Welcome to Part two of how the disclosure document works. As you know, the disclosure document details all of the necessary information about a franchisor and the franchise system that a franchisee will need to know before they decide whether or not to enter into a franchise agreement. If you’re unsure whether you’re getting all the information you’re entitled to in the disclosure document, contact your franchise solicitor to find out about your rights.
Discussed below are the rest of the inclusions ordinarily found in a disclosure document.
The intellectual property of a franchise is one of its most valuable assets. The disclosure document needs to be clear on what intellectual property is owned by the franchisor and what license the franchisor is providing to the franchisee to use such intellectual property.
To protect other franchisees within the same network, and prevent franchisees from competing with each other, the franchisor will normally set particular territories for each franchisee to operate in. The disclosure document should be clear on any geographical exclusions i.e. territories in which each franchisee exclusively operates, and give a rundown of the day-to-day operations.
Every business has its own way of operating and it is important that every franchisee follows the operations manual to ensure that the franchising network can operate in a consistent manner. For franchises that provide a service, like a car rental service, the document should clearly explain how those services would be delivered to the clientele. For goods-based franchises, the document should explain how the goods are supplied, delivered and purchased, and whether any rebates apply. Rebates essentially provide the franchisor with another source of income that is based on the sales and performance of the franchisee. As such, the franchise solicitor would be wise to disclose this information in the disclosure document.
Renewal, Term, Assignment
There should be details regarding the term of the agreement and details regarding any renewal options. It is important to have your franchise solicitor review these clauses to ensure they are fair and reasonable. It is also important to include details regarding the process of assignment in the event that the franchisee chooses they would like to assign their franchised outlet to another prospective franchisee. It is not enough to simply find a buyer and sell the business. The franchisor, understandably, has its own requirements of potential franchisees, such as the necessary finance and experience. These requirements should be reflected in the disclosure document.
Initial and Ongoing Fees
There will be a number of fees that are imposed on the franchisee at every stage of the franchise relationship. These can include a start-up fee, known as an initial fee, training requirements, marketing fund contributions and other promotional activities, royalties, and costs to fit out the site. Being unable to make payments on time may result in a delay in the opening of a franchise, or in more serious cases, lead to a termination of the franchise agreement. As a franchisee, it is important that you understand what the fees are, when they are payable and what you will receive. It is also recommend that you take these financial details to a financial adviser to determine the financial viability of the franchise that you are looking to open.
It should also be noted that as of 1 January 2015, there is now the ability to change the franchise agreement after disclosure is given but before signing, incorporating alterations requested by the franchisee or minor changes without having to formally issue disclosure again and wait another two weeks.
The disclosure document is a valuable source of information for prospective franchisees. Having said that, the disclosure document is not a replacement for the franchise agreement itself. To ensure that you understand the franchising business, further enquiries should be made, such as visiting existing franchising businesses to get a feel of the system and how it operates. Franchise solicitors and franchise financial advisers should be consulted where possible. For a fixed-fee quote from an experienced franchise solicitor, contact LegalVision on 1300 544 755.
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