If you are thinking about becoming a franchisee or already are one, the amount of documents you must go through may feel overwhelming. Amongst the raft of documents that your franchisor is required to provide to you is the disclosure document. This document provides a comprehensive picture of a franchise for prospective franchisees. However, it can take time to figure out the most critical details due to its comprehensive nature. This article will help you identify the crucial areas of the disclosure document and any warning signs to watch out for during your review.
What is a Disclosure Document?
Think of the disclosure document as a fact sheet for franchisees. It is designed to give you important information about the franchisor and the entire franchise network. The contents are set by the Franchising Code of Conduct (the Code) to ensure consistency across all disclosure documents. If the franchisor fails to include the required information, it will violate the Code.
The following sections unpack key areas to review in the disclosure document.
1. Experience
If you are a potential franchisee interested in buying a franchise, one of the first things you should examine is the franchisor’s experience. This legal document will include details such as how long the franchise network has been operative in Australia and the business experience of the franchisor’s key personnel. You can use this information to gain an idea of the franchise’s longevity. In doing so, you can ensure you enter into a well-established franchise with a history of success.
Continue reading this article below the form2. Number of Franchisees
As you consider entering a franchise, you should look for growth. A growing number of franchised businesses boosts brand recognition and strengthens the franchise network, generally indicating success. To ensure this, you should monitor if the number of franchisees has increased each year. If there has been a noticeable stagnation in the amount of new franchisees, you may wish to investigate why this has occurred
3. Termination or Transfer of Franchises
A high number of transfers, terminations, or non-renewals in the franchise network may indicate problems from within the overall business. If these numbers exceed 5% of the total franchises, you should ask the franchisor about the reasons. You may also consider asking what actions they are taking to address issues faced by outgoing franchisees.
As a potential franchisee, it is essential to know that the franchisor is obligated to share the contact details of former franchisees. Talking to these ex-franchisees during your due diligence can help you understand any potential problems within the franchise network and issues they face with the franchisor.
4. Litigation
Franchisors must disclose to you any court cases they are involved in. This can include:
- proceedings brought by disgruntled franchisees;
- proceedings relating to intellectual property and trademarks; and
- any third-party issues, such as a supplier demanding payment.
A franchise connected to numerous litigation cases, for obvious reasons, is not a good sign.
5. Territory
The franchisor must specify whether you, as a franchisee, will be granted exclusive territory to operate your businesses. If multiple franchisees operate in the same area, it may cause competition over the same customers, reducing the value of buying a franchise. You should also ensure whether the franchisor can sell the goods or services in your franchise territory.
6. Expenses
Franchisors have an obligation to disclose to you all foreseen costs throughout the franchise agreement. Use the itemisation found in the disclosure document to plan for the following year’s outgoings. You should carefully examine these numbers. This is because the franchisor might mislead you if they have not disclosed certain costs they know you are likely to incur.
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7. Intellectual Property
Your franchise fees pay for, at least in part, the all-important brand of your franchise. Therefore, it is worthwhile to verify that all trademarks you rely upon in your daily business operations are registered with IP Australia. Additionally, you must check the ownership status of the intellectual property. This ensures your franchisor has the right to license this property to you and that your franchisor is taking active steps to protect its valuable branding.
8. Online Sales
Franchisors need to outline whether they intend to provide the relevant goods or services online. In practical terms, this could have severe consequences for you as a franchisee. For instance, if a boutique coffee house intends to sell its coffee online, particularly in pods, this might make customers of that coffee brand prefer brewing coffee at home instead of going to franchise stores.
9. Marketing Fund Report
If your franchisor operates a marketing fund, they are required to include an annual report on the fund’s expenses for the previous year. Make sure to review this report to confirm that the franchisor is using the funds appropriately for marketing and promoting the network and not for any other purposes.
Key Takeaways
It is crucial for you, as an existing or potential franchisee, to carefully review the disclosure document provided by the franchisor. Some key areas to focus on in your review include:
- the growth of the network and how many franchised businesses have recently been transferred, terminated or not renewed;
- whether you have an exclusive territory and whether the franchisor can sell products online; and
- what expenses you are likely to incur in operating the franchised business.
If you require help understanding your franchisor’s 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.
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