Understanding Disclosure Documents
The Franchising Code of Conduct is the primary law that regulates franchising in Australia. The Franchising Code contains provisions dealing with disclosure of information to prospective franchisees, restrictions on what franchisors can have in their franchise agreement, rules regarding the sale of the franchise and termination of a franchise, and provisions regarding dispute resolution.
One of the key requirements under the Franchising Code is the obligation to give prospective franchisees a disclosure document together with a copy of the franchise agreement in a form that the franchisee must sign. The Franchisee must receive the disclosure document before signing the franchise agreement or making any final payment to the franchisor.
So that franchisees have a proper chance to review the disclosure document and the franchise agreement, and take advice regarding those documents, the franchisor must give the disclosure document to the franchisee at least 14 days before the franchisee signs a franchise agreement or pays any non-refundable money.
Key aspects of the Disclosure Document
Some key aspects required by Annexure 1 to be present in every Disclosure Document are:
- Franchisor details – a description containing a means of easy identification (item 2);
- Business experience – of the last ten years including experience in the same franchise (item 3);
- Litigation – current proceedings against the franchisor or an associate for breaches relating to among others the Corporations Act 2001 (Cth) and unconscionable conduct (item 4);
- Details of and the business history of the other franchises in the system (item 6);
- Details and usage of intellectual property such as trade marks (item 7);
- Franchise territory (item 8);
- Obligations with regard to suppliers of goods and services to the franchisee (item 9);
- Policy on the selection of the franchise site or Territory (item 11);
- Details of the Marketing Fund (item 12);
- Establishment costs for the franchised business (item 13);
- Summary of the franchisees obligations under the franchise agreement (items 16 and 17); and
- In the absence of an independent audit report regarding the solvency of the franchisor, copies of the profit and loss statements and balance sheets for the last two financial years of the franchisor (item 20).
Disclosure Document Review
The information that the franchisor discloses in the Disclosure Document is generally limited to the information that is required to be included under the Franchising Code. DON’T assume that the Disclosure Document will contain everything that you need to know about buying the franchise – franchisees should always take financial and accounting advice to verify particularly financial information that is provided.
When reviewing a disclosure document, take care to consider the following key aspects:
- The experience of the franchisor, its management and directors. Do they have depth of knowledge and experience in the business? That is what the franchisee is paying for. What can they offer?
- Whether the franchisor has been involved in previous litigation. If so, what was the nature of the litigation and the outcome? Is there any ongoing litigation? — an adverse result can severely impact the franchisor’s financial position
- Details of current franchisees. A prospective Franchisee should speak to as many current franchisees as possible. Ask them three questions:
- Were they satisfied with the initial training program and support
- Are they are satisfied with the ongoing training and support
- Do all of the numbers add up — that is, after making all the payments are they getting value and making a profit
- The number of franchisees that have exited the system. How many have left and why have they left? Speak to them all.
- Details of costs and expenses. Check and double-check all the costs and have them reviewed by an accountant
- The franchisor’s statement of solvency and supporting financial reports (refer those to your accountant for advice). The franchisor must be financially strong and stable and order to continue its business and to grow the network.