Franchising Code frequently asked questions

The current Franchising Code will be repealed and replaced with a new Franchising Code of Conduct from 1 January 2015.

Our frequently asked questions provide guidance for franchisors, franchisees and prospective franchisees.

Franchisors

What will I need to do to comply with the new Code?

From 1 January 2015, you must:

  • act in good faith
  • put marketing fund money in a separate account
  • contribute to the marketing fund, on the same basis as other franchisees, for each unit of the business that you operate
  • keep documents:
    • given to you by prospective/existing franchisees under the Code
    • that support claims in your disclosure document
  • give an information statement to prospective franchisees

From this date, you must also ensure that your franchise agreement does not include a requirement that actions or proceedings in relation to a dispute (including mediation) be brought in a State or Territory other than where franchisee based, or that the franchisee pay your costs in settling a dispute.

You also will not be able to require your franchisees to undertake significant capital expenditure. However, you can require franchisees to incur expenditure if it:

  • is approved by the franchisee
  • was disclosed to the franchisee in the disclosure document they received
  • will be incurred by a majority of franchisees and a majority of those franchisees approve the expense
  • is necessary to comply with legislative obligations or
  • is considered necessary by you as a capital investment in the franchised business (justified by a statement setting out the rationale for making the investment, the costs, as well as the risks and benefits).

You should put procedures in place to make sure that you are ready to comply with the Code when it commences.

Can I ‘contract out’ of the new Code?

No. If you enter into, renew, transfer, extend or otherwise vary a franchise agreement after 1 January 2015, the new Code (in its entirety) will apply to that agreement.

You are not able to avoid the operation of the Code by inserting a clause in your agreement to the effect that the new Code, or any of its provisions, do not apply.

When do I have to give an information statement?

You will need to give an information statement to a prospective franchisee as soon as possible after they formally apply, or express an interest in, buying a franchised business.

Example: A franchisor receives a phone call from a prospective franchisee. The prospective franchisee asks detailed questions about the system, the price of a franchise and the next steps in obtaining more information. The franchisor directs the prospective franchisee to the application form on its website, which she completes.

In this situation, the franchisor must provide the prospective franchisee with an Information Statement as soon as possible after it receives the completed form.

You are not required to provide an information statement to a franchisee who is proposing to renew or extend their agreement.

When do I need to update my disclosure document?

You have until 31 October 2015 to update your disclosure document to comply with the new Code. Of course, you can choose to update it earlier.

Going forward, you will then have to update your disclosure document annually within four months of the end of your financial year.

Example: A franchisor operates on the Australian 1 July – 30 June financial year. The franchisor updates its disclosure document on 31 October 2015 to comply with the Franchising Code.

The franchisor would next be required to update its disclosure document by 31 October 2016 (four months after the end of its next financial year).

Example: An Australian subfranchisor (with an American master franchisor) operates on a 1 January – 31 December financial year. The subfranchisor updates its disclosure document on 31 October 2015 to comply with the Franchising Code.

The subfranchisor would next be required to update its disclosure document by 30 April 2016 (four months after the end of its next financial year).

Example: A New Zealand based franchisor (with franchisees in Australia) operates on a 1 April – 31 March financial year. The franchisor updates its disclosure document on 31 October 2015 to comply with the Franchising Code.

The franchisor would next be required to update its disclosure document by 31 July 2016 (four months after the end of its next financial year).

Do master franchisors have to provide disclosure documents to subfranchisees?

In general, a master franchisor will not be required to provide a disclosure document to a subfranchisee.  However, if the master franchisor is a party to the subfranchise agreement (the agreement between the subfranchisor and the subfranchisee), it will have to provide a disclosure document to the subfranchisee.

What are my disclosure obligations between 1 January and 31 October 2015?

As you have until 31 October 2015 to update your disclosure document, you may use your existing disclosure document up until this date when dealing with prospective or existing franchisees (unless you choose to update earlier).

An ‘existing disclosure document’ means a valid disclosure document created in accordance with the 1998 Code.

However, you will have to continue to notify franchisees and prospective franchisees of certain materially relevant facts if the matter is not mentioned in your disclosure document.

If updated financial documents become available after you have provided a disclosure document to a prospective franchisee but before they have entered into the agreement, you should provide a copy of the documents to the prospective franchisee before they enter into the agreement.

If an existing franchisee requests a disclosure document today, how many days do I have to provide the document? 

If an existing franchisee requests a disclosure document you have up to 14 days to provide the document.

What are my obligations under the Code regarding marketing fund money?

If you operate a marketing fund, the Code imposes certain restrictions on how you deal with the marketing and advertising fees contributed to that fund.

From 1 January 2015, you must:

  • Keep the money in a separate bank account from your other money
  • Contribute to the fund, on the same basis as other franchisees, for each corporate store that you operate
  • Only spend marketing money on expenses that:
    • were disclosed in your disclosure document
    • have been agreed to by a majority of franchisees
    • are legitimate marketing or advertising expenses
    • represent the reasonable costs of administering and auditing the fund.

You must prepare an annual financial statement detailing the fund’s receipts and expenses. The statement must provide meaningful information about the money received by the fund, and how it is spent.

You must have the statement audited by a registered company auditor, unless 75% of the franchisees in Australia that contribute to the fund vote not to audit the statement. You are entitled to vote on behalf of any corporate stores. The vote must be revisited every year (under the 1998 Code, an exemption from auditing the marketing fund statement would operate for three years).

The statement and auditor’s report (if required) must be prepared within four months of the end of your financial year. Copies of the documents must be provided to franchisees within 30 days of their preparation.

Under the 1998 Code, I have an exemption from auditing my marketing fund until 2017. Do I lose this exemption under the new Code?

No. If you have a current exemption which will cover you into future financial years, you will not be required to audit your marketing fund financial statements for those financial years. However, once your existing exemption expires you will have to comply with the new Code and audit the financial statements each year (subject to the annual vote).

What documents am I required to keep under the new Code?

You will be required to keep any documents or written things that the Code requires or allows a franchisee or prospective franchisee to provide to you. This includes:

  • confirmation of receipt of disclosure document (cl 10(1))
  • professional advice statement (cl 10(2))
  • marketing fund audit votes (cl 15(2))
  • request to transfer franchise to a third party (and any additional information provided regarding the transfer) (cl 24(1) and (2))
  • request for a disclosure document (cl 16)
  • notice of dispute (cl 38(1) or 40(1))
  • request not to disclose former franchisee’s details (cl 32)

In addition, you will be required to keep any documents that you use to support any claims or statements in your disclosure document. For example, if you provide a prospective franchisee with summarised historical earnings figures as part of the disclosure document, you must keep the documents used to arrive at those figures.

This obligation applies to physical, as well as electronic, documents or written things.

These documents must be kept for six years from when they were created.

The ACCC can audit franchisors to monitor your compliance with the Code. For more information see the ACCC’s audits page.

Under the new record keeping obligations, can documents be kept electronically only?

Yes. Under the Electronic Transactions Act 1999, a requirement to record information or retain a document can be met electronically.

Do the penalty/infringement notice provisions apply to franchise agreements entered into prior to 1 January 2015?       

Yes, the penalty provisions apply to agreements entered into prior to 1 January 2015, but only to conduct occurring on or this date. This means that penalties or infringement notices are not available for breaches of the Code that occurred prior to 1 January 2015.

Franchisees

I am an existing franchisee. What does the new Code mean for me?

From 1 January 2015 you must act in good faith towards your franchisor and they must act in good faith in their dealings with you.

If you are required to contribute to a marketing fund, the new Code will limit how the franchisor deals with the fees contributed to the fund. Your franchisor may only use the fund to meet expenses that either:

  • were disclosed in the disclosure document
  • are legitimate marketing or advertising expenses
  • have been agreed to by a majority of franchisees or
  • reflect the reasonable costs of administering and auditing the fund.

Your franchisor must also provide you with more information about the marketing fund’s receipts and expenses (that is, who contributes to the fund and what the money is spent on).

Your franchisor cannot require you to undertake significant capital expenditure during the remaining term of your franchise agreement. However, the franchisor can require you to incur expenditure if it:

  • is approved by you
  • was disclosed to you in the disclosure document you received
  • will be incurred by a majority of franchisees and a majority of those franchisees approve the expense
  • is necessary to comply with legislative obligations or
  • is considered necessary by the franchisor as a capital investment in the franchised business (justified by a statement setting out the rationale for making the investment).

Prospective franchisees

I am thinking about buying a franchise. What does the new Code mean for me?

If you are proposing to enter into a franchise agreement on or after 1 January 2015, the new Code will apply to you.

The Code will require you to act in good faith when dealing with a franchisor. The franchisor must also act in good faith towards you. The obligation to act in good faith applies to pre-contractual negotiations. However, the good faith obligation will not require the franchisor to offer you an option to renew and it is also unlikely to compel the franchisor to make any changes you request.

The franchisor must also provide you with an information statement when you formally apply, or express an interest in, buying a franchised business. The information statement is a short document which sets out some of the risks and rewards of franchising.

You should note that the disclosure document you receive may differ from the requirements of the new Code. This is as franchisors are able to use their existing disclosure document until 31 October 2015. If you have any questions about the disclosure document you receive, you should speak to the franchisor.

The franchisor will not be able to require you to undertake significant capital expenditure during the term of your franchise (although there are some exceptions). You should read your disclosure document carefully as the franchisor can require you to meet any expenses set out in your disclosure document.

If you enter into a franchise agreement on or after 1 January 2015, the franchisor cannot require you to:

  • sign a document releasing the franchisor from liability towards you or waiving any verbal or written representations made to you
  • bring an action or proceeding in relation to a dispute (including mediation), in a State or Territory outside that in which you are based
  • pay the franchisor’s costs in relation to settling a dispute.

If your franchise agreement contains such a clause it will have no effect.

For more information on the Code and how it will apply to you, read the ACCC’s franchisee manual.

Published date: 
8 December 2014

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