10 Steps to Franchise Disclosure Compliance
Monday 5 August 2019 / by Corinne Attard posted in Business, Corporate & Commercial Franchising & Retail

Now that we are well into August, it is crucial for franchisors to be aware that there are just three months remaining before the deadline for franchise disclosure documents to be finalised (31 October 2019).  Franchisors should similarly note that there are now only 2 months left to get your vote organised and finalised in relation to the auditing of your marketing fund, if you have one.

If you are an Australian franchisor with operations based on the usual financial year (ending 30 June), now is the ideal time for you to look at organising a timeline for these necessary tasks.

With this in mind, Holman Webb has compiled a 10-step guide to compliance, which we encourage all franchisors to follow.

  1. Company financial statements for 2018-19 FY:
    If you are yet to speak with your accounting team with respect to your company's financial statements for the 2018-19 financial year, this should be your first priority. If you are a new franchisor (i.e. less than 2-3 years old) then you may also need to undertake an audit. It is important to both note and plan for the fact that the completion of an audit can take significant time.

    NB. Company financial statements must be completed and signed off by 31 October 2019.
  2. Marketing fund financial statements for 2018-19 FY:
    As with your company financial statements, it is crucial that you start the conversation with, and begin providing relevant information and documentation to your accounting team in relation to the financial reporting for your company's marketing fund - if you do have one.

    It is important to ensure that your accounting team has a full understanding of the additional requirements relating to the presentation of the marketing fund financial statements (see point 6 below), as well as the deadline for completion.
  3. Voting on a marketing fund audit:
    Franchisors are required to conduct a vote with your franchisees in order to confirm whether they believe that the company's marketing fund should be audited. It is possible to skip the audit (as well as the associated cost) if 75% or more of your franchisees agree to forgo an audit.

    NB. This vote must be completed by 30 September 2019.
  4. Franchisees vote to undertake an audit of the marketing fund:
    In the event that your franchisees do vote to have your company's marketing fund audited, you will be required to refer the company's marketing fund financial statements to the auditor - the costs for which can be deducted from the marketing fund.

    Franchisors must be aware that if an audit is undertaken, copies of the audit report must be provided to all current franchisees within 30 days of the franchisor's receipt of the report. Once the audit report is received, the dissemination of the report to franchisees should be prioritised, as a failure to distribute within 30 days will leave the company open to penalty.

    NB. Any audits of your company's marketing fund must be completed by 31 October.
  5. Follow up with your accounting team:
    It is important to follow up with your accounting team at regular intervals. Holman Webb suggests diarising regular contact with your accountants in order to ensure that you receive your company's financial statements as soon as they become available.
  6. Check that your financial statements are adequate and accurate:
    As a franchisor, once the financial statements relating to the company's marketing fund are received, you should take the time to confirm that they are indeed adequate prior to disseminating them to your franchisees.
    Since the judgement in the case of Australian Competition and Consumer Commission v Ultra Tune Australia Pty Ltd [2019] FCA 12 was handed down in January 2019, it has become crucial for franchisors to ensure that company financial statements provide franchisees with meaningful information, in order for the franchisees to properly understand the data within the relevant statements.

    Clarity is especially important within the context of franchisees understanding how the marketing fund was utilised in the past financial year, and in turn, whether the funds were allocated appropriately.

    NB. Additional information explaining the various expense items should be inserted or added as notes to the fund's financial report.
  7. Providing franchisees with marketing fund financial statements:
    Once the marketing fund financial statements are finalised and received by the franchisor, the franchisor is required to provide copies to all current franchisees within 30 days of the date of preparation of the statements.

    As with sending out any auditor reports, it is important to prioritise the dissemination of marketing fund financial statements to franchisees, as a failure to distribute within the required period will leave the company open to penalty.
  8. Franchise Agreement:
    If you are planning on amending your franchise agreement, now is the time to implement any relevant changes in order to have them coincide with the new disclosure document. It is important for franchisors to ensure that your updated disclosure document reflects any changes made to the agreement.
  9. Review the disclosure document:
    It is important to undertake a thorough review of your disclosure document, and in turn, to make any relevant updates in order for it to be ready to sign by 31 October 2019.

    In addition to including the most recent company financial reports, franchisors will, at a minimum, need to look towards:
    1. Updating the table of transfers and terminations of franchises;
    2. Updating the list of franchisees;
    3. Noting any changes in officers, directors of the franchisor or other corporate details;
    4. Including the marketing fund expenditure for the previous financial year; and
    5. Signing both the solvency statement and first page of the disclosure document.
  10. Final Check:
    Finally, look over your disclosure document again in order to ensure that it remains an accurate representation of your system, and that it is not in any way misleading.

Compliance is a necessary part of business, especially within the context of franchising here in Australia - an industry within which those with their fingers on the pulse will note the regulatory burden seems to only increase.

If as a franchisor, you do not have a new disclosure document ready from 31 October 2019, you will be delayed in granting new franchises from 1 November 2019.

If you require assistance in meeting any of the above mentioned requirements, or you have a separate franchising-related query, please don't hesitate to get in touch with Holman Webb's Franchising team today.

Click here for the Australian Competition & Consumer Commission's Franchisor Compliance Manual.

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