Annexing the required financial disclosures to a franchising disclosure document can feel burdensome, especially for newer or privately held franchisors. But it’s not optional. The Franchising Code of Conduct requires strict compliance with Item 21 of Schedule 1, and failing to attach the correct information can render the disclosure document non‑compliant, exposing franchisors to penalties and potential legal claims.
The Bedrock: a Director‑Signed Solvency Statement
Every franchisor, regardless of size or structure, must include a signed statement from at least one director confirming that there are reasonable grounds to believe the franchisor can pay its debts as and when they fall due. This solvency statement must reflect the franchisor’s position as at the end of its most recent financial year—or, if the franchisor did not yet exist at that time, as at the date of the statement. This document is a foundational part of the disclosure document and cannot be omitted.
The Default Rule: Two Years of Financial Reports
Unless an exemption applies, the solvency statement must be accompanied by full financial reports for the last two completed financial years. These reports must comply with sections 295–297 of the Corporations Act, or the foreign equivalent, and include the profit and loss statement, balance sheet, cash flow statement, and relevant notes. If the franchisor is part of a broader consolidated corporate group, and a franchisee requests it, the group’s financial reports must also be provided for the same period.
The Audit Shortcut
Franchisors may elect to rely on an alternative compliance pathway sometimes called the “audit shortcut”. If the solvency statement is supported by an independent audit conducted by a registered company auditor (or foreign equivalent), and the audit is completed within four months of the relevant financial year‑end, the franchisor is not required to annex the full two years of financial reports. This approach is often favoured by franchisors who prefer to keep financial performance confidential while still meeting legal obligations.
New‑Born Franchisors and Groups
Where the franchisor (or consolidated entity) has not existed for two full financial years, the Code permits a modified form of compliance. Instead of annexing historical financial reports, the franchisor may include a statutory declaration of solvency along with an independent audit report confirming solvency as at the date of that declaration.
When There Has Been Insolvency
If the franchisor or consolidated entity was insolvent at any time during the last two completed financial years, additional disclosures are required. These include a clear statement identifying the relevant period(s) of insolvency, a statutory declaration that the entity is now solvent, and an accompanying audit report verifying that solvency. Omitting this information can lead to allegations of misleading conduct and jeopardise the enforceability of franchise agreements.
Are There Exceptions to Updating the Financial Annexures Each Year?
The obligation to update the financial disclosures under Item 21 applies only where section 21 of the Code is triggered. Specifically, a franchisor must update its disclosure document within four months of the start of a new financial year if:
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It was a party to a franchise agreement on the first day of that financial year, and
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It either entered into two or more franchise agreements in the previous year, or intends to enter into one or more franchise agreements in the current year.
Where these conditions are met, the franchisor must ensure the disclosure document reflects the current financial and business position and incorporates any amendments to the Code. This includes ensuring the Item 21 annexures are up to date. Failing to do so can result in civil penalties of up to 600 penalty units (currently over AUD 187,000) and may give rise to claims that the franchisor has failed to meet its mandatory pre‑contractual disclosure obligations.
Importantly, if a disclosure document is issued or updated without the required Item 21 annexures (financial disclosure), it does not technically comply with the Code. That gap can raise serious doubts about whether proper disclosure has occurred at all, and can form the basis for rescission arguments or damages claims by franchisees.
Final Thoughts
Whether you rely on the default pathway or the audit shortcut, ensuring your financial disclosures are accurate, complete, and properly annexed is critical. The financial disclosure requirements are not just a formality—they go to the heart of the transparency the Code is designed to provide. If you are unsure which method applies to you, or whether your disclosure document is up to date, Magnolia Legal’s franchising team can help you get it right the first time.
This article is general information only and not legal advice. Always seek legal advice tailored to your particular circumstances.