What Does a Disclosure Document Tell Me as a Potential Franchisee?

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Table of Contents

• What is the Purpose of a Disclosure Document?
• Key Components of a Disclosure Document 
• Key Takeaways 

Understanding the contents of a disclosure document is paramount for you as a franchisee, as it provides crucial information necessary for making informed decisions before entering into a franchise agreement. As mandated by the Franchising Code of Conduct, franchisors are obligated to furnish you with specific documents at least 14 days prior to signing the agreement. These documents include the disclosure document itself and copies of the franchise agreement and Franchising Code of Conduct. This article explains the key purpose and features of disclosure documents. 

What is the Purpose of a Disclosure Document?

The primary purpose of the disclosure document is to equip you with comprehensive information. This enables you to assess whether entering into a franchise agreement is a prudent decision. This entails not only understanding the nature of the franchise business but also estimating the expenses and obligations that come with it.

Outlined within the Franchising Code of Conduct are the essential components that must be covered in any Disclosure Document. Familiarising yourself with these components is vital to safeguarding your interests as a franchisee.

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Key Components of a Disclosure Document 

A disclosure document should include details about:

• the franchisor and the franchise business;
• the professional background and experience of each officer of the franchisor;
• any litigations involving the franchisor;
• your responsibilities and obligations;
• existing franchisees;
• the franchise system’s intellectual property;
• the territory and exclusivity rights associated with the proposed franchise;
• potential operating and capital expenses that you may incur; 
• any marketing funds; and 
• contingency plans. 

Additionally, the document should include a statement affirming the solvency of the franchisor and its capability to settle debts promptly.

As a franchisee, you may query any information that a franchisor has disclosed to you in a disclosure document with them. This allows you to clarify any points of confusion before committing to enter into the franchise agreement.

Furthermore, you should contact other franchisees in the franchise network and raise any questions you may have with them in relation to the operation of the business, their relationship with the franchisor, and other relevant information. This allows you to gain an understanding of the franchise network and the franchisor from a different perspective, which can prove to be very beneficial when making a decision on whether to proceed forward.

Key Takeaways 

The Franchising Code of Conduct requires a disclosure document to provide comprehensive information about a franchise system to protect you as a franchisee and to ensure you are making an informed decision. Investing in a franchise can be a major investment both financially and in relation to the amount of time you are committing to operate the franchise business. As you would expect to do with all other key investments, undertaking thorough due diligence and being fully informed is extremely important. Therefore, the disclosure document is your key resource in this regard, and you should not underestimate or ignore it. 

If you have any questions regarding disclosure documents, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.