expert advice: Seva Surmei | Dmaw Lawyers
FRANCHISOR DISCLOSURE –
HERE’S WHAT YOU NEED TO KNOW Seva Surmei is a principal in the transactions team at DMAW Lawyers, which is a leading commercial law firm providing services throughout Australia. She specialises in franchising, licensing and distribution and acts for major franchisors in the establishment, development and operation of franchise systems including advising on compliance with the Code. Seva is a committee member and secretary of the Franchise Council of Australia, a committee member of the Women in Franchising group and has recently been named as a leading lawyer in franchise law by Best Lawyers (2021 and 2022 editions) and franchise lawyer of the year Adelaide (Best Lawyers 2022 edition). Ph: 0421 931 777 | Email: ssurmei@dmawlawyers.com.au | DMAW - https://dmawlawyers.com.au/
It’s critical for a franchisee to do some due diligence before signing a franchise agreement. This includes reviewing the mandatory information a franchisor must provide to a prospective franchisee under the Franchising Code of Conduct, which is the key piece of legislation governing the arrangements between parties to a franchise agreement. As a result of recent changes to disclosure obligations under the Code (2021), even more information must now be provided to a franchisee up-front. The amount of information a franchisee receives is overwhelming for many. Here is a guide for what to look out for when navigating your way through the paperwork leading up to the important moment of signing a franchise agreement.
Disclosure period The disclosure document is designed to help a franchisee make a reasonably informed decision about the franchise and must be provided to a franchisee at least 14 days before a franchise agreement is entered into. The period between receiving that document and signing the franchise agreement is referred to as the disclosure period. That 14 day disclosure period is a good time to seek advice from a lawyer before finally committing by signing the franchise agreement. 22 business franchise MAGAZINE
What information is disclosed The disclosure document must be in the form prescribed by the Code and must contain information about various things, including: • the franchisor (including involvement in any disputes), the franchise system and current franchisees; • proposed arrangements for the supply of goods and services to and by the franchisee, including increased disclosure about rebates payable to the franchisor; • estimated payments for establishing and operating the business; • details about the marketing fund (if applicable).
What documents accompany the disclosure document? The disclosure document must be accompanied by a copy of the Code and a copy of the franchise agreement in the completed form in which it is to be executed (not just a template). Since the 2021 changes, the disclosure document must now also be accompanied by additional documents including: • key facts sheet – the key facts sheet is a new short form document which provides a snapshot of some of the key information contained in the disclosure document; • headlease documents – a copy of the lease of the premises held by the franchisor must
be provided if the franchisor proposes to sublease the premises to the franchisee; • earnings information – if the franchisor has given, or proposes to give, earnings information (such as historical or projected earnings data) then it must be provided to the franchisee with the disclosure document; • significant capital expenditure – additional information must be disclosed about any ”significant capital expenditure” that might be incurred by the franchisee.
What should a prospective franchisee be concerned about? Aspects of a franchise arrangement that often lead to concerns or disputes include matters related to the marketing fund, significant capital expenditure and termination rights/ end of term arrangements, which are described below. Marketing funds A marketing fund may be established by a franchisor to collect funds for marketing or promotional activities for the franchise network. Franchisees contribute to the fund and a franchisor must also contribute to the fund for each of its company-owned stores on the same basis as a franchisee. A franchisor must prepare an annual financial statement in relation to the fund, which must be included in the disclosure document (as well as shared with franchisees already in the
