We’ve reviewed the legal documents of many franchises, from well-established to brand new, from goods to services, and from bricks and mortar to mobile. In today’s article, we will share our knowledge on the key things to consider in a franchise disclosure document.
Franchisors must provide potential Franchisee’s with a copy of a Disclosure Document. The Disclosure Document must follow a standard form set out in the Franchising Code of Conduct. It requires Franchisor’s to disclose particular information about the Franchise.
Although each section of the Disclosure Document is important, here are some key items to look out for when reviewing a Disclosure Document.
Found at item 14 of the Disclosure Document, for most Franchisees, fees are a crucial section, as this item sets out how much everything will cost. This section includes fees which are paid:
- before the franchise agreement is entered into;
- during the term of the franchise agreement;
- after the franchise agreement comes to an end; and
- any additional fees which could be come payable before, during or after the term of the Franchise agreement.
The first three are fairly self-explanatory. The last type of fee is for certain expenses which the Franchisee could potentially be required to pay. For example, to replace broken equipment, or to touch up some fit out etc.
In addition, the Disclosure Document also requires the Franchisor to disclose:
- how much the fee is;
- who the fee is paid to;
- what the fee is for; and
- whether the fee is refundable.
Item 6 of the Disclosure Document sets out how many existing Franchisees there are and whether in the past 3 financial years:
- a franchise was transferred;
- a franchise ceased business;
- a franchise agreement was terminated (by the Franchisee or the Franchisor);
- a franchise agreement was not extended; and
- a franchise was bought back by the Franchisor.
This information provides a good idea of how the franchise, as a whole, is running. For example, we recently reviewed a Disclosure Document in which almost half of the existing Franchisees had transferred or ceased the business. To us, this is a warning sign that the Franchise as a whole was not doing well, as a successful franchise generally manages to keep their 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 a Franchisee can use. Most Franchises have restrictions on suppliers and allow Franchisees to only use approved suppliers. However, in some cases, this can make a franchise uncompetitive. The Franchisee should make sure to ask a Franchisor about suppliers before they enter into any Franchise Agreement.
Sites or Territories
Found in the Disclosure Document at item 9, this item details what rights a Franchisee has in respect of their particular location or territory. Generally, Franchises are granted on a non-exclusive basis. This means that the Franchisor and/ or another Franchisee can compete against another Franchisee in a particular area. This can seriously impact a franchise and therefore, most of the time, there are some restrictions on this competition (for example, the territory is exclusive except when another franchisee has been referred to a customer in a particular territory). It is important for Franchisees to understand this section in detail.
Each section of the Disclosure Document is important. Each Franchisee should ensure to carefully read the Disclosure Document in full, before entering into a Franchise Agreement
We recommend that every Franchisee also read the Franchise Agreement carefully, as the Disclosure Document will contain only part of the information regarding the Franchise.
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