Why should you insist on receiving a franchise disclosure document?

Franchisees should insist on receiving a Disclosure Document because it is a legal requirement in South Africa, according to the Consumer Protection Act (CPA). The Disclosure Document and Franchise Agreement should be provided together for the potential franchisee’s review at least 14 days before signing the agreement. 

In addition to being a legal requirement, the franchise disclosure document contains important information about the franchisor, the franchise system, and the investment required. It must provide potential franchisees with the details they need to make an informed decision about investing in the franchise. It’s also important to read the Disclosure Document together with the franchise agreement, as the CPA doesn’t require a summary of the franchise agreement to be included in the Disclosure Document.

The Disclosure Document provides information to help franchisees learn about the franchisor’s financial performance, litigation history, franchise fees and royalties, advertising, and other details that can influence the success of their business. This information can help franchisees determine whether or not the franchise is a good fit for their goals, skills, and financial situation.

In addition, the Disclosure Document can help protect franchisees from fraudulent or deceptive franchisors. Since the document requires franchisors to disclose critical information about their business, unscrupulous franchisors cannot misrepresent their business or hide essential details that could impact franchisee success.

The following list contains a summary of the information that franchisors should provide in the Disclosure Document, according to the regulations of the CPA:

  • Number of franchised outlets and contact details for all those outlets
  • Growth of turnover and net profit for the franchisor (percentage of growth year on year)
  • Auditor’s certificate indicating that the business is a going concern and that it’s able to meet its current and contingent liabilities and financial commitments as they fall due
  • Financial projections indicating levels of potential sales, income, and gross or net profits, along with the assumptions used to create these projections
  • Part of the assumptions that should be detailed under financial projections include the initial and ongoing franchise fees to be paid and the total investment required for the franchise, and this should also be outlined in the franchise agreement
  • An organogram depicting support of franchisees

Franchisees must insist on receiving a Disclosure Document before investing in a franchise. Reviewing this document carefully and the franchise agreement’s details can help franchisees make an informed decision and protect themselves from potential risks.

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