So you enquired about buying a franchise and you have been sent a Disclosure Document? This is an important step- the Franchising Code of Conduct says you have to wait at least 14 days from receiving this document before you sign on the dotted line. The Disclosure Document is to give you information and to help you make a decision- read it and make use of it!
Of course you should immediately take (or email) the bundle of documents you have received to an experienced franchise lawyer to advise you but what important things should you check yourself?
1. Firstly make sure you have received everything you are supposed to get- As well as a disclosure document, by law you should have a copy of the franchise agreement that you will be expected to sign, a copy of any lease or licence agreement and a copy of the “Franchising Code of Conduct”. There might be other documents as well depending on the type of business. If something is missing or the information is not complete– ask for it!
2. A list of current franchisees (See Item 6.2 in the Disclosure Document or it might be attached to the back ) There should be franchisee contact details so you can call them and you should pick a random sample and do so. Just don’t waste their time – have some prepared questions to ask.
3. A list of ex- franchisees (Item 6.5). Sometimes these do not have their contact details available but if they do you may want to call and ask them the same questions as the current franchisees and why they left the franchise system.
4. How much is it going to cost? Item 14 of the Disclosure Document should set out all the fees and costs that are anticipated to be payable for establishing your franchised business and the recurring fees you will have to pay. Make sure that these are the same as what you have been told. For some costs such as potential construction costs or rent there may be an estimate or range given because the disclosure document is a generic document to cover all new franchisees. The Franchisor should however be able to give you the details of the actual costs you will have to pay for your particular franchise.
5. Marketing fund financial statement or audit- if your proposed franchise has a marketing fund then ask for a copy of the last year’s financials- you can see how the fund was spent although that does not mean it will be spent the same way in the future. Even if the financials are not provided Item 15 provides information on the spending of the marketing funds.
6. Is the territory exclusive? Item 9 of the Disclosure Document should tell you this.
7. Are there any requirements about buying stock or using particular suppliers of goods and services in the business? This is very common in franchising and these arrangements should be detailed in Item 10.
8. Are there any are any restrictions on what you can sell from your business (or restrictions on who you can sell to)? Item 11 should set this out and Item 12 should detail what the situation is with online sales. For example if the franchisor is going to operate a website to make online sales – what if any profit sharing arrangements with franchisees are in place,
9. What happens at the end of the franchise? Item 18 should tell you whether or not you have an option and if not what will happen at the end of term.
10. Finally there should be financial statements of the franchisor attached to the end of the Disclosure Document (for the last 2 financial years) or an auditor’s report. These can tell you things like the sources of income of the franchisor and whether the franchisor is solvent or whether it might be in financial trouble.
You will be required to sign a receipt of the Disclosure Document and to state that you have read it and understood it- so you need to make sure that you do this. If you have any questions about any thing in the Disclosure Document you should ask the franchisor or your lawyer before signing the franchise agreement.
About the author: Corinne Attard – Holman Webb Lawyers
Corinne Attard Corinne is a franchising and retail specialist with more than 25 years franchising and retail industry experience including extensive in-house experience as general counsel with responsibility for over 350 franchised stores. Corinne’s approach is outcome oriented and risk management based and combines practical business advice with legal solutions. She acts for primarily retailers, franchisors, master franchisees and multi-unit franchisees.
To ask Corinne a FREE legal question regarding franchising, you can contact her here.