Think of the disclosure document like a fact sheet for franchisees. Its purpose in the franchising world is to provide franchisees, or prospective franchisees, with important information about the franchisor and franchise network more broadly. The contents of that document are prescribed by the Franchising Code of Conduct (‘the Code’), so as to ensure all disclosure documents provide the same information.
If you’re a franchisee or are considering entering into a franchise document, there are a few key sections of the disclosure document which should you should review, and the franchisor can enquire. Further, with franchisors obliged to update their franchise agreements annually, and typically within four months of the end of each financial year, these key points should form part of every franchisees ‘annual audit’.
1. Number of Franchisees
Here, you should be (hopefully) looking for growth. An increased number of franchised businesses adds to brand recognition and strengthens your franchise network (and is, generally, indicative of success). Has the number of franchisees grown year to year?
2. Termination or Transfer of Franchises
If there are a large number of transfers, terminations or non-renewals, this could be a sign all is not well in the franchise network. If the numbers are more than, say, 5% of the number of franchises generally, you should ask your franchisor why this occurred, and perhaps, more importantly, what they are doing to fix any issues encountered by the outgoing franchisee.
Franchisors must disclose any litigation to which they are a party. 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. Lots of litigation, for obvious reasons, is not a good sign.
Franchisors now have an obligation to disclose all foreseen costs that the franchisee must bear over the term of the franchise agreement. Use the itemisation found in the disclosure document to plan ahead for the following year’s outgoings.
5. Intellectual Property
Your franchise fees pay for, at least in part, the all-important brand of your franchise. Accordingly, it is worthwhile to check all trademarks you rely upon in your day to day business operations are properly registered with IP Australia, and that your franchisor is taking active steps to protect their valuable IP.
6. Online Sales
This is a new requirement of the Disclosure Document. Here, a franchisor needs to outline whether it intends to provide the relevant good or service online. In practical terms, this could have serious consequences for franchisees. For example, if a boutique coffee house intends to sell its coffee online (probably in pods, because it’s all about pods these days), this could drive lovers of that coffee brand away from the franchised outlets – back into their very own kitchens.
If something in your franchisors disclosure document is confusing or raises concern, it is worthwhile to raise the issue with your franchisor. If you have questions about your disclosure document, ask our franchise lawyers – we’ve looked at more than is admittedly healthy, and would love to help.