WHAT IS IN A DIS­CLO­SURE DOC­U­MENT?

Inside Franchise Business - - Contents - LUKE MCKAVANAGH Rouse Lawyers

This doc­u­ment is a key part of the pre-pur­chase process when you buy a fran­chise.

If you are con­sid­er­ing buy­ing a fran­chise, the dis­clo­sure doc­u­ment is a key part of the process that aims to en­sure prospec­tive fran­chisees can

make an in­formed busi­ness de­ci­sion.

Un­der the Fran­chis­ing Code of Con­duct, all fran­chise sys­tems in Aus­tralia must main­tain a dis­clo­sure doc­u­ment, which must be pro­vided to prospec­tive fran­chisees at least 14 days be­fore en­ter­ing into a fran­chise agree­ment.

The pur­pose of a dis­clo­sure doc­u­ment is to sup­ply key in­for­ma­tion about the na­ture of the fran­chise sys­tem and to help the fran­chisee make an in­formed busi­ness de­ci­sion about en­ter­ing the fran­chise.

De­spite be­ing tai­lored to each fran­chise sys­tem, dis­clo­sure doc­u­ments must com­ply with the code’s pre­scribed for­mat. Key el­e­ments in a dis­clo­sure doc­u­ment in­clude:

1. A WARN­ING

The warn­ing state­ment on the first page cau­tions prospec­tive fran­chisees that fran­chis­ing is a se­ri­ous un­der­tak­ing. It rec­om­mends they ob­tain in­de­pen­dent le­gal, ac­count­ing and busi­ness ad­vice, but also high­lights their cool­ing-off rights.

2. SPE­CIFIC DATES

Dis­clo­sure doc­u­ments must spec­ify their prepa­ra­tion date and be signed by an of­fi­cer of the fran­chisor. Fran­chisees can ref­er­ence this date to en­sure cur­rency.

Fran­chisors must up­date their dis­clo­sure doc­u­ment an­nu­ally within four months of the end of their fi­nan­cial year (with some ex­cep­tions). There­fore, fran­chisors work­ing on a stan­dard July-to-June fi­nan­cial year must com­plete their up­date by the end of each Oc­to­ber.

3. FRAN­CHISOR’S DE­TAILS

The busi­ness ex­pe­ri­ence of the fran­chisor’s of­fi­cers and the du­ra­tion the fran­chise

sys­tem has been ac­tive in Aus­tralia pro­vides an in­sight to the stature of the sys­tem. Prospec­tive fran­chisees can judge whether the fran­chisor has a sat­is­fac­tory level of knowl­edge and ex­pe­ri­ence in the in­dus­try, which is es­pe­cially im­por­tant for new sys­tems.

Fran­chisors must dis­close lit­i­ga­tion they have been in­volved in, along with any in­volve­ment by their of­fi­cers in any failed fran­chise sys­tems.

4. FRAN­CHISEE DE­TAILS

Con­tact de­tails for all cur­rent fran­chisees within the sys­tem and those who have left dur­ing the pre­vi­ous three years (and the rea­son for do­ing so) are an es­sen­tial el­e­ment of a prospec­tive fran­chisee’s due dili­gence. Cur­rent and for­mer fran­chisees should be con­tacted to as­sess sat­is­fac­tion with the fran­chisor’s train­ing, sup­port and sys­tems.

If large num­bers of fran­chisees have had their agree­ments ter­mi­nated or have left the sys­tem, it may in­di­cate un­hap­pi­ness with the sys­tem.

5. IN­TEL­LEC­TUAL PROP­ERTY

Fran­chise agree­ments give fran­chisees the right to use the fran­chisor’s in­tel­lec­tual prop­erty. This can in­clude copy­right (trade se­crets), trade­marks (busi­ness names and lo­gos) and patents (in­ven­tions), which will be de­tailed in the dis­clo­sure doc­u­ment.

The own­er­ship struc­ture of the in­tel­lec­tual prop­erty must also be dis­closed. In many sys­tems, a sep­a­rate hold­ing com­pany owns the in­tel­lec­tual prop­erty and li­cences as part of an as­set-pro­tec­tion strat­egy.

6. SITE AND TER­RI­TORY

Fran­chisors must dis­close whether a fran­chisee is granted an ex­clu­sive ter­ri­tory or if their rights are lim­ited to a par­tic­u­lar lo­ca­tion. Some sys­tems give fran­chisees the ex­clu­sive right to work in a set ge­o­graph­i­cal area, while oth­ers can grant the right to work only from a spec­i­fied store. Fran­chisees can use this to de­ter­mine the risk of com­pe­ti­tion from within the fran­chise sys­tem it­self.

If the fran­chisor has site-se­lec­tion cri­te­ria, then de­tails must be dis­closed. Re­gard­less of whether the fran­chisor nom­i­nated the site, it is cru­cial that fran­chisees do their own in­de­pen­dent in­ves­ti­ga­tions as to whether the de­mo­graph­ics of the site or ter­ri­tory can sup­port the busi­ness.

De­tails of pre­vi­ous fran­chisees who have worked in the site or ter­ri­tory within the past 10 years must also be pro­vided. A high turnover of fran­chisees in the one lo­ca­tion could in­di­cate a prob­lem.

7. GOODS AND SER­VICES

In most fran­chise sys­tems, fran­chisees must ob­tain goods and ser­vices from the fran­chisor or an ap­proved sup­plier to en­sure uni­for­mity across the sys­tem. The dis­clo­sure doc­u­ment should de­tail how these ar­range­ments will work, along with the fran­chisee’s rights (if any) to do busi­ness on­line.

Fran­chisors must also pro­vide de­tails

of any re­bate ar­range­ments in place with sup­pli­ers.

8. PAY­MENTS

The fran­chisee’s es­tab­lish­ment costs and all the ex­pected pay­ments dur­ing the course of the fran­chise must be dis­closed. Fran­chisors will of­ten pro­vide large ranges, so fran­chisees should un­der­take a care­ful anal­y­sis. The cost of es­tab­lish­ing a store within a shop­ping cen­tre will be much higher com­pared to a quiet street cor­ner.

Un­fore­seen cap­i­tal ex­pen­di­ture is also im­por­tant to note. This could be the fran­chisee’s costs to re­fur­bish their store, or up­grade and re­place equip­ment and signs.

Fran­chisees should be able to use these fig­ures to es­ti­mate what the to­tal costs will be to set up and run the busi­ness, and whether the busi­ness model can reach and sus­tain prof­itabil­ity. A fran­chisee's ac­coun­tant will play a key part in this anal­y­sis.

9. MAR­KET­ING FUNDS

If the fran­chisee has to con­trib­ute to a mar­ket­ing fund con­trolled or ad­min­is­tered by the fran­chisor, then de­tails of the pay­ments and how the fund will be used must be dis­closed.

10. END-OF-TERM AR­RANGE­MENTS

Fran­chisors must clearly dis­close whether the fran­chisee has an op­tion to re­new or ex­tend the fran­chise agree­ment at the end of its term. This in­cludes whether fran­chisees are en­ti­tled to com­pen­sa­tion if they do not re­new, and ar­range­ments for un­sold stock and equip­ment.

It is im­por­tant for fran­chisees to un­der­stand that once the term of the fran­chise agree­ment ends, and if they walk away from the busi­ness, they gen­er­ally lose the right to re­ceive com­pen­sa­tion for good­will.

11. FI­NAN­CIAL DE­TAILS

Fi­nally, a dis­clo­sure doc­u­ment must con­tain a state­ment con­firm­ing the fran­chisor’s sol­vency, along with their fi­nan­cial state­ments for the pre­vi­ous two fi­nan­cial years or an in­de­pen­dent au­dit re­port.

It is im­per­a­tive the fi­nan­cial fig­ures are up to date. If the fig­ures in­di­cate the fran­chisor is strug­gling fi­nan­cially, then this is a red flag.

TAKE­AWAYS

While dis­clo­sure doc­u­ments can seem a lengthy and bur­den­some read, they con­tain a wealth of in­for­ma­tion in­valu­able to a prospec­tive fran­chisee try­ing to choose the right fran­chise sys­tem. Read­ing the doc­u­ments from cover to cover is es­sen­tial.

After con­sid­er­ing the dis­clo­sure doc­u­ment and mak­ing proper in­quiries, fran­chisees will bet­ter un­der­stand the risks in­volved in the fran­chise and how their fu­ture re­la­tion­ship with the fran­chisor will work.

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