Franchising Code frequently asked questions

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

What documents do franchisors need to provide prospective franchisees?

If someone approaches you and expresses an interest in becoming a franchisee you must provide them with a two-page information statement.

Example: You receive 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. You direct the prospective franchisee to the application form on your website, which she completes. In this situation, you must provide the prospective franchisee with an information statement as soon as possible after you receive the completed form.

You must also provide them with a disclosure document, the franchise agreement (in its final form) and a copy of the Code at least 14 days before they enter into an agreement or make a non-refundable payment.

If you require a party to enter into other agreements as a condition of the franchise agreement (e.g. lease/hire purchase agreement, confidentiality agreement, security agreement, etc.), you must also provide the prospective franchisee with copies of these documents at least 14 days before the franchise agreement is signed, or as soon as they become available.

If the franchisee will lease premises from you or one of your associates, you will also need to provide them with certain documents relevant to the lease (these are set out in the Code). These documents must be provided within 1 month after the lease or agreement to lease is signed by the parties. The requirements under the Code will differ where the franchisee occupies, without a lease, premises leased by you or your associate.

When do franchisors need to update the disclosure document?

The start of a new financial year is a key time for disclosure. It is when you will need to update your disclosure document to reflect any changes that occurred in the last financial year. For franchisors who run their business on the standard financial year (July–June), you will have until 31 October to update your disclosure document. If you operate on a different financial year, the same obligations will apply but you will need to ensure the update is completed within four months of the end of your financial year.

Be aware that you are not required to update your disclosure document if you:

  • entered into only one franchise agreement (or none) during the last financial year, and
  • you don’t intend to enter into a franchise agreement in the upcoming financial year.

What information do franchisors need to include in the marketing fund financial statement?

If you require franchisees to contribute to a marketing or other cooperative fund, the Franchising Code requires you to prepare a financial statement outlining who contributes to the fund and what the money is spent on. This statement must include sufficient detail so as to give meaningful information about sources of income and items of expenditure, especially relating to marketing activities.

The Franchising Code doesn’t define what ‘meaningful’ information means, so you should consider the ordinary dictionary meaning of this term, which is: 'having real impact; substantial’.

In our view, meaningful information in a marketing fund statement requires genuine transparency about:

  • sources of income (franchisee/corporate store contributions; supplier rebates)
  • the nature of the marketing or advertising services provided (merchandise; photography; brochures/flyers; website design; graphic design; equipment rental; radio advertising; print advertising; general advertising)
  • cost of the relevant services
  • geographical scope of the advertising or marketing, where relevant (local, state, or national).

Tip: If you’re uncertain about how much information to provide your franchisees, you should err on the side of caution. Providing more information is better than not enough – as long as the information is truthful, clear and accurate.

What are the franchisor's record-keeping obligations?

You’re required to keep any documents or written material that the Franchising Code requires, or allows a franchisee or prospective franchisee to provide to you. This includes:

  • requests for a disclosure document
  • notices of dispute
  • confirmations of receipt of disclosure document
  • professional advice statements
  • requests to transfer a franchise to a third party (and any additional information provided regarding the transfer)
  • requests not to disclose former franchisee details.

In addition, you’ll be required to keep any documents that you use to support any claims or statements made in your disclosure document. For example, if you provide a prospective franchisee with summarised historical earnings figures, you must keep the documents used to determine those figures.

These documents must be kept for six years from when they were created. The ACCC can request these documents in accordance with its powers to audit franchisor compliance with the Code.

See: Industry code compliance checks

Tip: You can keep documents electronically.

Can franchisors require franchisees to purchase goods/services from a particular supplier or a list of nominated suppliers?

Franchisors often require franchisees to purchase goods or services from themselves, their related entities or third party suppliers. This type of conduct is known as ‘exclusive dealing’.

Exclusive dealing occurs when one person trading with another imposes some restrictions on the other’s freedom to choose with whom, in what, or where they deal.

Exclusive dealing supplier arrangements are permitted as long as the conduct wouldn’t have the purpose, effect or likely effect of substantially lessening competition in the relevant market. An arrangement will be unlawful under the Act if it breaches this ‘purpose or effect’ test.

Generally, the more trade or commerce in a particular market is tied up by an exclusive arrangement, and the more market power the purchaser or supplier has, the more likely that arrangement is to substantially lessen competition.

If you’re concerned that your supply arrangements may raise competition concerns, you can seek an exemption from the ACCC to engage in the conduct.

Note: From 6 November 2017, third line forcing (a form of exclusive dealing) is no longer prohibited outright under the Act. Third line forcing will now only raise concerns under the Act if it has the purpose, effect or likely effect of substantially lessening competition.

What steps should franchisees take before entering into a franchise?

When considering a franchise opportunity you should:

  • Read the franchisee manual
  • Undertake some franchising education. Free franchising education is available to help you assess business opportunities and decide whether franchising is right for you
  • Take steps to identify it’s a genuine business and reconsider a business opportunity if you see warning signs
  • Seek advice from a lawyer, accountant and business adviser with franchising expertise
  • Speak to current and former franchisees about the system and their relationship with the franchisor. The disclosure document provided to you should have contact details for current and former franchisees.
  • Make sure you receive, read and have a reasonable opportunity to understand all information provided by the franchisor

Is there a cooling-off period if a franchisee has a change of mind?

You are entitled to terminate a new franchise agreement (not a renewal, extension or transfer) within seven days of:

  • entering into the agreement (or an agreement to enter into a franchise agreement) or
  • making a payment under the agreement.

Note: The cooling-off period will commence from whichever of the above occurs first.

If you choose to exercise this right, you are entitled to a refund of the payments you have made. The franchisor must provide this refund within 14 days, although they may keep an amount to cover their reasonable expenses if the expenses or method of calculation is set out in the franchise agreement.

What if there's a dispute with the franchisor?

The Code sets out a framework for resolving disputes. Franchisors must also develop an internal complaint-handling procedure that complies with the Code. If a dispute arises, you can choose to follow the franchisor’s process, or the process set out in the Code.

The obligation to act in good faith extends to both parties throughout dispute resolution.

Steps for dealing with a dispute

  1. Provide your franchisor with written details of the problem, the outcome you’re seeking and how you think the outcome can be met.
  2. Try to agree with your franchisor about how to resolve the dispute.
  3. If you cannot agree within 21 days, you can refer the matter to a mediator.
  4. If you cannot agree on a mediator, you or the franchisor can ask the Office of the Franchising Mediation Adviser to appoint a mediator.
  5. If mediation is initiated, you and your franchisor must attend mediation and try to resolve the dispute.

See also: Resolving franchising disputes

Can a franchisor set prices?

Businesses are generally free to set their prices and discount their goods and services as they see fit. While there’s nothing wrong with a franchisor providing a recommended resale price (RRP), it would be illegal for a franchisor to put pressure on its franchisees to charge the listed prices or any other set price, for example RRP less 10 per cent.

Note: Franchisors can generally set a maximum price for goods and services that franchisees cannot sell above.

Is churning illegal?

Churning is the repeated selling of a franchise site by a franchisor in circumstances where the franchise would be reasonably aware that the site is unlikely to be successful, regardless of the individual skills and efforts of the franchisee. The Act doesn’t have a specific prohibition against churning, however such conduct may raise concerns about misleading and deceptive conduct, unconscionable conduct or a lack of good faith.

 

Published date: 
18 January 2018

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