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Read Between The Lines Of A Franchise Disclosure Document

Understand Franchise Disclosure DocumentYou decided to take the big leap and buy a Franchise business. But how well do you know the Franchisor? Did you review the Disclosure Document?

Under the Australian Franchise Code of Conduct, all Franchisors must deliver a Disclosure Document to all its prospective franchisees. A Disclosure Document provides countless information about the Franchisor to help you decide if your chosen franchise is the right one for you.

You will find valuable information about the franchisor’s history, the company structure, costs associated with the franchise, fees, existing franchisees, mutual expectations, and much more.

Like any legal document, it can be quite daunting. So before you begin, let us guide you through some important areas to help you understand the franchise system better.

Why Is the Disclosure Document So Important?

The franchise document follows a strict structure set by the Franchise Code of Conduct. The objective is to provide transparency about the Franchisor and provide the potential franchisees with a non-biased view of the franchise system. As a result, the franchisor is required to put everything on the table.

As you run your eyes through the document, make notes along the way and do not hesitate to get clarification from the Franchisor when necessary. Reviewing your Disclosure Document is a critical part of your due diligence.

When considering a business, there are many things you should be reviewing. To help you with this critical step, we’ve created a free Due Diligence Checklist which you can download here.

What Should You Pay Attention To?

While you should carefully read the entire disclosure document, here are some essential points to keep in mind.

1. Franchisor’s details and business experience

Items 1, 2 and 3 provide a general idea about the structure of the franchisor and the experience summary of its directors and managers.

2. Litigation

Item 4 reviews any disputes or bankruptcy the Franchisor may have including, misconduct, contravention of trade practices law, dishonesty, fraud and breach of a franchise agreement or the Franchising Code of Conduct.

In addition, the franchisor must also include information about bankruptcy or insolvency of all Directors over the last 10 years.

You must closely review the Information in this section; it can indicate a serious problem. Litigation happens in the course of business practices. However, many litigations is a worrying sign.

3. Current and past franchisees

Item 6 of the disclosure document must list the details of current and former franchisees. This is allowing you to ask franchisees about their experience with the franchisor. Existing and past franchisees are an excellent source of information about the franchise system.

If you would like to know more about what questions to ask an existing Franchisee, click here.

The disclosure document should provide you with the past 3 years information about:

  • The number of franchise transferred?
  • How many franchises ceased to operate?
  • How many franchise agreements the franchisees or the franchisor terminated?
  • The number of franchise agreements not extended? And,
  • How many franchises were bought back by the franchisor?

A high number of franchises for sale – higher than 10% – and a high turnover rate might be considered as a red flag since you would expect a healthy Franchise system to have a low turnover.

Therefore, if half or more of current franchisees either ceased to operate, transferred their business or were bought out by the franchisor, this might be a sign that the overall health of the system is not good.

Want to save yourself time and stress?

Download our FREE Ultimate Due Diligence Checklist today Download here

4. Site and territory

Item 9 will detail the rights of the franchisee in respect to their territory. Not all franchise systems have the same rules around their territories. The franchisor must provide clear information about the territory you buy into and the rules around exclusive or non-exclusivity.

The disclosure document must also provide historical information about the territory for the last 10 years.

Why is this important? Because you need to understand if the franchisor and/or other franchisees can compete on your territory. However, keep in mind there are usually restrictions on competition.

5. Supply of goods or services to a franchisee, by the franchisee and online

Items 10, 11 and 12 establish the limits on the suppliers the franchisee can use. Often franchisees can only use approved suppliers.

These items also set out details about the goods and services offered by the franchisor to the franchisees and their restrictions.

Online sales: The legislator added a recent requirement to the Disclosure Document. The Franchisor needs to provide details of any goods and services it supplies to customers online.

6. Fees and payments

Items 14 and 15 are perhaps one of the most important items for prospective franchisees, these sections outline all the costs and fees associated with the franchise business. Ensure to take all costs and fees into account when preparing your financial forecasts:

  • Upfront fees, often referred as franchise fees, training fees, setup costs, deposit etc.
  • Fees payable during the term of the agreement, often referred to as royalties, marketing levies, IT levies, renewal fees, or fees payable to a third party etc.
  • Fees payable when the franchise comes to an end, often referred as exit fees or transfer fees.

For all fees, the franchisor must disclose:

  • how much the fees are;
  • what the fees are for;
  • who receives the fee payment; and
  • whether the fee is refundable.

 

While it can be laborious to review a Disclosure Document, it is a crucial step of your due diligence and will help you make a well-informed decision.

Here at Kwik Kopy, we’re committed to new franchise prospects conducting a thorough due diligence. Why not tell us more about your current situation and where you want to be. Our experts can help you identify if Kwik Kopy is right for you.

Maybe it’s time to contact Benoit Davi on (02) 8962 8556 or by email on franchise@kwikkopy.com.au

We’re here to help you find the right business to suit your budget and aspirations.

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