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What is in a franchise disclosure document?

PUBLISHED ON 30TH OF AUGUST 2017 ONLINE – FRANCHISING MAGAZINE ONLINE

In Australia, the Franchising Code of Conduct requires all franchisors to issue a disclosure document to all its potential franchisees.

The disclosure document must be provided in a prescribed form containing valuable information about the franchisor and its system.

In particular, the disclosure document will contain the following information.

10 things in the disclosure document

1. Franchisor’s details and business experience

The franchisor must provide its details, details of all its related entities and its business experience.  The franchisor must also provide information about and business experience summary of all its directors and managers in control.

2. Litigation

The disclosure document must list any current litigation the franchisor is involved infor matters including dishonesty, fraud andbreach of franchise agreement or the Franchising Code of Conduct.

The franchisor must also include details of bankruptcy or insolvency of the franchisor, its directors of associated entities in the last 10 years, as well as any of the abovementioned parties being convicted of a serious offence in the last 10 years or being subject to a final judgment in the last five years.

3. Existing franchisees

The disclosure document must list details of all existing and past franchisees, thus allowing a potential franchisee to contact them with any questions about the franchisor’s system and operations.

Current and past franchisees are usually the best source of information about the franchisor and the franchise system.

4. Intellectual property

The franchisor must provide a full list of its intellectual property and describeany conditions restricting the use of the intellectual property by franchisees.

In many franchise systems a related corporate entity of the franchisor owns all the intellectual property and licences it to the franchisor, in which case the particulars of such licence must be disclosed.

5. Site and territory

The franchisor must clearly specify if there is a territory granted under the franchise agreement and whether such territory is exclusive or non-exclusive. The franchisor is further required to provide the detailed history of the territory or the site which is relevant to the particular potential franchisee.

This must also be provided as a separate document.

6. Provisions of goods and services to the franchisee,by the franchisee and online

The disclosure document must contain details of all conditions to be imposed on a franchisee in their supply of goods and services.

It will also contain details of the provision of goods and services by the franchisor to the franchisee and any restrictions imposed.

The franchisor is also required to provide details of any goods and services the franchisor supplies directly to customers through any online channels and its effect on the franchisee and the franchisee’s territory.

7. Fees and payments

The disclosure document must outline all fixed and variable payments required from the franchisee for the duration of their franchise agreement.

These fees include royalties, marketing levies, renewal and transfer fees, as well as fees payable to third parties, such as landlord and other suppliers of goods or services.

8. Obligations of the franchisor and the franchisee

The disclosure document will contain information about the franchisor’s obligations contained in the franchise agreement, including initial and ongoing training and maintenance and improvements of the franchise system.

It will also contain a list of certain obligations and restrictions imposed on the franchisee.  However, each franchisee should thoroughly review the franchise agreement to understand all its obligations.

9. Earnings projections

The franchisors canprovide earning forecasts to its potential franchisees. However, as this is a highly litigious area, most franchisors chose not to provide any financial figures in relation to any earning potential.

10. Financials of the franchisor

The disclosure document must contain either the financials of the franchisor for the last two financial years or an independent audit report stating that the franchisor entity is able to pay its debts as and when they fall due.

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