There are four essential documents a franchisor must provide a franchisee before a franchise agreement is entered into. These documents are set out in the Franchising Code of Conduct (the Code).
Preliminary Document: Information Statement
The first document a franchisor must provide is an Information Statement (as provided for in the Code) explaining franchising and its risks and benefits. This must be given as soon as practicable after a potential franchisee shows a genuine interest in the franchise.
The remaining documents must be provided at least 14 days before an agreement is signed/ a non-refundable payment is made. This gives franchisees 14 days to review these documents in detail and seek advice.
1. Franchising Code of Conduct
Under the Code, the franchisor must provide the franchisee with a copy of the Code. This industry code governs conduct between franchisors and franchisees. While it may seem bland, it is crucial to read and understand your rights and responsibilities under the Code as either a franchisor or a potential franchisee before entering into a franchising agreement.
2. Disclosure Document
The disclosure document must include all information about the franchise to assist the franchisee in making a reasonably informed decision about whether to buy the franchise. The Code provides detailed requirements for a disclosure document. The document includes:
- The franchisor’s details including business experience and solvency
- The details of current franchisees
- Circumstances surrounding franchisees ceasing operations during the past 3 years
- Details about the franchise (i.e. number of operational years in Australia)
- Legal proceedings relevant to the franchise
- Details of the franchise’s intellectual property
- The franchise site or territory
- The franchisor’s requirements for supply of goods or services to a franchisee and by a franchisee
- Whether the goods or services may be sold online
- Agreements about terminating and renewing or extending the agreement
The disclosure document is considered to be the most important document when considering entering into a franchise agreement as it can significantly assist a potential franchisee in performing their due diligence.
3. Franchise Agreement (Final Form)
This agreement must be provided in its final form which is ready for signing. This document is particular to the specific franchisee and is a contract between the franchisor and franchisee. This agreement should detail:
- Terms of the franchise
- Intellectual property rights
- Obligations for the operation of the franchise
- Franchise site and whether the franchise has exclusive or non-exclusive territory
- Supply requirements and restrictions
- Payments to the franchisor
- Franchisor’s and franchisee’s rights
- Dispute resolution process
- End of agreement procedures
As a potential franchisee, it is important when reviewing the Franchise Agreement to look out for and consider clauses which may restrict your ability to open a similar business afterwards and which impose supply restrictions (i.e. limiting the franchisee to purchasing supplies from particular suppliers – these suppliers may be more expensive than others).
Any differences between the disclosure document and franchise agreement should be raised and clarified.
These four documents must be provided under the Code. It is crucial the documents are read as a whole to understand the franchisor’s and franchisee’s obligations and rights. Additional documents, such as a Confidentiality Agreement, are also likely to be provided. Only after considering all of these documents can the cost and profitability of the franchise be reasonably understood (i.e. with reference to the cost of the franchise, franchise fees, supply restrictions, equipment, wages, electricity, rent).