4 crucial compliance rules franchisors need to consider now

By Robert Toth | 12 Aug 2020 View comments

We’re still knee-deep in Covid-19 so what do franchisors need to consider for 2020 and beyond? 

Check these legal pointers to ensure you are compliant with crucial regulations.

4 crucial compliance rules to consider

1. Have you diarised the expiry date for every franchisee in your system?

If not, you are at risk.

The Franchising Code of Conduct requires franchisors to advise a franchisee in writing at least six months before the end of the franchise term whether or not they intend to renew or extend the franchise agreement.

A failure to comply with this clause can attract a maximum financial penalty of $63,000.

2. Have you reviewed your website, online or social media marketing and your legal disclosure documents recently?

We find that our franchisor clients will update their disclosure documents annually as required by the Code each year however they then fail to review all of their supporting marketing and advertising to ensure it is ACL compliant, with no misleading representations or statements.

Section 29 of the ACL is something that the ACCC will also consider when investigating any franchisee complaints.

The section requires a business not to engage in false or misleading representations about goods and/or services as to their standard, quality, style, or model.

3. Financial representations as to turnover to prospective franchisees 

You’ve provided a franchisee with financial information (in the form of a template profit and loss or cashflow projection) but do you have the source information that supports those numbers if they are ever questioned by a franchisee?

Have you given detail as to the assumptions that underpin the forecast or projections?

Have you considered the differences between an existing going concern or a greenfield site?

4. Lease or occupancy license in the era of Covid

Have you reviewed your franchise model to check who holds the head lease? One shoe may not fit all locations. It may be that you hold the lease to primary sites and locations and the franchisee takes out the lease on the secondary sites.

Bear in mind in the era of Covid and businesses coming out of Covid that holding the head lease means the franchisor is primarily liable to the landlord if the franchisee defaults or is terminated.

On the other hand, the franchisor can then control the negotiations for rent relief with the landlord. 

Penalties for breach of the Code and ACL provisions

A breach of the ACL provisions as opposed to a breach of the Franchising Code carries far greater financial penalties and can extend to the company’s directors and officers.

A breach of the Franchising Code can incur penalties of up to $66,000 whereas penalties for breach of section 29 of the ACL are:

  • for a corporation the greater of $10 million, three times the value of the benefit received or 10% of annual turnover in the preceding 12 months if the court cannot determine the benefit obtained, and
  • for individuals, $500,000.