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If you’re a franchisor operating a franchise system in Australia, starting from the 1st of July the clock is ticking to update your Disclosure Document [including the all-important but tedious financial disclosure information] to ensure your franchise system is compliant, and to avoid penalties [around $63,000 per contravention].
The Franchising Code of Conduct (Code) requires that franchisors update their Disclosure Statement within 4 months after the end of each financial year. For most franchise groups operating on the 1st of July to 30th of June financial year, this means that you have until the 31st of October to complete this process.
In addition to updating the content of the Disclosure Document [for example, to reflect the coming and going of franchisees, and changes in management personnel] franchisors must also include detailed financial disclosure. Generally, this requires the franchisor to include its full financial statements for the past 2 financial years or a report from an independent auditor. This type of information can take time to prepare and requires coordination between the franchisor and their accountants and lawyers, so it is important to act early.
Further, if the franchise system has a marketing fund, the Code requires that the franchisor prepare and give to the franchisees an audit of the marketing fund [within the same timeframe].
Experience shows these matters often get left to the last minute. Aside from the potential financial penalties, if the Disclosure Document is not updated by the 31st of October, the franchise system is unable to properly sign-up or renew franchises without giving defective disclosure. This effectively puts the brakes on the franchise system and can create other problems.
If you have any questions about your franchising disclosure obligations before the 31st of October, reach out to the team at businessDEPOT Legal.q