What does a disclosure document tell me as a potential franchisee?

Under the Franchising Code of Conduct, franchisors must provide potential franchisees with certain documents at least 14 days before the franchising agreement is signed. These documents include:

• A Disclosure Document
• A copy of the Franchise Agreement
• A copy of the Franchising Code of Conduct

To access the full version of the Franchising Code of Conduct, please see: http://www.comlaw.gov.au/Details/F2010C00457

The purpose of the Disclosure Document is to give sufficient information to franchisees so they can make an informed decision about whether to enter into a Franchise Agreement. This includes estimating all the expenses a franchisee will incur.

The Franchising Code of Conduct sets out the essential elements that should be covered in any Disclosure Document. You should be aware of what needs to be disclosed in a Disclosure Document in order to protect your interests as a potential franchisee.

The required elements to be covered in a Disclosure Document differ depending on the expected annual turnover of the franchise business. Businesses with an expected annual turnover of $50,000 or more must cover a broader range of topics in their Disclosure Document than a business with an expected annual turnover of $50,000 or less.

The key elements of a Disclosure Document include:

• Details of the franchisor and a description of the franchise business.
• The business experience of each officer of the franchisor.
• Details of any litigation against the franchisor.
• Contact details for each of the existing franchisees.
• Description of the franchise system’s intellectual property.
• Details of the territory of the proposed franchise and exclusivity rights.
• A comprehensive lists off all the operating and capital expenses which a franchisee is likely to incur.
• Details of the franchisor’s requirements for the supply of goods or services to a franchisee.
• Details of the requirements the franchisee must satisfy for the supply of goods and services to customers.
• Details of any marketing funds.
• What happens if there are unforseen significant capital expenditures.
• Summary of the franchisor’s obligations under the Franchise Agreement.
• Summary of the franchisee’s obligations under the Franchise Agreement.
• What happens at the end of the Franchise Agreement.
• Earnings information. The franchisor often does not give earnings information about their franchise on the basis that earnings may vary between franchises and they cannot estimate earnings for a particular franchise.
• A statement from the franchisor that it is solvent and will be able to pay its debts as and when they fall due.

Conclusion

The Franchising Code of Conduct requires a Disclosure Document to provide comprehensive information about a franchise system to protect you as a potential 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 one would expect to do with all other key investments, undertaking a thorough due diligence and being fully informed is extremely important. The Disclosure Document is your key resource in this regard and should not be underestimated or ignored. To speak with a franchise solicitor, contact LegalVision on 1300 544 755.