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Rules about disclosing financial information
The Franchising Code of Conduct has specific requirements for when and how to disclose financial information.
Franchisors must tell franchisees and prospective franchisees about their financial position at specific times.
Before a prospective franchisee signs
Before a prospective franchisee signs, the franchisor must give them current financial information.
If a franchisor’s financial details change after they’ve given a disclosure document to prospective franchisees, the franchisor must give the prospective franchisee a copy of the new financial information before they sign a franchise agreement.
New financial information includes:
- a solvency statement
- financial reports, and
- an independent auditor’s report.
When a franchisor is giving earnings information
If a franchisor is going to give a franchisee or prospective franchisee earnings information, the franchisor must give it in:
- the disclosure document, or
- a separate document attached to the disclosure document.
Franchisors cannot provide this information after giving the franchisee or prospective franchisee other pre-franchise documents.
If the franchisor is not providing earnings information, they'll tell franchisees this at Item 20 of the disclosure document.
A solvency statement once a year
Franchisors must update their solvency statement once a year. Franchisees can see the solvency statement by requesting a copy of the disclosure document from the franchisor.
Every year, franchisors must update their financial information under Item 21 of their disclosure document. In particular, franchisors must provide:
- a signed solvency statement that reflects the franchisor’s position at the end of the last financial year, signed by at least one director
- financial reports for the past 2 financial years or an independent audit report about the franchisor’s solvency prepared by a registered company auditor.
Different reporting requirements apply if the franchisor was insolvent in either or both of the last 2 financial years.
Financial information that the franchising code says is ‘materially relevant’
Franchisors must tell franchisees about financial information that the code says is ‘materially relevant’.
If it is not already mentioned in the disclosure document, franchisors must tell franchisees in writing and within 14 days of becoming aware of the event, if they:
- go into administration
- go into liquidation
- have a receiver appointed
- execute a deed of company arrangement.
The code considers these events to be materially relevant facts for franchisees to know.
Making sure information is not misleading
Franchisors must always be careful that the information they give to franchisees is not misleading.
Franchisors may need to add extra information in the disclosure document about any significant changes on the franchise network. This is so they don't give a false or misleading impression about the solvency and financial position of the franchise.