A lot has changed for businesses over the past financial year, with the COVID-19 pandemic impacting the financial position of many businesses.
Franchisors who are reviewing and updating their disclosure documents must ensure they comply with the Franchising Code and do not contravene the Australian Consumer Law.
Here are key considerations when reviewing and updating disclosure documents for the 2019/20 financial year.
The Code requires franchisors to update their disclosure document within four months after the end of each financial year, so if you’re a franchisor who runs your business on the standard financial year (1 July–30 June) you have until 31 October to update your disclosure document.
Unless you receive a written request from a franchisee to do so, you are not required to update your disclosure document if you:
- entered into only one franchise agreement (or none) during the last financial year
- you don’t intend to enter into a franchise agreement in the upcoming financial year.
People often commit a significant amount of money when buying or renewing a franchise. The disclosure document gives current and prospective franchisees information to help them make a reasonably informed decision about the franchise. It provides franchisees with current information that is material to running the franchised business. The information must be true, accurate and able to be substantiated.
You (the franchisor) must ensure your disclosure document does not contain any information that is false or misleading, or omit any important information about the franchise. This includes making sure that the financial details in the disclosure document do not give a false or misleading impression about the solvency and financial position of the franchise. You may also need to include additional information about the impact of COVID-19 on your franchise network.
This information must be accurate and must not be misleading, otherwise it is likely you’ll have breached the Code and contravened the Australian Consumer Law. This can attract substantial penalties.
Your financial position and any changes to it are essential information for franchisees and prospective franchisees. The Code has specific requirements for when and how to disclose financial information.
1. Annual solvency statements are still required
Every year franchisors must update their financial information under Item 21 of their disclosure document. In particular, you 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 two financial years, or an independent audit report prepared by a registered company auditor in respect of the solvency statement.
Make sure you give your accountant or auditor enough time to prepare these reports. Different reporting requirements apply if you were insolvent in either or both of the last two financial years.
2. Give franchisees and prospective franchisees current financial information before they sign
Where possible, you should wait to provide franchisees and prospective franchisees with your updated disclosure documents. However if you’re giving your 2019 disclosure documents to prospective franchisees or franchisees between 1 July and 31 October 2020, while you’re in the process of updating those documents, you’ll have to give more up-to-date financial information if it comes into existence.
New financial information includes a solvency statement, financial reports, and an independent auditor’s report. In any event, you must provide this new financial information to the prospective franchisee or franchisee before they sign the franchise agreement.
3. If things get bad, keep people informed
If at any time, you go into administration, liquidation, have a receiver appointed or execute a deed of company arrangement and this is not mentioned in your disclosure document, you must tell franchisees and prospective franchisees about this fact within 14 days of becoming aware of it.