Understanding the Franchise Disclosure Document [GUIDE]
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When a potential franchisee is seriously interested in purchasing a franchise, the franchisor will present them with a franchise disclosure document, and it must be provided at least 14 days before they sign their franchise agreement.
In conjunction with the franchise agreement, the disclosure document should greatly assist a prospective franchisee in making a well-informed decision on whether or not to go ahead with the franchise purchase.
The franchise disclosure document must be provided to a franchisee every time a new franchise agreement is to be signed, and when a renewal, transfer or extension is granted.
It is customary for a franchisor to request a franchisee to sign a confidentiality agreement when presenting the disclosure and ancillary documents. The franchisor is sharing pertinent company and brand information with a prospective buyer and, if that purchase does not eventuate, the franchisor needs its rights to be protected. Although signing a confidentiality agreement is commonplace, this document should also be thoroughly reviewed before signing.
The franchisee should carefully review and understand all documents in their entirety, and it is advisable to seek specialist advice.
The franchisee must provide the franchisor with a signed statement either to the effect they have received advice from any or all of a lawyer, accountant or business advisor, or they have decided not to seek such advice, but have received, read and understood the franchise disclosure document before signing the franchise agreement.
WHAT’S IN A DISCLOSURE DOCUMENT?
In brief, the disclosure document should reveal important, confidential and relevant information about the franchisor, the franchise arrangement being offered and the obligations of both parties.
There is vital information in a disclosure document and among the points it must contain are:
- franchisor contact details and business experience
- details of criminal
- civil or insolvency proceedings
- details of the franchisor’s ownership
- details of the franchise site or territory and the site selection policy
- a summary of payment costs and timings required
- a summary of the franchisor/franchisee obligations.
Disclosure deems that franchisors provide names and contact details of all its current franchisees, as well as former franchisees for the last three years who are happy to be contacted.
All franchised businesses must legally comply with the Franchising Code of Conduct, which is governed and enforced by the Australian Competition and Consumer Commission. The franchise disclosure document is a major element of the Code.