the franchisor uses the funds in a way that you do not agree with, consider if the franchise system is right for you."
  11. Details of any unilateral variations of the franchise agreement, including the following tip:
    "Consider if you would be comfortable if the franchisor made changes to your agreement in the future. If not, consider if franchising is right for you."

  12. Whether the franchisor has the right to terminate the franchise agreement, including the following tip:
    "If yes, consider any capital or investments you may need to put into the business and what you would do if your business was terminated".

  13. Whether the franchisee has the right to terminate the franchise agreement, including the following tip:
    "If no, consider if you would be able to cover costs of keeping the business funning for the duration of the agreement even if the business was unprofitable".

  14. Details of the arrangements to apply at the end of the franchise agreement, including the following tip:

    "Consider and check what the pre-conditions are (if any) for extending or renewing your agreement. For example, you may be asked to spend a lot of money to renovate the site to get another term".

  15. Details of earnings information, including the following tip:
    "It is highly advisable to seek financial advice from a professional who has expertise in franchising".

  16. Financial details, including the following tip:
    "Exercise caution if:
    • you are not given a financial report; and
    • the report shows that the business is struggling."

 

Key Facts Sheet Mock Up 2

The second mock up of the Key Facts Sheet released in November 2020 was similar to the first, but did not contain the tips set out above.

The second mock up of the Key Facts Sheet contained:

  1. Details about the franchisor;
  2. Details of litigation against the franchisor (not a director or an associate of the franchisor);
  3. Details of existing and previous franchisees;
  4. Details of Master Franchises;
  5. Details of the franchise site or territory;
  6. Details of lease arrangements;
  7. Details of the supply of goods or services to the franchisee;
  8. Details of the supply of goods or services by the franchisee;
  9. Details of the supply of goods or services online;
  10. Details of payments, including pre-payments, establishment costs and other payments;
  11. Details of the marketing fund;
  12. Details of financing;
  13. Details of any unilateral variations of the franchise agreement;
  14. Whether the franchise agreement provides for the arbitration of disputes;
  15. Whether the franchisor and/or the franchisee have the right to terminate the franchise agreement;
  16. Details of the arrangements to apply at the end of the franchise agreement;
  17. Whether the franchisor will amend the franchise agreement before the transfer of the franchise;
  18. Details of Earnings Information;
  19. Financial Details.

 

Key Facts Sheet Mock Up 3

The third mock up of the Key Facts Sheet released in November 2020 was a less detailed document than the first two mock ups.

The third mock up of the Key Facts Sheet contained:

  1. Details about the franchisor;
  2. Details of litigation against the franchisor, or a director or associate of the franchisor in Australia;
  3. Details of existing franchisees;
  4. Whether any franchisees operate under a master franchisor;
  5. A summary of the franchise site or territory information contained in the disclosure document;
  6. Details of lease arrangements;
  7. A summary of the supply of goods and services information contained in the disclosure document;
  8. Estimates of total prepayments and establishment costs;
  9. Details of other payments;
  10. A summary of the marketing fund information contained in the disclosure document;
  11. A summary of financing information contained in the disclosure document;
  12. A summary of the unilateral variation information contained in the disclosure document;
  13. Whether the franchise agreement provides for arbitration;
  14. Whether the franchisor and/or the franchisee have the right to terminate the franchise agreement;
  15. A summary of the arrangements to apply at the end of the franchise agreement contained in the disclosure document;
  16. Financial Details.

 

amended Information Statement 

In addition to the Key Facts Sheet, the Federal Government in its response to the Fairness in Franchising Report indicated that it would amend the Information Statement (Annexure 2 to the Franchising Code of Conduct) which is currently 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 franchisees 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.

While the proposed Information Statement contained in the Franchising Code Exposure Draft:

  • advises prospective franchisees to find out whether they will be entitled to a share of marketing funds if the franchisor becomes insolvent, the proposed Information Statement does not specifically advise prospective franchisees that they may lose the benefit of shared funds;
  • advises prospective franchisees to think about and question whether there are any restrictions on the prospective franchisee starting a similar business if the agreement is not renewed, the proposed Information Statement does not warn prospective franchisees of the need to obtain advice about restraint of trade clauses before entering into the franchise agreement.

Submissions about the proposed amendments to the Information Statement closed on 4 December 2020.

 

Licensing vs Franchising

 

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.

Stephen

Written by Stephen