What is a Franchise Disclosure Document?
Before entering into a franchise, it's required to provide prospectives a franchise disclosure document. Read this article to find out what this includes.
If you currently own a business that is about to be franchised, you must provide a franchise disclosure document. This is overseen by the Australian Competition and Consumer Commission. Basically, it ensures that all the facts of the franchise are given to potential franchisees. Existing franchisees also need these updates regularly so they can see how the franchise is running.
1. The basics
Some of the essential information you need to include are simple things like the contact details of all present and previous franchisees. The only time you don’t include their details is when they have asked so in writing. Potential franchisees can contact them and directly ask any questions about the franchisee side of the business.
You will need to detail all legal actions taken against the company, if any. All present and future franchisees have a right to know about any legal issues associated with the company. This is important to show potential franchisees how legally protected your business is, and can provide peace of mind for them.
Including a list of options for your franchisees to take when the contract ends is a critical feature. You should consider what you would like their options to be and specific guidelines. For example, renewal of the franchisee, extension, or maybe making an entirely new agreement. This allows prospects to know very clearly what is in store at the end of their contract.
It is also handy to include your business experience. The more experienced you are the more likely others will want to franchise your business. You will be able to build trust easily with your franchisees, and properly look after your brand reputation.
You will also need to list the obligations between you and your franchisees, as well as their obligations to you. This should be made very clear so there is no confusion at all. If it is too vague, you will experience a lot of issues with your franchisees due to miscommunication and potentially lawsuits. There is also lots of space for them to take advantage over you if this is the case.
Contents of the franchise disclosure document
There is a specific format that your document must follow according to Annexe 1 from the Code. After you create the document, it then needs be signed by the franchisor, director or authorised agent.
Not all the headings set out in the Code may be applicable for your business, in which case they can be deleted. However, you will then need to list these deleted headings so that franchisees can see what isn’t included.
It is required by the Code that your franchise disclosure document has all the financial information related to your business. Before any franchisee comes on board, they need to use this information to see if this is a business suited for them or not. Current franchisees can also see how the business is running and if there are any changes they should be aware of. You want to find the right franchisee for the business, not just anyone.
If it is found that you have purposefully lied in any part of the document, there is grounds for the other party to sue you. Particularly when it comes to the costs and profit margins. If a franchisee branch fails, this can also reflect poorly on your records.
The aim of the game is to minimise risks and maximise profits.
The franchise disclosure document needs to be completely transparent to your prospective franchisees. This helps to eliminate liability for you as the franchisor, and allows others to make informed decisions. It is recommended to consult a franchise lawyer to help you draft up a proper franchise disclosure document.
Taeisha is a Legal intern at Lawpath. She is a Law student at Macquarie University, previously completing her Commerce degree. She has an interest in Commercial Law.