One of the regulations of the Franchising Code of Conduct states that franchisors must provide all franchisees with a full disclosure document of the franchise and the franchisor.
A disclosure document tells you everything there is to know about the franchise company, what you are actually buying, and what promises the franchisor is actually making.
In line with the Franchising Code of Conduct, it is now obligatory to provide disclosure documentation.
It lays everything out before the prospective buyer, eliminating the unknowns and providing them with a thorough description of the business and all parties involved.
Contents of a disclosure document
A typical disclosure document should contain all relevant details about the franchise, including the following:
- Details of Franchisor
Name, address and registered office of the franchisor must be provided in the document. A resume detailing the franchisor’s business experience (work history, time with the franchise, previous positions held) is also a requirement.
Details of Directors
Like the franchisor, all relevant information including names, addresses and occupations of any directors, investors, and principals must be divulged.
- Financial Viability Statements
Key financial data for the last two financial years must be revealed by the franchisor. Key financial data in this instance includes asset and liability totals, profit and loss figures, and the amount of shareholder equity tied up in the company.
This is very much for you benefit, simply because the franchisor is unable to withhold any vital information relating to his finances which could deter you from buying the business.
It gives you an accurate indication of exactly how the company has been performing in recent years.
- Past Records
Details of any relevant criminal, civil or bankruptcy proceedings brought against the franchisor or any of the franchise’s directors should be disclosed.
- Summary of Franchise Features
This section should particularise the main features of the franchise, such as:
- Territorial restrictions
- Ongoing payment details
- Identification of trade marks
- System of operation
- Conditions of termination
- Obligations of the franchisor
This is quite similar to the information you would find in the franchise agreement. It’s important that the two documents are fairly similar in this respect – too many discrepancies will cause problems later on.
Disclosure document details
The following is a continued list of what disclosure details should contain:
- List of Components
A complete list of the items making up the franchise purchase must be disclosed so that you know exactly what you’re paying for.
Sale components vary from franchise to franchise. Some include shop fittings as part of the initial fee; others charge an additional amount to fit out the premises. Whatever the case it is important that you understand precisely what is included in the purchase fee, and that you get everything you pay for.
- Franchisee Financial Requirements
Most franchisors won’t sell to you unless you can fund a certain percentage of the investment fee from non-borrowed capital. Details of all financial responsibilities expected of you need to be outlined in full.
- Existing Franchises
The franchisor must also disclose the number and locations of all existing franchises, as well as details of franchises that have closed and explanations for them. A complete list of the names and addresses of the other franchisees must be supplied.
The franchisor is responsible for compiling and producing the disclosure document, and as you can see, it is mainly for your security.
- NOTE: If you suddenly decide that you don’t want to deal with all of this legal documentation, be rest assured there is nothing to be fearful of. The burden of compiling and producing these documents falls on the franchisors.
All you have to do is read the documents thoroughly, get them checked by professionals if necessary, and make sure you understand the effect that each document has on all parties involved. If any points or issues seem unnecessarily tough, don’t be afraid to ask the franchisor for an explanation. Most often you will be told that they exist only to protect the franchisor against the odd inefficient operator.
This may be true but remember that as long as they are documented they can always be used against you. It is worthwhile negotiating with the franchisor if you feel that anything contained in the agreement is unfair or potentially detrimental to your position as a franchisee.
Buying a franchise is not something to be taken lightly. In most cases you are going to be parting with a large portion of your savings (if not all of it) and a lot of your leisure time to go into business. Don’t sign anything until you’re sure it’s the right thing to do. It is a tremendous sacrifice, and you should take your time to get to understand and appreciate not only the legal side of franchising, but the business and humane aspects as well.