How to update your Franchise Disclosure Document

The Trade Practices (Industry Codes – Franchising) Regulations 1998 provides at section 6 that –
“A franchisor must, before entering into a franchise agreement, and within 4 months after the end of each financial year after entering into a franchise agreement create a document (a disclosure document) for the franchise in accordance with (the code)”
The effect of section 6 is that all franchisors must update their disclosure document no later than 31 October each year.
We strongly recommend that franchisors obtain advice from their lawyer or J J Riba & Company before issuing an updated disclosure document. It is however possible for franchisors to consider for themselves what amendments might be necessary. By going through this process before seeing a lawyer it should be possible to save legal costs.
Step 1 – Have there been any changes to the Franchising Code of Conduct? It is important to again realise that the content of the disclosure document is driven by the requirements of Annexure 1 of the Franchising Code of Conduct. Before you make any changes to the disclosure it is essential to check the current version of the code to ensure that changes have not been made to the requirements of the code. Most franchisors will know that in 2010 changes were made to the Franchising Code and the Annexure. These changes had the effect of requiring franchisors to amend their disclosure documents in July and October. If in any year the code requires additional information, then a careful note should be made of the required amendments.
Step 2 – Consider a list of the parts of the annexure that are most likely to have changed during the course of the year. When the task of considering these obvious sections is complete then the remaining parts of the code should also be considered. We have listed below the areas of the disclosure that are most likely to vary from year to year. These sections should be considered most carefully.
Sections of the Disclosure Document most likely to Change
1. Section 2 – Details of the Franchisor
a. Has the name and address for any franchisor or an associate changed?
b. Has the name position or qualification of any officer of the franchisor changed?

2. Section 3 – Business experience
Make any changes to the details of experience of the franchisor, if most things have remained constant then the franchisor may have one year more experience.

3. Section 4 – Litigation
Are there any current proceedings against the franchisor or a director of the kind referred to in the code?

4. Section 5 – Payments to Agents
Have you set up any agreements with suppliers agents where you make a payment for recruitment of franchisees.

5. Section 6 – Existing Franchisees
If any of the following have happened in relation to any franchise then the details must be noted:
a. Transfers.
b. Closures.
c. Terminations by franchisor.
d. Terminations by franchisee.
e. Expiration.
f. Purchase by Franchisor of a franchised business.
g. Franchise agreement was terminated and the franchised business was acquired by the franchisor.

6. Section 7 Intellectual Property
Any changes to intellectual property should be noted.

7. Section 11 – Sites
If you have changed your policies in relation to site selection you must provide notice.
If any territory or site has been subject to a franchised business operated by a previous franchisee, granted by the franchisor, then you must provide detail of the franchised business including the circumstances in which the previous franchisee ceased to operate. This is to be provided in a separate document.

8. Section 12 – Marketing or other cooperative fund
If there have been changes in relation to the fund then they may need to be mentioned for example, how much franchisees must contribute.

9. Section 13 – Payments
This is an area where there are frequently changes. If there have been changes in the amount the franchisor or others charge for services associated with the franchise system then these changes may need to be noted.

10. Section 15, 16 and 17 Franchisee and Franchisor obligations and other conditions
If you have made any changes to the terms and conditions of the franchise agreement during the course of the year then it is quite possible that these changes may need to be reflected in one or more of these parts of the disclosure document.

11. Section 17A Unilateral Variation
If a franchise agreement is entered into in a financial year commencing on 1 July 2011 or later, the circumstances in which the franchisor has unilaterally varied a franchise agreement since 1 July 2010 must be disclosed.
There are circumstances where this may happen! For instance when there is a sale of a franchise and the new franchise agreement is not on the same terms or when a change is introduced across the system.

12. Section 17C.2
Have you and will you consider any significant capital expenditure undertaken by a franchisee in determining what arrangements will be made at the end of the franchise agreement?

13. Section 20 Financial Information
Directors statement must be renewed.
Financial reports must be prepared and attached for the last 2 financial years or alternatively, an auditors report must be attached.

14. Section 21 Disclosure of materially relevant facts.
Check clause 18 of the code and disclose any matters that need to be disclosed under that section.

15. Section 22
Make sure that the franchise agreement attached to the disclosure is up to date.
Make sure that the copy of the code attached to the disclosure is up to date.
This is not intended to be an exhaustive list of every change that might need to be made to a disclosure document each year, however, it is hoped that it provides a good starting point. We suggest that you use this list to prepare for that yearly meeting with your lawyer to review the disclosure. If you have considered each of these matters you will be well advanced before the lawyer’s clock starts to tick.
J J Riba and Company can provide you with a fixed quote for the yearly review of your disclosure.
Step 3 – Keep a copy of each disclosure document going back at least 10 years. If a claim is made against the franchisor it may be necessary to identify what your franchise agreement looked like in each year of its operation. The old disclosure cannot be disgarded.

If you need help contact J J Riba & Company


How to prepare your first disclosure document

Firstly, let’s consider where this step fits in the overall process of establishing a franchise system.
If you are preparing a disclosure document for the first time, then you are not yet in the business of franchising. You can’t sign up your first franchisee to your system until you have prepared a franchise disclosure document.
In the scheme of things, the disclosure document is the third document that you will prepare. The operations manual is the first document to prepare. The next is the Franchise Agreement, then the disclosure.
How do you prepare your Franchise Agreement? Well, that is a job for a lawyer. You will need to use a lawyer who does this kind of work all the time. J J Riba & Company can help you with this job.
The industry is constantly changing, as is the code which governs the industry. You can buy template franchise agreements online. A search in Google will produce a number of results. Most of these websites will not produce documents that are current or relevant to Australia.
Of course everyone starts the task of drafting any document with a template. The most difficult and time consuming part is making sure that the template is modified to cover the correct issues in the way needed in your particular industry and, in your particular franchise model.
So let’s assume you have a franchise agreement that sets out the future agreement between you and your franchisees. You therefore also have your operations manual and you have a very good understanding of the way that the system is intended to operate. There are other agreements that you will need as well such as a prior representations deed and a deed of restraint of trade. You are happy with all of these.
The next step is to turn to the annexure at the back of the Franchising Code of Conduct. There are two annexures in the back of the code. You should use Annexure 1. Included here is a link to the franchising code that was current at the time of writing this article.
Clause 1 of the annexure sets out the way that the first page of the disclosure document must look. Be aware, this first page does change from time to time, so you need to keep checking to see that the first page includes the content and form required by the code.
Clause 2 is the beginning of a series of questions which must be answered. The preparation of the disclosure is a matter of answering each of these questions. You cannot change the order in which you answer the questions. Your disclosure document must stick to the order required by Annexure 1.
Many of the questions that need to be answered in order to prepare the disclosure document seem to be very simple and can be answered quickly and easily. Other questions raised by the annexure seem on the surface to require a simple answer, but can hide a sting if not answered with care. Remember that disgruntled franchisees will rely upon any inaccuracies in the disclosure document to try to avoid complying with the franchise agreement or to base a claim for misrepresentation and damages.
There is some good news! If your franchise system is new then there will be many sections of the franchise agreement that are indeed very easy to complete. As the years go by and your system grows, complexity will increase.


Remember that you or your lawyer will need to track changes throughout the year so that a new franchise agreement can be prepared in the following year.
We suggest that before you see a lawyer about drafting the disclosure document that you attempt to prepare it yourself. It is important that you understand how the disclosure works and you will be in a better position to provide instructions to your lawyer if you have looked at each question and considered the appropriate answer before you seek help. Your lawyer will be able to answer the more difficult questions, and point out where more detail may need to be included.

If you have any questions about drafting any franchise documents including your disclosure document please contact J J Riba & Company.

1.1.2.2 – The process of setting up a Franchise System

The most commonly asked question that we receive is – what are the steps in setting up a franchise? The short answer is that you will need a good team of people to help you with each of the steps set out below. The first step is deciding if you should move ahead with the idea at all.

Step 1 – Determine if your business is ready for franchising:
• Is the business well established?
• Is there potential for expansion?
• The business needs to be thoroughly market tested and proven to be successful.
• Is the business adequately differentiated from its competitors?
• Are systems in place to allow it to be duplicated? Each Franchised business can’t rely on you personally in order to operate successfully.
• Is your business profitable?
• Can the average Franchisee make a good return on their investment after paying Franchise fees
Step 2 – Determine if franchising is what you want. Does it help you achieve your goals? Are you the right person for the job?
Step 3 – Ensure that your intellectual property is adequately protected. Register trademarks if required. Establish the correct entities for proper protection in this regard including separate entities to hold trademarks, enter franchise agreements, enter leases etc.
Step 4 – Document your operating procedure (i.e. Write your operations manual). Use the process to continue to refine your procedures. Are you using best practice? What can be improved? You do not want your franchisees to repeat mistakes made by you as you built your own business?
Step 5 – Work with your advisers to prepare relevant documentation including Franchise Agreements, Disclosure Documents, Prior Representations Deeds and Security documentation, if applicable. You will need to consider how your system will operate. Consider, for example, the following:
The Franchise Fee:
• What fees will you charge (Initial fee? Ongoing Fees? Promotions Levy?)
• How will you calculate your royalty? Flat or percentage rate or a combination?
Territory and Term:
• How long will you offer the Franchise for?
• Will you give an option to renew? Remember people need sufficient time in the business to be able to make their money back
• Will you offer exclusive territory?
• Will you be permitted to operate in a similar business within the territory?
Training:
• What will you provide?
• Who will do the training?
• Where will the training take place?
• How much training is needed for your franchisee to be in a position to operate the business successfully?
• At whose cost will the training be provided?
• Stock control and Performance Criteria.
• What sort of control will you maintain over stock?
• Will you establish performance criteria?
Step 6 – Develop your marketing campaign. Who will you recruit? How do you determine the best franchisee? Ensure that you speak with other Franchisors in relation to recruitment of Franchisees and read available information. Don’t rush the recruitment process. Quality Franchisees are vital particularly in the early phase of the System Development.
Step 7 – Start operating your Franchise and keep operating your pilot business. Continually look for improvements in the way you operate your business and in the operations of the Franchise System.
Remember – it’s a process!


Selling a Franchise

The sale of a franchised business raises some issues which are additional to the usual business sale.
1. The franchise agreement may set out certain matters that need to be dealt with in the contract of sale. It would be a breach of the franchise agreement not to include required clauses. Don’t sign the business sale contract without first ensuring that you have included clauses dealing with all the matters as required by your Franchise Agreement.
2. The franchise agreement will normally specify what process needs to be undertaken to effect the sale. Make sure you comply with the process or seek legal advice.
3. The franchisor will invariably require you to obtain their consent before effecting the sale. This consent must be requested in writing and generally must be accompanied by certain information such as details of the proposed purchaser of the business and the proposed purchase price.
4. The Franchising code requires a franchisor to consent to the transfer of the franchise agreement unless the refusal of such consent is reasonable. Whether the refusal is reasonable is considered objectively. The code sets out a list of circumstances where it may be possible for a franchisor to refuse consent. JJ Riba & Company can provide you with a list of these matters and advise you in relation to how they may affect you.
5. If the Franchisor does not provide consent or does not provide a written notice setting out the reasons why consent is refused then the Franchisor will be said to have given consent.
6. If there is a lease involved, the Franchisor may have control of the lease which can complicate the process of assigning the lease.
7. At an early stage you must determine if the existing franchise agreement will be assigned or whether as an alternative the franchisor will sign a fresh agreement with the purchaser. Many franchise agreements provide that on assignment the franchisor can issue a franchise agreement which is different from your franchise agreement. This can cause concern for a purchaser and so that issue and the current form of franchise agreement needs to be dealt with early.
8. What will your obligations under the franchise be after the date of the sale? Try to obtain a full release of your obligations under your Franchise Agreement.
9. J J Riba and Company can assist you with all of your franchising requirements.


How to buy a Franchise – the process and some legal issues

Seek legal advice before you go too far! JJ Riba and Company can undertake a thorough review of the Franchise Agreement you are considering. They have read hundreds of different Franchise Agreements and can tell you what is normal and reasonable. Small firm legal fees and big firm knowledge.

START BY UNDERTAKING SOME RESEARCH

Ask yourself:

 What are my strengths and weaknesses and how do these suit the requirements of the business?
 What are the demographics of the area in which the business would operate?
 Why does that demographic suit this kind of business?
 What do I expect a Franchisor to do for me that I could not do for myself?
 What is the real cost of entering into the franchise system and does the benefit weigh up?

Remember

Going into a franchise means setting up a business and, as with any business, there needs to be the demand for what the business sells in the territory in which the business is located in order for the business to succeed. Just because a business is successful in one area does not mean that it will succeed in another.

The idea is to make a return on your investment and receive income from your labour. You should first write down all of the Business’ sources of income, all its costs and expenses and everything else which could impact on profits. What volume of business will be required to pay your wage and make a return? Can you achieve the necessary volume of work?

Is there direct competition? Is your Business’ product or service superior to the competition? Is it highly sought after?

Try comparing your Franchise system with Franchise systems for similar types of businesses e.g Donut King v Fantasy Donuts

Once you’ve made some initial decisions you should look more closely at the Franchise system you’ve selected as your primary goal. At this stage you should:

• Sit down and talk with your Franchisor – What’s their vision? What are their requirements? Do you meet their criteria for a franchisee?

• Go and speak with existing franchisees – Ask if they are happy? What do they like about the system? What don’t they like? Make sure you read between the lines. People don’t like to criticise their franchisor.

The Code

Franchising in Australia is governed by the Franchising Code of Conduct. The Code provides:

• certain restrictions on Franchise Agreements;
• sets minimum standards; and
• provides you with certain rights.

A Franchisor must, at least fourteen (14) days prior to you entering into a franchise agreement and paying a non-refundable deposit, give you:
• a Disclosure Document;
• a copy of the Franchising Code of Conduct; and
• a draft copy of the Franchise Agreement.

You should use the fourteen (14) days provided under the code to complete your investigation of the Franchisor and the Franchise system. The Disclosure Document will provide you with information in relation to the Franchise System and the Franchisor. Make sure you get a Disclosure Document. These documents often contain a lot of information. Please contact us if you want assistance to understand the documents.

Some things you need to know before signing a Franchise Agreement:

Costs

What costs will you incur when entering into the Franchise Agreement and what on-going costs will you incur?
These costs may include:

• Initial Franchise Fee.
• Royalty or Administration Fee.
• Marketing or Promotion Levies.
• Other advertising requirements contained in the Franchise Agreement.
• Other ongoing fees payable to the Franchisor or a third party.
• Training Fees.
• Renewal Fees on any option.
• Sale fees to transfer the business should you decide to sell.
• Costs relating to the premises from which the Franchise will operate.
• Legal costs of the Franchisor/documentation drafting costs etc.
• Duties and search fees.

Territory

Will you be provided with an exclusive territory?
Can your territory be changed? If so, how?
Can the Franchisor operate a similar business within your territory?

Existing litigation

Is there any actual or threatened litigation?
The threat of litigation could turn into legal proceedings in the future, hopefully not after you have taken control of the business.

Exit Strategies

Sometimes even the best plans fail. How can you get out of the Franchise Agreement? What will it cost you to get out of the Franchise Agreement?

Term of the Franchise and any options

How long is the initial term? The term should be long enough for you to recover your initial and set up costs.

Are there any options? How do you exercise your option? Will any new agreement be on the same terms? What costs are involved in the exercise of an option? How long is the option period?

Minimum Performance Criteria

Is there any? Is it reasonable? Will you be able to meet it?

Stock

Where does it come from and what restrictions exist? Do you have a right to sell the whole of the range?

Transfer of your franchise

A request for a franchisor’s consent to transfer a franchise must be in writing. A franchisor cannot unreasonably withhold consent. The reasons for which the franchisor may withhold consent are set out in Item 20(3) of the Code.

If the franchisor does not respond in writing stating that consent is withheld, and given reasons for withholding consent within 42 days, then consent is taken to have been given.

Speak with your Financier about:

1. The availability of finance.
2. The financier’s requirements for the provision of your finance.
3. Any necessity to provide security/mortgage.
4. The estimated date that funds will be available.

Some financiers have arrangements with certain franchise systems.

Speak with your lawyer about:

1. The terms of the Franchise agreements, any associated contracts and documentation, and any special conditions you may require.
2. Any representations which may have been made to you by the franchisor upon which you are relying.
3. Most Franchisors will require you to obtain a certificate to say that you have received legal advice.
4. Restraint against trade i.e. whether you may operate a similar business outside your territory.

Get advice from your consultants

If you cannot afford to get advice then you cannot afford to go into business!

Get advice from your accountant
1. The correct entity to buy the business. (Would it be best to set up a company or a trust?).
2. Reviewing any projected figures provided by the franchisor.
3. How does GST affect the transaction?
4. Cashflow, business plan and a budget for the purchase and operation of the business, incorporating the establishment costs and ongoing franchise costs.

How can you protect yourself?

1. Seek legal advice before you go too far. We undertake a thorough process to review your franchise agreements. We have read hundreds of different franchise agreements and we can tell you what is normal and reasonable and what is not.
2. As with any business, prospective franchisees should carefully consider whether or not the type of business meets their requirements and financial circumstances. Important things to consider include the upfront cost, duration of the agreements, and the exit options available.
3. Carefully read the Disclosure Documents and Franchising Code of Conduct.
4. Write everything down. By writing down all the franchisor’s pre-contractual verbal representations and sending them for confirmation to the franchisor before entering into the contract, you are covering yourself against potential misunderstanding later on. This may also be done by email

Before you get any advice, make sure you read all the documents thoroughly. Even if you do not fully understand the documents you will be in a better position to ask good questions of your lawyer, your accountant, and the franchisor. This may also help you to save some costs.


-10 Important things a franchisee should know before buying a Franchise.

1. A Franchise Agreement is defined in the Franchising Code of Conduct. The definition is very broad. Be cautious of anyone who tells you that they issue Licence Agreements and not Franchise Agreements. Some Franchisors believe that by calling an Agreement a Licence rather than a Franchise they can avoid compliance with the Franchising Code of Conduct. This is incorrect. See section 4 of the Franchise Code of Conduct.
2. At least 14 days before you enter into a franchise agreement the franchisor must give you:
• A copy of the code;
• A Disclosure Document; and
• The Franchise Agreement.
3. A franchisor must not enter into a franchise agreement with you unless you have provided a written statement that you have read and had a reasonable opportunity to understand the disclosure document and the code.
4. After you sign you are allowed a cooling off period. You can terminate the Franchise Agreement for 7 days after:
• entering into the agreement; or
• making a payment.
5. If you lease premises from a franchisor then the franchisor must provide you with a copy of the lease within one month after the lease is signed. Any failure to do so is a serious breach of the Code. See section 14.
6. A franchisor is not obliged to give you any further term after the Franchise Agreement expires. Courts have said that it is not unconscionable, nor unfair for the Franchisor to refuse to renew your franchise agreement. If your franchise agreement ends and is not renewed you will lose your business. You must make sure that your franchise agreement contains an option. If an option to renew is not given in the franchise agreement then you should make sure that you can pay off the purchase cost of the franchise and make a sufficient profit in the time allowed i.e. the term of the franchise agreement.
7. Many Franchise Agreements contain a sale fee. This means that the franchisor requires you to pay a fee, sometimes in the amount of tens of thousands of dollars, before you will receive consent to sell the franchise. Make sure you know what the sale fee is before you sign the Franchise Agreement.
8. A franchisor is not entitled to include a clause in a franchise agreement that says no matter what they do they are released from any liability or responsibility to you the franchisee.
9. If a franchise agreement requires you to pay money to a marketing fund then the franchisor must provide you with a copy of a statement, showing all receipts and expenses with 5 months of the end of the last financial year. Be careful however to read the franchise agreement or obtain a promise from the franchisor about the use of the funds. Courts have ruled that franchisors do not have to use the funds to help you in your business unless the franchise agreement requires this. Often the franchise agreement does not have this requirement.
10. A franchisor is not entitled to unreasonably refuse a request for the assignment of a franchise agreement. In fact if the franchisor has not given reasons why consent is refused within 42 days after a request, then the Franchisor is taken to have given consent.
Contact J J Riba & Company if you have any questions about franchising.


Franchising – Lease and Sublease or Licence

Look at any shopping centre in Australia and you will notice that many of the shops across many different shopping centres are the same. We see from this, the huge popularity of franchising in Australia.

The need for retail premises with each of these Franchised retail stores means that decisions need to be made about who controls the premises. Should the owner of the business (Franchisee) take a lease of the premises? This means taking the direct benefit and risk associated with the lease. If the Landlord has a complaint or needs to sue for performance of the lease the first point of contact would be the lessee. If the business owner or Franchisee signs the lease then they are personally and directly responsible to the landlord.

Alternatively, should the Franchisor take the lease, and then give a licence to the franchisee? This means that the Franchisor is in control of the premises. The benefit for the Franchisor is that, if there is a falling out with the Franchisee or, the Franchisee leaves the business, there is no direct impact on the lease, provided that, the Franchisor continues to honour the Franchisors obligations under the lease.

I should point out that generally a Franchisor will ask for an indemnity from the Franchisee in respect of all the obligations of the Franchisor written in the lease. This is done so that the franchisee shares the same risk as the franchisor, regardless of how the premises agreement is structured.

I should also note that it is possible for the Franchisor to take no risk under the lease simply by allowing the franchisee to take the lease directly. The downside for the Franchisor is the loss of control.

So how to make a decision? For the Franchisor the decision should be made on the quality of the premises. If the Franchisor feels that the premises are important to the system, because of location, demographics or competition, then one might expect the Franchisor will want to control those premises by signing the lease directly with the landlord. The Franchisor may feel that these premises should remain part of the system even if the Franchisee defaults. In this situation control is the dominant issue.

From the Franchisee’s point of view, a decision should be made based on the Franchisor’s requirements. If the Franchisor requires indemnities and guarantees and a tight licence agreement then it might be better for the franchisee to ensure that they have direct control of the lease as the risks associated with the lease will all be repeated in the licence. A restraint of trade will mean that the lease is of no benefit once the franchise agreement ends.

So how do you get what you want? This is where your negotiating skill and knowledge of the industry will help.

These are issues in addition to those noted above that need to be examined closely by both Franchisors and Franchisees at an early stage. A franchise agreement is a sale and the best time to negotiate if you are a franchisee is at the time the salesman wants to make that sale – not after you’re on the hook!

If you are a Franchisor your best bet is to ensure that you have a written policy.

Contact JJ Riba & Company if you wish to set up a franchise systems or purchase a franchised business.


How to Read a Franchise Disclosure Document?

All Franchisors prepare Disclosure Documents because the Federal Government requires every Franchisor to prepare this document. Franchisees can insist that the Franchisor provide a Disclosure Document each year.

The first thing to realise is that the Franchisor cannot choose what information they will include in their Disclosure Document. Each Franchisor has to answer some very specific and probing questions about their business. Disclosure Documents can be difficult to read because of the volume of information contained in the Document. But if you know how to read it, then you can tell a lot about what the Franchisor is like.

Would you like to know for instance, if the Franchisor has been involved in any legal proceedings with any Franchisees in the last 10 years? If so, do you want the court number so that you can see what the court decided? This is the kind of information that must be provided by a Franchisor.

Is the Franchisor in the habit of terminating or not renewing franchise agreements? The Franchisor must say how many times this has happened.

These are the kinds of important questions that Franchisors are required to answer. If you are a buyer of a franchised business then you need to know how to find these answers in a document that can sometimes be longer than the Franchise Agreement itself.

The solution is simple! Don’t go to the Disclosure Document first. Firstly you must look at the Franchising Code of Conduct. There is an annexure at the back. Each question has a number assigned to that question. The answer to each question must be numbered in the same way.

As you come across a question of interest in the annexure to the code then you should go to the same number in the Disclosure Document. There, you will find the answer.

Please follow this link to the Franchising Code of Conduct.
If you need help understanding a Disclosure Document please contact J J Riba & Company