Review These Disclosure Document Points Before Setting Up A Franchise

So, you have finally decided to take the giant leap and expand your business. Setting up a franchise consists of many steps, including creating and signing up your Disclosure Document. As the franchisor, it’s your responsibility to deliver the document to the franchisees, as per the Australian Franchise Code of Conduct.

However, do you know what points you are supposed to cover in the Disclosure Document? Well, this piece of document offers countless details about the brand. And you will probably have a lawyer to help you include all the critical information. While your lawyer will take most of the responsibility, there are a few vital points that you should review yourself. Even the slightest mistake with the information can cost you big time.

So, if you are ready, keep reading, and we will tell you what that critical information is.

Setting Up A Franchise? Review These Disclosure Document Points First!

The Franchise Code of Conduct sets out the structure of the franchise document. The primary purpose of this document is to offer transparency about the franchisor and help franchisees grasp the franchise system from a non-biased point of view.

Here are the most significant components of the franchise document:

1. Current and Past Franchisees

The franchise Disclosure Document offers critical information divided into items. Item six of this document discusses current and former franchisees of a brand. It lists them clearly so the franchisor can ask them about their experience. It is a great source to learn about the business and the franchisor. The document should mention the past three years of information regarding the following.

• The number of transferred franchise

• The number of franchises that stopped operating

• The number of agreements terminated by the franchisor and the franchisee

• The number of franchise agreements you didn’t extend

• The number of franchises the franchisor bought back

If you are Setting up a franchise that has a high turnover rate or if you have several franchises on sale, investors may consider it as a red flag.

2. Fees and Payments

Items 14 and 15 outline the cost and fee structure of the franchise business. After calculating all the costs and fees associated with your franchise, ensure your forecast includes these points.

• Setup cost, training fees, deposit, upfront or franchise fees etc.

• Fees you will pay during the agreement term or royalties, IT levies, marketing levies, fees payable to third parties and renewal fees

• Exit fees or transfer fees that the franchisor will pay at the end of the franchise term

You must disclose the amount of the fees, its purpose, who will receive the payment and if it’s refundable.

3. Site and Territory

As the franchisor, you shall be transparent and highlight the right of your franchisee on the region in item nine. The rules around territories can vary based on different franchise systems. Nonetheless, you must ensure the information is clear, and it discusses the exclusivity and non-exclusivity of the site. Also, the document should mention historical information on the site, including the past ten years.

4. Litigation

To ensure franchisees make informed decisions, item four of the document reveals disputes, bankruptcies, misconduct, dishonesty, fraud, and breaching of the Franchising Code of Conduct and trade laws related to the franchisor. The item contains information on the company directors from the past ten years. Naturally, this section will significantly impact the investor’s decision. So, ensure every piece of information is accurate and not misleading.

5. Supply of Goods and Services to The Franchisee

Establishing the limits on suppliers, items 10, 11 and 12 provides information on what suppliers the franchisee can use. These items offer detailed information on the goods and support the franchisor will offer and their restriction. The recent upgrade of the Disclosure Document also requires the franchisor to mention the goods and services they supply to consumers online.

6. Details On The Franchisor

The first, second and third items offer information on the franchisor and their experience. They revealed the structure of the brand and how its managers and directors are. Franchisors shall be honest and transparent about everything they put out in these items to comply with Australian franchising laws.

Bottom Line

Setting up a franchise can be a daunting task. Therefore, if it’s your first time planning to expand the business, consider taking training or consulting with a franchising expert before making any decision. The Disclosure Document is a crucial piece of paper you cannot go wrong with. Spending a few minutes with professionals can help you ensure its accuracy.