How to Use a Franchise Disclosure Document
by LegalVision - Jonathan Muncey
How to Use a Franchise Disclosure Document
The franchise disclosure document is one of the most important documents for a prospective franchisee. It contains important commercial and legal information that will help a franchisee complete their due diligence This article acts as a short guide on what to do once you have received the disclosure document.
What Does the Disclosure Document Include?
The disclosure document is a prescribed form document, meaning that the franchisor must respond to a prescribed set of questions and statements. This is to ensure the prospective franchisee can make an informed decision. Franchisors must include information such as:
- a history of the franchise system;
- a list of former and existing franchisees;
- ownership of intellectual property (IP);
- rights concerning online sales;
- site and territory rights (i.e. whether exclusivity is granted);
- all initial and ongoing costs a franchisee will have to meet in operating the franchise;
- end of franchise arrangements; and
- financial disclosures.
What Doesn’t the Disclosure Document Include?
As a prospective franchisee, you should note that the following information is not included in the disclosure document (or is not included in full):
- Entire contractual terms: The disclosure document is not a substitute for carefully considering the franchise agreement (and any related agreement) in full. It is a useful breakdown of relevant information, not a contract.
- Anticipated business revenue/turnover: While franchisors may provide ‘earnings information’, most do not. Even where projected earnings are included, you should still assess whether the franchise is financially viable.
- Amount of any rebates to the franchisor: The franchisor is only required to list the suppliers who provide rebates, not the amount of those rebates.
- The contents of the operations manual: The disclosure document may refer to the manual, however, you are not always given access to the full manual before signing the contract (despite agreeing to comply with it). Where possible, look at this in addition to the disclosure document.
Warning Signs to Look For in a Disclosure Document
You should also look for any red flags a disclosure document may reveal about the franchisor or franchise system, including:
- Current or recent litigation: The franchisor must list any legal proceedings which relate to it or an associate (for example, the franchise’s holding company). If there are proceedings on foot, you should investigate whether they will adversely affect the business.
- Number of terminations or closures: The franchisor must list the number of terminations or closures in the last three years. If there are a significant number, you should ask the franchisor why this has occurred.
- Any issues regarding IP ownership. For example, confirm that the franchisor has registered the franchise network's logo as a trade mark (and that a third party has not opposed the registration). You can do this by searching IP Australia's trade mark register online.
- Franchisee ‘turnover’ in the last few years: If there is a high number of franchises which have stopped operating, been terminated or transferred, you should try to uncover the reason for this movement.
- Additional costs not previously disclosed by the franchisor, such as significant training, assignment or renewal fees. Compare any costs and expenses in the disclosure document with previous indications and ensure they match.
Value of the Disclosure Document
The disclosure document will provide the contact details of existing and former franchisees in the network. Contact as many franchisees as possible about their experience. While feedback will vary, you should be reassured of the network’s general stability and success. If few franchisees say they are making good money or performing well, you may need to re-evaluate your decision.
The disclosure document can help you make an informed and commercially savvy decision about joining a franchise network. Keep an eye out for any red flags, as you prepare to sign a contract. If you are looking to purchase a franchise and need assistance, get in touch with LegalVision’s franchise lawyers on 1300 544 755.