In Short
- Disclosure documents are required by franchisors to provide essential business information to potential franchisees.
- These documents ensure transparency and help franchisees make informed decisions.
- Franchisors must include specific details, including financial performance and franchisee obligations, in their disclosure documents.
Tips for Businesses
If you are a franchisor, ensure your disclosure document is thorough, accurate, and compliant with the Franchising Code of Conduct. Regularly update it with key financial and operational information to maintain transparency and avoid legal risks. Seek legal advice to ensure all required details are correctly included.
Deciding whether to buy a franchise is a significant decision that demands thorough consideration. As a prospective franchisee, it is crucial to conduct due diligence before joining a franchise network. One of the most valuable resources is the disclosure document from your potential franchisor. This two-part series will explore the disclosure document in depth, guiding you through the essential sections to help you decide if you want to become a franchisee.
What is the Disclosure Document?
Under the Franchising Code of Conduct (the Code), franchisors must prepare and provide a disclosure document to prospective franchisees. As a prospective franchisee, you should receive this document from your franchisor at least 14 days before signing the franchise agreement and other related documents. The disclosure document offers a comprehensive overview of:
- the franchisor’s network;
- essential operational details; and
- the costs associated with becoming a franchisee.
This information is crucial in determining whether becoming a franchisee is the right choice for you.
The Franchise Network
The disclosure document primarily provides information about the franchisor and its network. This includes details about the key players, the size of the franchise, and its operational history. Below, we outline the specific information you can expect to find.
Franchisor’s Details
As a franchisee, it is crucial to maintain a strong relationship with the franchisor. The disclosure document provides valuable insights into the franchisor’s identity, key decision-makers, and their contact information. It details the franchisor’s and its officers’ experience, including directors and other decision-makers. Reviewing this information will help you assess the franchisor’s operational history and the leadership’s experience.
Size of the Franchise Network
The disclosure document will also provide information detailing the size of the franchise including:
- the number of franchisees in the network;
- the number of corporate stores operated by the franchisee; and
- the locations of these stores by State or Territory.
A large franchise suggests a history of robust growth across the network. However, it may also result in increased competition among franchisees for customers. It is advisable to confirm with the franchisor whether you will be granted an exclusive territory.
Ex-Franchisees
The disclosure document must detail the franchisees who have exited the franchise network in the past three years and explain their reasons for leaving. A high turnover of franchisees is a warning sign and should raise concerns.
This can provide valuable insights beyond what the franchisor presents.
Continue reading this article below the formFinancial Information
Fees
Reviewing section 14 of the disclosure document is crucial, as it details the range of fees you will incur as a franchisee. These fees include:
- costs you will need to pay when starting up the business;
- fees payable to the franchisee on an ongoing basis (i.e. royalties); and
- other recurring fees payable to third parties (e.g. rent if operating from a premises).
Carefully examine these fees before joining. Consult your franchisor for any necessary clarifications. If the franchisor omits or significantly underestimates any fees, they may have deliberately misled you, and you should consider legal action.
Marketing Expenses
If your franchisor manages a marketing fund, review the disclosure document to determine your required contributions if your franchisor manages a marketing fund. Additionally, understand how the franchisor will spend these funds. Further, request a copy of the franchisor’s marketing fund report for the previous financial year.
Earnings Potential
As a franchisee, you naturally want to understand your earnings potential when entering a franchise agreement. Although the disclosure document might include historical earnings of other franchisees or estimates of your future profitability, franchisors are not obligated to provide this information, and most do not.
Constantly scrutinise any earnings information. Additionally, investigate the franchisor’s sources for these calculations to ensure they are not enticing you with unrealistic financial promises.
Materially Relevant Facts
Franchisors must disclose any materially relevant facts not outlined in the disclosure document. These may include updated financial documents released after the disclosure document was prepared but before you sign the franchise agreement. They may also include a change in the franchisor’s ownership.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
Key Takeaways
The disclosure document is essential for any franchisee conducting pre-contractual due diligence. When reviewing the document, focus on these key points:
- the size of the franchisor’s network and any franchise agreement terminations in the past three years.;
- the range of costs and fees you can expect to incur; and
- any earnings information provided by the franchisor.
In addition to conducting your own due diligence using the disclosure document, consult an expert franchise solicitor. A franchise solicitor specialises in dealing with franchisors and can help identify critical risks for you to consider before deciding to become a franchisee.
Read Part Two of this series on how the disclosure document operates for details and key points to consider.
If you need help reviewing or drafting the disclosure document, our experienced franchising lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
The document details the franchisor’s identity, key decision-makers, contact information, the size of the franchise, and its operational history.
The document must detail franchisees who have exited the network in the past three years and their reasons for leaving. A high turnover rate is a red flag.
We appreciate your feedback – your submission has been successfully received.
