Embarking on the journey of owning a franchise is an exciting prospect. Still, prospective franchisees must tread carefully through the sea of legalities and information that come with it. At the heart of this process lies the Franchise Disclosure Document, which provides prospective franchisees with crucial insights into the franchisor-franchisee relationship. This blog will delve into the critical aspects to empower aspiring franchisees with the knowledge needed to make informed decisions.
What is a Disclosure Document?
The Franchise Disclosure Document (FDD) is a legal document that franchisors must provide to potential franchisees. This document, mandated by the Consumer Protection Act’s (CPA) franchise regulations, aims to ensure transparency and fairness in franchising. The Disclosure Document is an invaluable resource for understanding the implications of a franchise opportunity, and it serves as a vital tool for due diligence. The information provided in this article is based on the minimum requirements for disclosure as set out by the CPA.
Contents of a Disclosure Document:
1. Franchise Introduction:
The first section typically includes details about the franchisor’s business experience and an introduction to the franchise.
2. Franchise Fees and Other Initial Costs:
This section outlines the expenses that come with opening a franchise, including the initial franchise fee, ongoing royalties, and any other costs associated with starting and running the franchise. The franchisor should also provide financial projections regarding potential sales, expenses, and net profits, together with the assumptions that informed these projections.
While franchisors are not obligated to disclose specific earnings, providing information on their franchises’ historical or projected financial performance can significantly influence a potential franchisee’s decision-making process. This section requires careful scrutiny and, if available, should be analysed in conjunction with other aspects of the Disclosure Document.
3. Franchisor statement:
The Disclosure Document should contain a statement to the effect that the franchisor is a going concern, that there have been no material changes since the last Annual Financial Statements, and that the franchisor can pay its debts as they fall due.
4. Franchisor growth:
The franchisor must provide information on the growth in the number of outlets, turnover, and net profit in the past year. The turnover and net profit growth may be stated as percentages. If this information is not available, a reason should be provided.
5. Auditor’s certificate:
Similar to the franchisor’s statement, the auditor’s certificate should provide information on the solvency of the franchisor’s entity. The CPA contains specific wording that must be included in this certificate, and it must be done on the letterhead of the auditor and attached as an annexure.
6. List of current franchisees:
The Disclosure Document should include a list of current franchisees with their addresses and contact details. Potential franchisees may contact them as part of their own due diligence process.
7. Franchisor support
The Disclosure Document should include an organogram of the franchisor’s business that depicts the support provided to franchisees.
Franchisors are legally obliged to provide the Disclosure Document and Franchise Agreement to potential franchisees and to give them 14 days to consider this information before signing a franchise agreement. Prospective franchisees should consider seeking legal advice to ensure a thorough comprehension of both documents and their implications.
Knowledge is power when it comes to franchising. A well-informed franchisee is better equipped to navigate the complexities of the franchisor-franchisee relationship, setting the stage for a successful and mutually beneficial partnership. The Franchise Disclosure Document is an invaluable resource that, when thoroughly understood, empowers aspiring franchisees to make informed decisions, mitigating risks and maximising the potential for a prosperous franchise venture. To ensure the continued success of your franchise business, it is crucial to allocate time and effort towards comprehending the Disclosure Document.