When you buy a franchise, you receive what may seem like an overwhelming amount of information. One of the most important documents you will receive during the application process is the disclosure document. This document discloses key information about the business you are thinking of purchasing.
This article will outline how you can use the disclosure document to understand:
- the franchise brand;
- the fees you will pay;
- how the business operates; and
- your obligations as a franchisee.
Understanding the Franchise Brand
The disclosure document will typically provide details about the key management personnel in the franchise business.
This information can reassure you that you will be working under a management team with sufficient industry experience. This should mean that they will be able to provide the advice and insights you may need.
You will also receive information about any current legal proceedings against the franchisor or any of the franchise directors. You may also learn if the franchisor or a member of the management team has ever been:
- convicted of a serious offence; or
- declared bankrupt or insolvent.
Hopefully, this will reassure you that you are joining a legally sound business.
Understanding the Franchise Fees
Your disclosure document should include details of all the fees you will need to pay to the franchisor as part of your purchase. Typically, these fees will include:
- initial fees (e.g. fees that cover basic training, system support and marketing material fees);
- royalty fees; and
- advertising or marketing fees.
There may be other fees you will need to pay. Reading the disclosure document and asking the right questions during the application process can allow you to avoid paying any unexpected fees.
Understanding How the Business Operates
Some of the most valuable information in the Disclosure Document is a list of current franchisees. This list should include enough information for you to contact the franchisees. Take advantage of this opportunity to learn about how the franchise operates by calling as many franchisees as you can during the application process. You may want to ask them about:
- their relationship with the franchisor;
- the current state of the industry;
- any hidden costs or fees; and
- their experiences as a franchisee generally.
Understanding the Franchisees’ Obligations
Your due diligence should help you to determine whether the franchisor will give you the support you need to run a successful business.
However, you will also be required to meet certain contractual obligations as a franchisee. Your disclosure document may specify:
- any marketing obligations you are responsible for; and
- the details of the franchise operations manual, which explains the day-to-day systems involved in running your business.
You should fully understand the obligations you are committing to before you purchase your franchise business.
Another way to find out how the franchisor will support the overall success of your business is to check if the franchise has a marketing fund. Your disclosure document will indicate whether this is the case.
The franchisor is obligated to disclose which expenses the marketing fund can be used for and provide examples of how it was spent over the last financial year.
After reviewing the marketing fund, you should conduct a quick online search to see how effective any marketing is. You will be able to make a more informed decision about your purchase by spending some time browsing any relevant social media platforms, such as the franchise’s:
- Instagram profile;
- Facebook page; and
- Twitter profile.
Looking up these platforms can help you to determine the franchise’s audience and popularity. Remember that the franchise’s brand is a significant part of what you are paying for.
Your disclosure document may state that you must comply with the details set out in your operations manual. The manual may be an essential guide to running your new business, but you should find out how closely you need to follow it to meet your obligations as a franchisee. Failing to do so could mean that you accidentally breach your franchise agreement.
On the other hand, you should be cautious if you receive a very short or simple operations manual. If the operations manual does not provide you with a comprehensive guide on operating the business, it could indicate that the franchisor does will not offer you much support as a franchisee.
If you are purchasing a franchise, you will receive a lot of valuable information during the application process. You should take the time to carefully read and understand it.
One of the most important documents you will receive is the disclosure document. This document will provide you with invaluable insight into how the franchise works. You should use it to make an informed decision about purchasing the business. If you have any questions or need advice about purchasing a franchise, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
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