INSIGHTS

THE NEW RULE BOOK

Revisions to the Franchising Code of Conduct aim to help franchisees. Check them out.

Franchising rules and regulations are changing. The industry code, the Franchising Code of Conduct, governs the relationship between franchisees and franchisors.

In 2017 it underwent a parliamentary inquiry, which questioned the code’s effectiveness; a taskforce in 2019 made various recommendations; and now the federal government has authorised some revisions.

New rules are in place from July 1 2021 so that means if you’ve looked at the code earlier than July, some of that information will now be out of date.

The revisions imposed have been introduced as a way of making franchisees more secure in the franchise relationship with the franchisor.

Key to the reforms have been increased transparency and boosting franchisees’ rights.

While the introductions have been welcomed by official bodies such as the Franchise Council of Australia and the Australian Small Business and Family Enterprise Ombudsman, implementing the rules is more of a challenge for franchisors and lawyers.

Specialist franchise lawyer Robert Toth of law firm MMRB believes the changes after the three-year delay from the inquiry will help to better protect franchisees. But he points out there is still commercial risk going into any business opportunity and getting expert advice will limit the risks.

As a franchise buyer, there are some crucial changes you need to consider.

WHAT’S CHANGED?

A new key fact sheet has to be supplied by the franchisor when you receive the company’s disclosure document. It aims to provide an improved scope of financial disclosure, including information on goodwill and supplier rebates.

Franchisors must provide disclosure around leasing and any franchisor conflict of interest.

If you decide to go ahead and buy a franchise, whether this is from an existing franchisee, or a brand new site you are purchasing from the franchisor, you will now have a 14-day cooling off period. This is a doubling of the previous seven-day cooling off period.

This means if you change your mind after first paying any non-refundable money to the franchisor or signing the franchise agreement within the 14-day cooling off period, you can still exit the franchise. Although you are entitled to a refund the franchisor can retain a certain amount from the money you paid provided this is clearly set out in the agreement and disclosure document.

Similarly, franchisees are now able to request the early termination of their franchise agreement in writing at any point

The new mandatory Franchise Disclosure Registry, which is scheduled for release in early 2022, is key to providing prospective franchisees with vital information needed prior to entering a binding franchise agreement.

during a franchise term, giving reasons, and the franchisor must respond within 28 days in writing either agreeing to termination or rejecting it, again giving reasons.

Franchisors cannot ask for franchisees to cover all the franchisor’s “indeterminate” future legal costs relating to the franchise agreement, although there is not yet clarity around what this constitutes. Franchisors can still charge an up-front fixed fee like a document fee to prepare and negotiate the franchise agreement as a once-off payment.

Franchisors also cannot commit franchisees to unexpected capital expenditure across the network without agreement from a majority of the franchisees.

Franchisors are also prohibited from making unilateral retrospective agreement changes without the franchisee’s consent.

The code amendments also allow for improved dispute resolution processes with ASBFEO (the new Ombudsman body appointed) and include a specific multifranchisee process where a number of franchisees have a similar dispute against the franchisor.

This is a win for franchisees as in the past franchisors may have tried to divide and conquer franchisees one by one.

Restraints of trade restrictions on franchisees are limited now to a serious breach of an agreement and therefore non-compete clauses are less enforceable by franchisors.

Other amendments prevent a franchisor from contractually passing on to a franchisee future indeterminate legal costs, such as legal costs to renew or transfer the agreement or even for a breach notice relating to the franchise agreement.

In 2022 a registry of franchise documents will be introduced, designed to bring transparency to the purchasing process by housing key franchisor documentation in one repository.

Australian Small Business and Family Enterprise Ombudsman Bruce Billson said the significant reforms will help level the playing field across the franchising sector.

Increased powers for the office of the ASBFEO will help resolve disputes in a cost-effective and timely manner, he said.

“This supports a no-surprises, collaborative and mutually respectful commercial relationship between franchisees and franchisors.

“Allowing my office to facilitate group mediation when several franchisees are in a similar dispute with the same franchisor, is another critical reform that will help restore confidence in this sector.”

Bruce Billson said the code changes mean prospective and current franchisees will be better armed with the information necessary to run their business.

“This includes more transparency around the marketing fund, with an annual financial statement which sets out meaningful information regarding expenditure. Greater visibility around rebates and leasing arrangements will be achieved by these reforms.

“The new mandatory Franchise Disclosure Registry, which is scheduled for release in early 2022, is key to providing prospective franchisees with vital information needed prior to entering a binding franchise agreement.”

SO WHAT SHOULD YOU DO?

You can read the code revisions for yourself at https://www.legislation.gov.au/ Details/F2021L00670

Get good advice from a specialist franchise lawyer and accountant who are members of the FCA, understand franchising and are up-to-date with the legal changes. It’s worth seeking out franchise-friendly professionals who can provide expert advice before you buy the business.

Undertake a free online Pre-Entry Franchise Education course provided by Franchise-Ed and supported by the Australian Competition and Consumer Commission.

Download or listen to the ACCC’s Franchisee Manual. At time of press, the ACCC was working to update the information to reflect the new rules imposed in July. n