How do changes to the franchising code affect your beauty business?

Recent changes to the Australian franchising code are pretty wide ranging as a result of the Fairness in Franchising Report. The report revealed systemic power imbalances between franchisors and franchisees, the former having an outsized amount. This often left franchisees in financially difficult, or impossible, franchises and franchise relationships. The changes are meant to establish a more even balance of power between the franchisors and franchisees.

(Read our article on franchising: Is it time to franchise?)

“In 2019, a Parliamentary report into Australia’s franchise industry found the current regulatory environment did not deter systemic poor conduct and that exploitative behaviour had entrenched the power imbalance between franchisors and franchisees,” says InDaily magazine in Adelaide. This often stemmed from incomplete or obscured information and disclosures from franchisors that resulted in franchisees being in difficult situations where they couldn’t meet the financial obligations of the post.

New obligations for the franchisor

If you are a franchisor, from July 1st you must now provide potential franchisees with a copy of the new version of the information statement and a key facts sheet.

What is the information statement:

The information statement must be given to a prospective franchisee before the franchisor gives them other disclosure related documents.

What is the key fact sheet:

The mandatory sections of the key facts sheet must be completed by the franchisor and provided to prospective franchisees, along with other disclosure related documents required by the Code. Prospective franchisees need to receive these at least 14 days before they enter into a franchise agreement or pay non-refundable money.

Franchisors must provide the same to prospective franchisees who are acquiring the business from an existing franchisee at least 14 days before the franchisor consents to the transfer.

Changes to the dispute process

Mr Billson says the reforms to the Code, which come into effect from 1 July 2021, will go a long way to addressing the power imbalances that often exist between franchisees and franchisors, particularly when disputes arise. “These reforms are an important step towards getting the balance right for our small and family businesses in the franchising sector,” Mr Billson says.

“Allowing my office to facilitate group mediation when several franchisees are in a similar dispute with the same franchisor, is another critical reform that will help restore confidence in this sector.”

Transparency around the marketing fund

“This includes more transparency around the marketing fund, with an annual financial statement which sets out meaningful information regarding expenditure. Greater visibility around rebates and leasing arrangements will be achieved by these reforms,” says Australian Small Business and Family Enterprise Ombudsman Bruce Billson.

An article on LegalVision says “Terminology in the marketing fund sections will change. The obligations concerning marketing funds (and cooperative funds) will remain the same. However, the Code will replace the term ‘franchisors’ with the term ‘fund administrators’, capturing franchisors, individuals and master franchisors who operate a fund. Similarly, the fund administrator will no longer need to maintain a separate account with a ‘bank’ but can maintain a separate account with a ‘financial institution’ instead.”

Mandatory Franchise Disclosure Registry

Billson says “The new mandatory Franchise Disclosure Registry, which is scheduled for release in early 2022, is key to providing prospective franchisees with vital information needed prior to entering a binding franchise agreement.”

The Australia Retailers Association says key substantive changes are:

  • Minimum 7 days’ notice required for termination by franchisor for serious breaches i.e. can no longer be immediate.
  • Franchisor legal costs can only be charged as a fixed amount for document preparation.
  • Specific disclosure required around the treatment of goodwill in the franchised business and earnings rights on termination or expiry.
  • Cooling off period increasing to 14 days, clock starting from later of disclosure document or lease/licence being provided.
  • Cooling off period to also apply to franchise transfers.
  • Franchisee right to request early termination of franchise agreement.
  • New dispute resolution procedure (this will override any dispute resolution procedures in franchise agreements as of 2 June 2021).
  • Significant capital expenditure required during the term of a franchise agreement must be disclosed in detail in the disclosure document.
  • Further detail on rebate information must be included in the disclosure document, namely the formula for the rebate.
  • Further detail is required on marketing fund sources and expenditure items.
  • A new ‘Key Fact Sheet’ must be provided with the disclosure document.
  • A new right of Motor Vehicle dealership franchisees to a reasonable opportunity to make a return on their investment including compensation for early termination of a franchise agreement by a franchisor.

“Over the past six months my office has fielded over 240 calls from franchisees seeking information regarding disputes under the Franchising Code of Conduct. This demonstrates just how critically important it is for prospective franchisees to know exactly what they are getting into before signing on the dotted line,” says Billson.

Anyone involved in a franchise dispute under the Code is encouraged to contact ASBFEO for assistance on 1300 650 460 or email info@asbfeo.gov.au.

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