What is a Disclosure Document?

What is a Disclosure Document?

 

Under the Franchising Code of Conduct (the Franchising Code) all Australian franchisors must issue a disclosure document in a prescriptive form to a prospective franchisee, or to an existing franchisee when the franchisee is proposing to renew or extend the scope or term of a franchise agreement.

A disclosure document includes information about the franchise, including the number of franchisees, the intellectual property, likely fees and costs, and information about goods and services offered in the franchise.

One of the stated purposes of the Franchising Code is to improve standards of conduct and practice in the franchise industry by better disclosure of information to inform decision making (section 15 Franchising Code).

 

 

Disclosure Document Requirements

 

The disclosure document must be:

• signed by a director or other officer of the franchisor,
• updated annually within 4 months of the end of the financial year,
• given to a new potential franchisee or to an existing franchisee looking to renew or extend their franchise agreement at least 14 days before the franchisee signs the new franchise agreement. 

In addition to the disclosure document, the franchisor must provide the prospective franchisee with the documents set out in section 23(2) of the Franchising Code. These documents include a copy of the franchise agreement in its final form [What is a Franchise Agreement?], and a copy of the Franchising Code (together with further documents if the franchisor leases the premises).

 

 

Disclosure Document Contents

A disclosure document will need to contain the following information to comply with the Code.

 

The date of the disclosure document

A disclosure document must include on the first page, the date of preparation of the disclosure document.

The information contained in the disclosure document must be accurate as at the preparation date of the disclosure document or where the disclosure document provides for another date (such as the end of the last financial year) as at that date.

 

Franchisor’s details and business experiences

Franchisors must provide details of the business to be franchised,  the franchisor's associates, and the qualifications and business experience of each officer of the franchisor.

The term "officer" has the meaning given by the Corporations Act 2001.

 

Litigation

The franchisor must provide all details, if there are any, of any present litigation and any litigation which was commenced in the past.  The relevant litigation is generally for matters including fraud, dishonesty and any breach of franchise.

In addition, pursuant to the 2021 amendments to the Franchising Code, the franchisor must include the percentage of franchisees in the franchise system who were a party to a mediation, conciliation or arbitration process in the previous financial year.

 

Existing franchisees

The disclosure document must contain details of all existing franchisees as at the date of the disclosure document. This allows a potential franchisee to contact existing franchisees with any questions they may have about the franchise business.

In addition, the disclosure document must contain details for each of the last 3 financial years about the following events:

• the franchise was transferred;
• the franchise business ceased to operate;
• the franchise agreement was terminated by the franchisor;
• the franchise agreement was terminated by the franchisee;
• the franchise agreement was not extended;
• the franchised business was bought back by the franchisor;
• the franchise agreement was terminated and the franchised business was acquired by the franchisor.

Subject to section 63 of the Franchising Code, the contact details of former franchisees must be included in the disclosure document unless the former franchisees have requested that their details not be included under section 63(2).

Section 63 of the Franchising Code provides that a franchisor must not disclose a former franchisee's personal information to a prospective franchisee unless at least 14 days before, the franchisor has informed the former franchisee that the former franchisee may request that their details not be disclosed. 

 

Intellectual Property

Intellectual Property includes property such as patents, trade marks, copyrights and designs and confidential information [What is Intellectual Property?].

The franchisor must describe and list its intellectual property and outline the conditions which restrict the use of the intellectual property by franchisees.  The franchisor also must provide any details of a licence agreement regarding the intellectual property.

 

Territory

The franchisor must disclose whether the franchise is for an exclusive or non-exclusive territory or whether the franchise is limited to a particular site.

If the franchisor has a site-selection policy then the details of the site-selection policy must also be disclosed.

 

Territory History

The franchisor must provide a prospective franchisee with a history of the territory or site in which it is proposed that the franchise business be operated.  The history is to be provided in a separate document to be included with the disclosure document.

In addition, if the franchisor has an interest in a lease of the premises, that interest will also need to be disclosed in a separate document to be included with the disclosure document.

 

Goods and Services

The disclosure document must contain information regarding the conditions which will be imposed on a franchisee in relation to supply of goods and services.

The ACCC has indicated that names of suppliers and specific types of goods and services should be disclosed, if the details are known as at the date of the disclosure document.

In addition, the disclosure document must detail the nature of any rebate or other financial benefit received from each supplier.

 

Significant Capital Expenditure

The franchisor must state in the disclosure document whether the franchisor will require the franchisee to undertake significant capital expenditure during the term of the franchise agreement.

If the franchisee will be required to undertake significant capital expenditure, the franchisor must include information about:

• the rationale for the expenditure,
• the amount, timing and nature of the expenditure,
• the anticipated outcomes and benefits of the expenditure,
• the expected risks with the expenditure.

 

Fees and Payments

The disclosure document must provide details regarding the requirement and specifics of any franchisee payments to the franchisor or an associate of the franchisor.  This information must include upfront fees and ongoing items such as marketing fees, advertising fees or other financial obligations requiring contributions.

In addition, the disclosure document must provide details regarding any payments to be made to third parties. These payments will include ongoing operating costs which are reasonably foreseeable, such as rent, inventory, wages, and office expenses.  

 

Specific Purpose Funds

If the franchisor administers a specific purpose fund to which franchisees contribute, then details of the specific purpose fund and how the payments made to the specific purpose fund will be used must be disclosed.

A specific purpose fund is any fund controlled or administered by the franchisor or an associate of the franchisor, that franchisees are required to contribute to under the terms of their franchise agreement.

The fund must be used for a clearly defined common purpose, such as marketing.

 

Ending the Franchise Agreement Early

The disclosure document must include a summary of the rights under the franchise agreement, that both the franchisor and the franchisee have to end the franchise agreement early. This summary should include more than just directing a prospective franchisee to clauses in the franchise agreement.

 

End of Term Arrangements

One of the important issues in franchising is what happens once the franchise agreement expires. Most franchise agreements include  a term providing that the goodwill in the franchise business belongs to the franchisor.

In addition, most franchise agreements contain a restraint of trade clause. [Legal Challenges to Restraint of Trade Clauses in Franchising: What Franchisees Need to Know]  

The disclosure document must set out details of the arrangements to apply at the end of the franchise agreement, including whether the franchisee will have the option to renew or extend the franchise agreement, whether the franchisee has any right to goodwill and whether the franchise agreement contains a restraint of trade clause.

 

Earnings Information

A disclosure document must include earnings information (either in the disclosure document or as an attachment to the disclosure document), if a franchisor has given earnings information to a prospective franchisee before giving the franchisee a copy of the disclosure document, or if the franchisor proposes to give earnings information to the prospective franchisee.

 

Financial Information

A disclosure document must contain a statement which confirms the franchisor's solvency, together with the financial statements of the franchisor for the last two financial years or an independent audit report.

 

When must a disclosure document be given to a prospective franchisee?

A disclosure document must be given to a prospective franchisee or a franchisee at least 14 days before the prospective franchisee or the franchisee enters into, renews or extends the term or scope of the franchise agreement.

 

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.