According to the Franchising Code of Conduct, franchisors are required to provide franchisees and potential franchisees with a copy of the Disclosure Document. This is often provided alongside the Franchise Agreement. A franchisee should expect a number of things to be included in the Disclosure Document.
The business experience of the franchisor should run through the name, position and qualifications of any officeholder of the franchise. Details of the business experience can run as far back as 10 years. The franchisor should also note whether or not they are operating a business that is similar to that of the franchise or if they have offered other franchises apart from the one up for consideration.
The litigation section of the Disclosure Document is quite important as a franchisee will be able to determine whether or not there have been former disputes with the franchisor, and if there have been, what actions they took to rectify the situation. Although a dispute may have arisen, the franchisor may have dealt with it in an effective way that is responsive to the franchisee’s concerns.
Details of Existing Franchisees
The franchisor needs to provide details of their current franchisees. This list can provide a potential franchisee with contact information in order to perform the adequate due diligence. They can find out details of how the franchise works in practice and any concerns they have had during their operation.
To commence a franchise is a significant investment and it is important for potential franchisees to be informed of all the other potential costs that may be involved in starting the business. It should outline the amount, the receiver, and details about whether or not the fee is refundable. Establishment costs do not only include the initial franchise fee, but also equipment, rent, assets, inventory and insurance, to name a few.
The Disclosure Document often runs through any obligation that the franchisee may have in using the same or authorised suppliers. This is particularly important if the quality or safety of a product is an important aspect of the franchise’s success. This may be, for example, ingredients or equipment to be used.
Franchises put value on their intellectual property, particularly business names or logos. The Disclosure Document usually outlines whether or not the franchisee has access to the franchisor’s intellectual property, and if so what their rights and obligations are.
This is only a summary of what is included in the Disclosure Document, there are of course other things that need to be addressed such as the franchise territory, the marketing fund or the independent audit report. A franchise lawyer can provide you with advice on the Disclosure Document and outline the key issues you need to consider. Potential franchisees should always do their due diligence before purchasing a franchise, contact a member of the LegalVision team of franchise lawyers to guide you through the process.