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As the owner of a franchise, you have a wide range of responsibilities. One of these responsibilities is ensuring that your franchise has the necessary legal documentation. In doing so, you will likely have to put together a disclosure document. This article details what a franchise disclosure document is and outlines how you should use one in New Zealand.

What is a Disclosure Document?

A disclosure document sets out the key facts and information about your franchise and the franchise location you intend to sell. 

Franchises in New Zealand are not legally required to have a disclosure document. However, it is best practice to have a document drafted when setting up your franchise. This is because it offers clarity for both you and your franchisees.

How Should I Use a Disclosure Document?

The purpose of a disclosure document is to:

  • inform prospective franchisees about the franchise; and
  • comply with the Franchise Association of New Zealand (FANZ) guidelines. 

Recruiting Potential Franchisees

The principle aim of a disclosure document is to provide any prospective franchisees with the necessary information about your franchise to make an informed decision about purchasing a franchise outlet.

This ensures that you are taking on franchisees that are well aware of the nature of your franchise. Furthermore, it can protect you from any potential arguments or allegations of a misunderstanding or misrepresentation as to the franchise.

To properly inform any potential franchisees, you should provide all candidates with a copy of the document at least 14 days before signing the franchise agreement. This document should be updated annually to ensure that the information is accurate and up to date. 

Member of FANZ 

Although it is not a legal requirement, the Franchise Association of New Zealand (FANZ) has its own Franchising Code of Practice which requires all members to have a disclosure document.

Therefore, if you wish to become a member of FANZ, you must have a disclosure document. Membership with FANZ comes with:

  • credibility, as you can benefit from the association’s image of representing franchises committed to the best practice possible;
  • government advocacy, as FANZ has a direct correspondence with government agencies and departments; and 
  • conferences, seminars and regular industry events that are focussed on franchising. 

What Should a Disclosure Document Include?

Your disclosure document should contain all of the information necessary to properly inform any prospective franchisees. This includes each of the points outlined below.

A Company Profile

The document should contain key information on you as the franchisor, including:

  • your financial information; and
  • any past bankruptcies or liquidations.

It should also cover any other relevant officials, such as:

  • the name and job description of each individual; and
  • their business experience.

This information provides the prospective franchisees with the opportunity to conduct their own research on all of the higher-ups in the franchise. This research allows the potential franchisees to get insight into the: 

  • nature of the franchise; and 
  • key individuals that they will have to interact with.

An Outline of the Franchise

The document should outline all of the main particulars of the franchise. These particulars include:

  • the history of the franchise, including how the franchise system was first developed; 
  • an outline of the relevant franchise intellectual property, such as the trademark, logo and symbol of the franchise;
  • details on the array of costs and payments that your franchisees will need to make to you;
  • a summary of the franchisee’s obligations; 
  • terms covering the termination, renewal and assignment of the franchise; and
  • the franchisor’s level of support of each franchise outlet.

Covering these issues in the disclosure document ensures that the franchisee does not encounter any nasty surprises when they enter into the franchise. 

What Accompanies the Franchise Purchase 

It would be best if you articulated what accompanies the up-front franchise fee. The initial purchase of a franchise outlet will usually entitle a franchisee to:

  • the use of the franchise’s intellectual property, such as the name and logo; 
  • the franchise’s operating systems; 
  • training for the franchisee and their staff; and 
  • help from the franchisor to set up the franchise outlet. 

The Franchisees

The disclosure document should provide a list and the details of current, past and terminated franchisees. Doing so enables the potential franchisee to contact individuals who have first-hand experience of being a franchisee and operating in the franchise. 

Figures 

You may also wish to include figures to give any potential franchisees an insight into the performance of the franchise. However, it is important that you clarify whether:

  • these figures document the franchise’s actual performance; or 
  • they are a mere projection of that franchise location’s performance. 

Other Relevant Matters 

Your document may also contain other information, such as:

  • whether a deposit is necessary for purchasing the franchise location; 
  • if there is a deposit, whether it is refundable; or
  • if the franchisee is entitled to a ‘cooling-off’ period, in which they can cancel the franchise agreement after signing it.

Key Takeaways

You should provide a disclosure document to potential franchisees, to outline key information about the franchise. This document must include all the information franchisees would require to make an informed decision about whether to purchase a franchise outlet. It is best practice to prepare a disclosure document when setting up your franchise, particularly if you wish to be a member of the Franchise Association of New Zealand. If you would like assistance drafting a disclosure document, contact LegalVision’s New Zealand franchise lawyers on 0800 005 570 or complete the form on this page.

FAQs

What is a Franchise Disclosure Document?

A franchise disclosure document is a legal document that sets out the key facts and information about a franchise, as well as the franchise location that is being sold. 

What is the Purpose of a Franchise Disclosure Document?

A disclosure document is intended to provide a potential franchisee with the necessary information about the franchise. Doing so ensures that any prospective franchisee can make an informed decision when they decide to buy a franchise location.

What are the Key Items in the Franchise Disclosure Document?

A franchise disclosure document should include a profile of the franchise and its key figures, an outline of the franchise system and a description of what accompanies the purchase of the franchise. You should also provide a list of past and present franchisees and an outline of the performance of the franchise.

What is a Franchise Agreement?

A franchise agreement is a legal document that both creates and governs a franchisee and a franchisor’s relationship. This agreement will be provided to a potential franchisee once they have read through the disclosure document. 

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