FRANCHISE DEVELOPMENT: Franchise Package Elements – The Disclosure Document

disclosure [dɪsˈkləʊʒə] n
1. something that is disclosed
2. the act of disclosing; revelation
Collins English Dictionary – Complete and Unabridged © HarperCollins Publishers 1991, 1994, 1998, 2000, 2003

As you wade your way through the documentation that is required it is important to spend time on the compilation of your Disclosure Document. The purpose of this is exactly that – to disclose! It is the tool that your potential franchisees will use in order to make a good business decision about whether or not they want to be part of your franchise system.

The Disclosure Document has always been a requirement of the Franchise Association of Southern Africa (FASA) per their Code of Ethics and Business Practices. FASA has upheld the view that all potential franchisees should be provided with a Disclosure Document that outlines the pertinent aspects of the franchise and the required operational details, and it should also include pertinent details about the Franchisor. The Disclosure Document should be accompanied by a financial certificate as well as a list of current and ex-franchisees.

You may decide only to provide potential franchisees with a Disclosure Document once they have signed a Confidentiality Agreement or a Commitment Undertaking, but it must be prior to them signing the Franchise Agreement. This document should be provided to the potential franchisee at least fourteen days before signing an agreement. The franchisor is also required to provide the franchisee with a cooling-off period from the date of receiving the agreement and Disclosure Document before entering into and signing the franchise agreement.

In the past the provision of a Disclosure Document, unless you were a member of FASA, was a voluntary requirement. FASA is a governing body for the industry but they have no statutory powers and thus only the members complying to FASA’s Code of Ethics have Disclosure Documents. Until recently there was no special category of “franchising law” in South Africa and it was largely treated as a commercial agreement in the courts of law. This is soon set to change and Franchisors, whether they are members of FASA or not, are now required to ensure their house is in order. With the introduction of the Consumer Protection Act the franchisee will now be regarded as a consumer and have more rights than ever before. One of these fundamental rights is the requirement for full disclosure of what they are buying into.

Although the Consumer Protection Act has been published the addition of the specific regulations has been extended to 1 April 2010. These regulations will be stipulated by the Minister of Trade and Industry and will include the requirements for disclosure of certain information. While the specifics are not yet known it is largely assumed in franchising circles that the requirements will be very similar to FASA’s current requirements. This list can be accessed on www.fasa.co.za and it is advisable to follow this as a guideline for your Disclosure Document. What is known is that it will be required to be in plain and understandable language. Furthermore, franchisors will be regulated to ensure their marketing is both fair and responsible with no false claims or misleading representation.

Your Disclosure Document can be presented in any format but it is recommended that you have the following important information:

  • Information about the Franchisor: Company details and particulars (including a history of the franchised brand); brief resume of the Directors and key management staff; executive summary of the business.
  • Reference must be made with regards to any interest in other franchised businesses as well as the franchisor’s interest and involvement in the supply of any of the products.
  • The pertinent details of the Franchise Agreement must be included – this can either be a summary or extracts of the key terms and conditions around issues such as fees, restrictions, sale of business, main obligations of the franchisor as well as mention of any other agreements that will have to be entered into by the franchisee.
  • The document must outline key financial information such as: fees (initial and ongoing), funding, total investment, working capital requirements as well as financial projections. (Please note that these projections should be conservative and must include a relevant disclaimer.)
  • A set of annexures: List of current franchisees and their contact details; details of franchises closed in the last 36 months; relevant certificates of registration; applicable auditor’s certificate; organogram of the company.

A Disclosure Document is as important as your Franchise Agreement. It is imperative that you ensure the two documents comply and concur. If the two documents are contradictory a franchisee can argue his case in a court of law based on information that was provided to him in the Disclosure Document. As such it is advisable if you decide to compile your own document to have it reviewed by your franchise attorney or a franchise consultant.

Your Disclosure Document must be honest and accurate, and in no way misleading. It should be the document with the necessary information that your potential franchisee bases his business plan on, and ultimately uses to make a wise decision about investing in your brand.

Lindy Barbour
Franchize Directions
www.franchize.co.za
(011) 803 0665 / This email address is being protected from spambots. You need JavaScript enabled to view it.