Entering a franchised business as a franchisee is a huge commitment and such a decision should be given careful consideration. Not only is it important to conduct your own investigations into the different franchisee opportunities within the various franchise systems, but also to consult a franchise solicitor to assist you during the bargaining stages. A franchise solicitor is trained in dealing with franchisors specifically and can negotiate on your behalf to try and get you a better deal.
To properly investigate a franchise system, you need to have time on your hands and energy to invest. It can be a long and arduous process, particularly without the assistance of a franchise solicitor, but an excellent starting point for unravelling the fine print that details the inner workings of the franchise business is the disclosure document. Generally, the franchisor or its franchise solicitor will prepare the disclosure document.
What to include in the Disclosure Document
- Franchisor’s Details – As you would expect, franchisees need to be able to get in touch with their franchisor any time (at least during working hours). Contact details, such as the name, number, email, facsimile, etc., along with details of the executives/directors of the franchisor (positions in the company).
- Franchisor’s Resume – The franchise solicitor will usually include details of the franchisor and the franchisor’s officers, including their experience in the franchise business/industry. Any experience that relates to franchising will also be included as a way of showing the prospective franchisees how qualified the franchisor will be to guide, assist and support the franchisee during the franchise relationship.
- Financial Reports/Earnings Potential – All franchisees will want to know their earnings potential when entering a franchise agreement. This part of the disclosure document is in some ways the most important, as it gives the franchisee an insight into the financial viability (or lack thereof) of the particular franchise system. In some cases, the disclosure document will not contain any projected earnings as a way of minimising the risk of inadvertently misrepresenting franchisees with respect to the expected minimum earnings/income of the franchise business and the levels of profit they should anticipate. Another option for the franchisor is to have the franchise solicitor draft a separate document that details the projections of the business. To limit any liability for the representations made in these documents, in most cases, the franchise solicitor will require the franchisee to seek independent legal advice and sign an agreement that acknowledges having received this independent advice. In addition, the franchise solicitor may even require an acknowledgement from the franchisee of having received financial advice, which will usually state that the franchisee will not rely on the financial information within the disclosure document. It is worth noting that the financial details of the disclosure document that relate to future potential earnings are usually based on the performance of previous franchisees. The franchise solicitor will usually preface these details with a disclaimer stating that the prospective franchisee may or may not perform to this standard.
- Materially Relevant Facts – Franchisors are obligated to disclose materially relevant facts to the franchisee that are not outlined in the disclosure document. For example, updated financial documents that become available after disclosure but before signing of the agreement.
- Other financial information – This is where the franchisor and its solicitor will include financial details of the franchisor, any investors or other key stakeholders. It should also detail any financial hiccups the company or its executives have had, such as receivership and bankruptcy. At the end of the day, transparency is what the franchise relationship will thrive on. There is no point in the franchisees and franchisor keeping important details from each other when essentially they are a partnership in many ways and each is working for the benefit of the other. Just as franchisees will investigate the franchisors, franchisors too will investigate the prospective franchisees, typically with the assistance of a franchise solicitor.
- Pre Disclosure Information Sheet – As of 1 January 2015, franchisors are also required to provide prospective franchisees with a 2 page information sheet which outlines the risks and rewards of franchising. This should be provided at the interview stage and explains the due diligence enquiries franchisees should make.
Stay tuned for part two of this two part series on how the disclosure document works. For any legal assistance in reviewing or drafting the disclosure document, or any franchise-related advice, contact LegalVision on 1300 544 755 and ask to speak with one our team of experienced franchise solicitors.