Franchising 101: Why Disclosure Matters

Franchising within Australia is regulated by the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) (Regulation). Just like other forms of contracts, a franchise agreement (FA) can be a written, oral or even implied agreement.^[1] Despite this, it is always good practice to have FAs in written form.

Entering a franchise agreement

1. Before a prospective franchisee can sign an FA, the franchisor must provide the prospective franchisee a copy of the following documents:^[2]
   1. the agreement in its final form;
   2. the most up-to-date disclosure document;
   3.  the key facts sheet relating to the franchise;
   4. the Regulation; and
   5. any relevant leases, sub-leases, licences, etc. if the franchisee is required to let, sub-let or licence a premises to the franchisee.^[3]
2. Once the prospective franchisee has received these documents, they must wait 14 days to ensure they have properly considered the franchise documents before they may sign the FA and accompanying documents / pay a non-refundable payment to the franchisor.^[4]

Disclosure Document

3. The purpose of the disclosure document is to assist the prospective franchisee in making a reasonably informed decision about joining the franchise and providing them information that is relevant to the operation of the franchised business.^[5]
4. The disclosure document must:
   1. comply with the form requirements detailed in Annexure 1 of the Regulation;
   2. be signed by the franchisor (or its authorised agent);
   3. have a table of contents; and
   4. be maintained and updated within 4 months after the end of each financial year.^[6]
5. It is strongly recommended franchisors comply exactly with the disclosure document requirements or you risk contravening the Regulation. The first page of the disclosure document must comply with the Regulation and the disclosure document must detail a range of areas, including (but not limited to):
   1. the franchisor’s details and relevant persons related to the franchisor entity (this can be directors / company secretaries / shareholders) and their business experience;
   2. any current or past litigation the franchisor or an associate is involved in;
   3. payments required under the franchise agreement, including the franchisor’s estimates of all costs of establishing and running the franchised business;
   4. existing franchises;
   5. details of any intellectual property (ie trademarks) of the franchise;
   6. the franchisor’s requirements relating to the supply of goods or services to the franchisee;
   7. details around the sites or territories that the franchisee may operate in;
   8. details of any marketing funds that the franchisee must contribute to;
   9. how the franchise agreement can be terminated early including summary of each of the franchisor and franchisee’s rights on termination;
   10. financial information, including details surrounding any relevant earnings information (if the franchisor wishes to provide this) and the franchisor’s financial position (ie solvency, financial reports, audited financials, etc.).

Key Facts Sheet

6. Franchisors must prepare a key facts sheet to accompany the FA.^[7] The key facts sheet essentially acts as a summary of the FA which the proposed franchisee can use to assist them in their decision-making of whether they would like to enter the agreement.
7. The ACCC require the key facts sheet be in the same format as found on their website here.

Maintaining the disclosure document and key facts sheet

8. The disclosure document and the key facts sheet must be maintained and updated within 4 months after the end of each financial year.^[8] However, if a franchisor has not entered into any additional FAs that financial year, then they are not required to update their disclosure document or key facts sheet.^[9]
9. Further, before the franchisor can enter into the FA, they must have also received from the prospective franchisee signed statements from an independent legal adviser, business adviser and accountant.^[10]

Failure to comply

10. Franchisors who fail to comply with the disclosure regime under the Regulation can be charged a civil penalty of $187,800 in the 2023-2024 Financial Year / $198,000 in the 2024-2025 Financial Year (600 penalty units).^[11]
11. A failure to comply with the disclosure regime can also result in an FA being unenforceable

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific circumstances. It is intended for information purposes only and should not be regarded as legal advice. Further professional advice should be obtained before taking action on any issue dealt with in this publication.

[1] Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) schedule 1 s 5(1)(a).

[2] Ibid sch 1 s 9(1).

[3] Ibid sch 1 s 9(1A).

[4] Ibid sch 1 s 9(1).

[5] Ibid sch 1 s 8(2).

[6] Ibid sch 1 s 8(3) – (6).

[7] Ibid sch 1 s 9(1), (1A).

[8] Ibid sch 1 ss 8(6), 9A(2).

[9] Ibid sch 1 ss 8(7) – (8), 9A(3).

[10] Ibid sch 1 s 10(2)(a).

[11] Ibid sch 1 s 9(1).