Are you looking to franchise your business and wondering what a franchise disclosure document is and whether you need one? Or you’ve just received a disclosure document and you don’t know what you’re looking at? Well, this article describes the ins and outs of a disclosure document.
What is the purpose of a disclosure document?
The disclosure document is intended to provide prospective franchisees, or an existing franchisee proposing to renew, extend or extend the scope of their franchise agreement the information necessary to help the franchisee to make a reasonably informed decision about the franchise.
It is also intended to provide a franchisee current information that is material to the running of their franchised business.
Do I need to create a disclosure document?
As the disclosure document must be given to prospective franchisees, you will need to create your first disclosure document as part of the process of franchising your business. From then on, a franchisor must update the disclosure document within four months after the end of each financial year.
When do I need to give someone the disclosure document?
When a person proposes becoming a franchisee and an existing franchisee proposes renewing, extending or extending the scope of a franchise agreement, a franchisor must provide the disclosure document at least 14 days before entering into, renewing or extending the agreement. In these circumstances, the disclosure document is provided alongside a copy of the franchising code and the franchise agreement.
A franchisee can also request a copy of the disclosure document once every 2 months. The franchisor must provide this document within 14 days of such a request. However, if the disclosure document needs updating, the franchisor could seek an exemption to fulfil the request within 2 months.
What information goes into a disclosure document?
The document includes:
- The franchisor’s details including their business experience
- The details of existing franchisees (including business address and business phone number of each franchisee)
- Circumstances surrounding franchisees ceasing operations during the past 3 years
- Details about the franchise (e.g. the number of operational years in Australia)
- Legal proceedings relevant to the franchise
- The intellectual property material to the franchise
- The franchise site or territory
- The franchisor’s requirements for the supply of goods or services to a franchisee and by a franchisee
- Whether the goods or services may be sold online
- Other payments
- Marketing or other cooperative funds
- Financing arrangements offered to franchisees for the establishment or operation of the business
- Unilateral variation of the franchise agreement (including details of its unilateral variation in the last 3 years and circumstances in which it may be varied in the future)
- Agreements about terminating and renewing or extending the franchise agreement
- Whether the franchisor can amend the franchise agreement on or before the transfer of the franchise
- Earnings information (NB: this is given in a separate document, attached to the disclosure document)
- Financial details (including the franchisor’s solvency)
Formatting and content requirements
The disclosure document must follow the formatting and content requirements detailed in Annexure 1 of the Franchising Code.
Under the Franchising Code, the franchisor must have an up-to-date disclosure document which is provided to existing and prospective franchisees. The franchisor must follow the specific formatting and content requirements to comply with the Code. The disclosure document is highly significant when considering entering into, extending or extending the scope of a franchise agreement as it can significantly assist a potential franchisee in its due diligence.