Part Two: How Does the Disclosure Document Work?

In Short

• Franchisors must include specific legal and financial details in their disclosure document.
• Key components include franchisee obligations, upfront costs, and ongoing fees.
• Failing to provide accurate information can lead to legal disputes and penalties.

Tips for Businesses
Ensure your disclosure document clearly outlines all fees, costs, and legal obligations. Regularly review and update the document to remain compliant with the Franchising Code of Conduct. Accurate disclosure helps protect your business from potential disputes with franchisees and fosters a transparent relationship.

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Table of Contents

• Intellectual Property
• Territory
• Operations Manual
• Renewal, Term and Assignment
• Initial and Ongoing Fees
• Key Takeaways
• Frequently Asked Questions

Welcome to Part Two on how the disclosure document works. As you know, the disclosure document details key information about a franchisor and the franchise system that you need to know before deciding to enter into a franchise agreement. The franchisor must provide this information to you in line with their obligations under the Franchising Code of Conduct. If you are unsure if you are receiving all the information you are entitled to in the disclosure document, this article will discuss the key details to look out for in a disclosure document.

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Intellectual Property

The intellectual property (IP) of a franchise is one of its most valuable assets. IP includes the:

• branding and trademarks of the franchise network;
• systems;
• processes;
• recipes;
• trade secrets; and
• more.

The disclosure document must clearly state what IP the franchisor owns and what rights the franchisor is providing to the franchisee to use such IP.

If a separate entity in the franchisor’s corporate structure owns the IP, you need to clarify how this entity has granted rights to the franchisor to license the IP to the franchisee. You must disclose this information in the disclosure document.

Territory

To protect other franchisees in the same network and prevent competition among them, the franchisor may assign specific territories for each franchisee to operate in. The disclosure document should clearly state any geographical exclusions, meaning territories where each franchisee exclusively operates, and provide a summary of the day-to-day operations. However, some franchises do not offer exclusive territories and may allow the franchisor to start other competing businesses in the same territory.

Operations Manual

Every business has its own way of operating, and each franchisee must follow the operations manual to ensure that the franchising network operates consistently. For franchises that provide a service, like a car rental service, the manuals should clearly explain how to deliver those services to clients. For goods-based franchises, the document should explain how to supply, deliver, and purchase the goods and if any rebates apply to both the franchisor and franchisee. Rebates provide the franchisor with another source of income based on the sales and performance of the franchisee. You must disclose rebates.

Renewal, Term and Assignment

The disclosure document should include details about the agreement terms and any renewal options. It is important to have your franchise solicitor review these clauses to ensure they are fair and reasonable. Additionally, provide information about the assignment process if the franchisee decides to sell their franchised business to another prospective franchisee. Simply finding a buyer and selling the business is required. The franchisor has requirements for potential franchisees, such as necessary finance and experience. These requirements should be reflected in the disclosure document.

Moreover, the disclosure document must specify how either party can end the term early. This includes the franchisee’s cooling-off rights, the parties’ rights to terminate for breach, and any other early termination rights.

Initial and Ongoing Fees

You will face several fees at every stage of the franchise relationship. These include a start-up fee, known as an:

• initial fee;
• training requirements;
• marketing fund contributions;
• other promotional activities;
• royalties; and
• costs to fit out the site.

Key Takeaways

The disclosure document provides valuable information for prospective franchisees. It stands apart from the franchise agreement itself. To ensure your understanding of the franchising business, you should make further inquiries. For example, you can visit existing franchising businesses to get a feel for the system and how it operates.

If you require assistance with your disclosure document, 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.

Frequently Asked Questions