What to Look for in a Disclosure Document

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Table of Contents

• Litigation and Dispute History
• Fees
• Existing Franchisees
• Supply of Goods or Services to a Franchisee
• Sites or Territories
• Key Takeaways

When reviewing a franchise opportunity, the disclosure document is a critical form that provides information about the franchise system. Franchisors must provide potential franchisees with a copy of a disclosure document before they enter into any franchise agreement. Likewise, the document must comply with the Franchising Code of Conduct, which requires franchisors to disclose particular information about the Franchise. This article explores key items to look out for when reviewing a disclosure document.

Litigation and Dispute History

At Item 4 of the disclosure document, you can review the history of litigation or disputes between the franchisor and franchisees. This section provides insights into the relationships within the franchise network and potential risks associated with the business. 

You should assess the nature and frequency of disputes, paying attention to any patterns or recurring issues. A transparent account of past disputes can help you gauge the level of support and communication within the franchise system. This can influence your decision on whether to proceed with the opportunity.

Fees

The disclosure document will also outline fees and how much everything will cost in Item 14. This section includes fees that you would pay:

1. before entering the franchise agreement;
2. during the term of the franchise agreement;
3. after the franchise agreement comes to an end; and
4. any additional fees which could become payable before, during or after the term of the franchise agreement.

In addition, the disclosure document also requires the franchisor to disclose:

1. how much the fee is;
2. who the fee is paid to;
3. what the fee is for; and
4. whether the fee is refundable.

Existing Franchisees

Item 6 of the disclosure document sets out the number of existing franchisees. It will also provide information about whether, in the past three years, a franchise:

• ceased business;
• was transferred;
• was terminated (by the franchisee or the franchisor);
• was not extended; or
• was bought back by the franchisor.

This information provides a good idea of how the franchise network is running. For example, suppose a disclosure document reveals that almost half of the existing franchisees had transferred or ceased the business in the past financial year. This would be a warning sign that the franchise network is not doing well. Likewise, there may be significant internal issues resulting in the charge churn in franchisees.

Supply of Goods or Services to a Franchisee

Item 10 of the disclosure document is important for a franchisee, as it sets out the restrictions on the suppliers that you can use. Most franchises have restrictions on suppliers and allow you to only use approved suppliers. However, in some cases, this can make a franchise uncompetitive. 

Sites or Territories

Site or territory information is essential for the running of franchises as they may limit the area in which franchisees can operate. Item 9 details what rights a franchisee has in respect of their particular location or territory. 

Generally, franchises are granted on a non-exclusive basis. Accordingly, the franchisor or another franchisee can compete against another Franchisee in a particular area. This can seriously impact a franchise and therefore, there are some restrictions on this competition. For example, your agreement might specify that the territory is exclusive except when another franchisee has been referred to a customer in a particular territory. Be sure to review this section in detail. 

Franchisor Financial Disclosure Factsheet

This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.

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Key Takeaways

Each section of the disclosure document is important. As a potential franchisee, carefully read the disclosure document in full before entering into a Franchise Agreement. You should also read your franchise agreement carefully,  as the disclosure document will contain only part of the information regarding the Franchise.

For more information or assistance drafting or reviewing a 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.