Buying a Franchise. What Should Be in My Disclosure Document?

by Legal VIsion 6th of July, 2020

franchise for sale disclosure document

If you are buying a franchise for sale, you should pay careful attention to the details in your disclosure document. A disclosure document discloses important information about your potential new business. It should answer many of the questions you have about the franchisor and the franchise.

For example, it should outline:

what business experience the franchisor has;
whether the franchise has been involved in any disputes or litigation;
who the existing franchisees are;
how your franchise fees will be spent; and
how much training and support the franchisor will provide.

The franchisor is legally required to provide you with a disclosure document before you enter into a franchise agreement. The information it contains may determine whether you proceed with the purchase. This article will explain what your disclosure document should include.

What Is the Franchisor’s Business Experience?

Your disclosure document should outline the franchisor’s business experience. You should read this carefully, as you are likely to have greater confidence in the franchise as a whole if the franchisor can show you that they have extensive experience in the industry. The details given about the franchisor’s experience may run as far back as ten years. The franchisor should note:

whether they are operating a similar business to the franchise; and
if they are selling any franchises other than the one you are considering buying.

Does the Franchisor Have a History of Breaches or Disputes?

Before you enter into a franchise agreement with the franchisor, find out if they have a history of rule-breaking. The disclosure document may contain details of any:

disputes with former franchisees;
alleged breaches of the franchise agreement; or
general illegal activity.

A breach or dispute may be cause for concern. However, you may do some research and decide that the franchisor dealt with the dispute or breach effectively.

What Are the Details of Existing Franchisees?

It may be helpful to contact current franchisees to ask about how the franchise operates. In order for you to do this, the franchisor should provide details of current franchisees in the disclosure document. When you speak with existing franchisees, you should ask:

what level of training they have been given;
if the franchisor’s marketing is effective in bringing in business; and
what their relationship with the franchisor is like.

This is an important part of your due diligence because it shows you how the franchise works in practice.

How Are the Fees I Pay to the Marketing Fund Spent?

Under your franchise agreement, you will pay several different fees to the franchisor. One of these fees is a contribution to the franchise’s marketing fund. Typically, this money is spent on advertising, such as Instagram or Facebook advertisements. The franchisor is obligated to disclose:

which expenses the marketing fund may be used for; and
how funds were spent in the past financial year.

You should read these details carefully. You can also get an overview of how effective any marketing is by googling the franchise and looking at any social media accounts it operates.

What Are the Costs of Setting Up?

There may be significant costs required to set up your franchise.

For example, if you purchase a cafe franchise, you may need a coffee machine and industrial kitchen appliances. If you purchase a hairdressing salon, you may need new chairs and mirrors.

The disclosure document should provide details of any costs you might face before opening your new business. For example, this may include the details of costs relating to:

purchasing new equipment;
any required construction;
decor and signage;
rent;
insurance; and
any stock required to start operating.

If the franchisor has mentioned any set up costs to you that are not in the franchise agreement, it is a good idea to ensure that they are included.

What Is the Franchise Territory? Is It Exclusive?

The disclosure document will outline the details of your franchise territory, which is the area in which you are allowed to operate. It will either be:

exclusive, meaning the franchisor has promised that no other competing franchises may operate in your territory; or
non-exclusive, meaning that the franchisor has the right to open future competing franchises in your territory.

Before you buy your franchise, you should consider any other business that the franchisor owns in your area and whether they will affect your business.

What Suppliers Can I Use?

Owning a franchise means that you must provide customers with the same product or service as the rest of the franchise. This is so that people associate your business with the franchise brand.

Because of this, the franchisor may specify particular suppliers of a product or service you must use to run your franchise. The franchisor does this to ensure the safety, quality and consistency of the products, and these details should be in your disclosure document. It should also state whether the franchisor will receive any benefit from the supply of goods or services to franchisees.

What Rights Do I Have to Use the Franchises Branding and Intellectual Property?

A franchise’s intellectual property (IP) includes its branding, slogan, logo and any trade secrets. Because the franchise brand is what brings new customers to your business, how you will be permitted to use it is very important. The disclosure document will outline what rights you have to the franchise’s branding and any other IP. It will also explain any obligations you have relating to the use of the IP.

For example, you may need to notify the franchisor if you become aware of any unauthorised use of their IP. This might include the use of the brand, training manuals or any other intellectual property that the franchisor owns.

Key Takeaways

As a franchisee, it is important to be aware of what your disclosure document should include. This is because the information in this document may influence your decision to either buy the franchise or pass up on the opportunity. The disclosure document should include:

the franchisor’s business experience;
any past breaches or disputes;
the details of existing franchisees;
how your fees will be spent;
what the costs of setting up will be;
what your territory will be;
which suppliers you can use; and
your rights to the franchise’s branding and IP.

To make sure that this information remains current, the franchisor is required to update the disclosure document every year.

You should ensure that your disclosure document includes all the details that are required under the Franchising Code of Conduct. If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

About Silje Andersen-Cooke

Silje is LegalVision’s first point of contact for disputes, litigation and franchising enquiries. Before joining LegalVision, Silje was a Youth Advisor at the Office of the eSafety Commissioner and, before that, a Public Policy Fellow at Twitter, where she was given valuable insight into how the internet has changed the legal landscape.

Article Originally Published by Legal Vision

Tags: legal selling small business franchise