In Short
- The 14-day disclosure period is mandatory for potential franchisees to review legal documents before signing.
- The period starts when documents are filled with the franchisee’s details, not with blank pro forma documents.
- After the 14 days, there’s a 14-day cooling-off period where franchisees can withdraw, with some costs potentially refunded.
Tips for Businesses
When recruiting franchisees, ensure compliance with the 14-day disclosure period as required by the Franchising Code of Conduct. Don’t rush the process; allow franchisees adequate time to review documents. Be clear on the process, and keep track of the deadlines to ensure the validity of your franchise agreements.
Attracting prospective franchisees to your franchise network can be lengthy and time-consuming as a franchisor. The last thing you want to happen during this process is to have a legal issue arise, bringing into question the enforceability of the precious franchise agreement. Once a potential franchisee seems ready to join the franchise network, all you would want them to do is sign on the dotted line as soon as possible. However, you cannot rush the process. This article explains the legal requirements franchisors must comply with during the franchisee recruitment process.
What Is the 14-Day Disclosure Period?
Seasoned franchisors know better than to rush a potential franchisee. Any potential franchisee needs to be provided with 14 days to review the legal documents supplied before any executed documents can be signed. This is known as the 14-day disclosure period.
The Franchising Code of Conduct
The Franchising Code of Conduct requires that potential franchisees be provided with a number of documents, including the:
- franchise agreement;
- disclosure document and key facts sheet; and
- Franchising Code of Conduct (including the information statement).
The documents are important for any potential franchisee to understand their obligations in the franchise arrangement. You can issue pro forma documents to allow the prospect to review these documents. However, that does not start the 14-day time clock. Under the Franchising Code of Conduct, the 14-day time clock only starts when the documents are in ‘executable form’. This means the franchisee’s details must be included in the documentation and issued before the 14-day review period commences. If the franchisee asks for amendments during this 14-day period, that does not necessarily restart the time. This is because the franchisee is the one requesting the changes.
However, a blank pro forma document does not start the time clock.
Therefore, franchisors should urge any prospect to set up their company and provide their personal details as soon as practicable. Doing this allows for the drafting process to commence and the 14-day disclosure period to start. You should reassure them they are not committing to anything by providing these details. But, they must provide them as soon as practicable so that no unnecessary delay occurs in the signing process.
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Documents for Franchisee Recruitment
Many franchisors provide two sets of documents. These are the:
- pro forma (blank) documents that you can use very early in the franchisee recruitment process; and
- ‘filled out’ documents for use at some later point, which starts the 14-day disclosure period.
Inexperienced franchisors can assume that issuing the blank pro forma documents “gets the ball rolling” and starts the review process because the prospect can review the documentation once received. However, this is not the case. The 14-day review period only commences.
So I Should Just Do It?
Franchisors need to comply with the Franchising Code of Conduct. If they do not, they may find the franchise agreement unenforceable later or be penalised by regulatory authorities, including the Australian Competition and Consumer Commission. However, this is not the only reason you should provide potential franchisees with the 14-day period. There are also other reasons, including that you:
- can sort through the serious franchisees from ones that may just be ‘looking around’;
- can ensure that the franchisees understand their obligations to you. This will help in the smooth running of the franchise network generally; and
- will be able to clarify any of your verbal discussions by providing the written terms and conditions, and if necessary, including any special conditions.
What Happens After the 14 Days?
After 14 days, the potential franchisee can sign the documents. However, you should also note that there is a 14-day cooling-off period. This means that franchisees can have “second thoughts” and seek to withdraw from the arrangement within 14 days of signing. You can retain reasonable franchisee training and recruitment costs incurred during this period, provided they have been disclosed. Otherwise, the fees must be returned should a franchisee seek to withdraw during this cooling-off period.
Key Takeaways
Before you take any money from a potential franchisee, it is best practice (as well as required by the Franchising Code of Conduct) to receive a statement from them outlining that they have read and have had a reasonable opportunity to understand the:
- franchise agreement;
- disclosure document; and
- Franchising Code of Conduct.
As a franchisor, it is important to understand your obligations under the Franchising Code of Conduct, particularly concerning clauses 9 and 10. As with many aspects of franchising, a large component has to do with the process. By ensuring you comply with the procedural aspects of entering into the agreement, you will be able to remove any doubt as to the validity of the agreement in the future.
If you need further advice regarding franchisee recruitment and the 14-day disclosure period, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Any potential franchisee needs to be provided with 14 days to review the legal documents supplied before any executed documents can be signed.
After 14 days, the potential franchisee will be able to sign the documents. However, there is now a 14-day cooling-off period, where franchisees can seek to withdraw from the arrangement within 14-days of signing.
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