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As a prospective franchisee, your franchisor may provide you with a franchise disclosure document before finalising everything. Although this document is not compulsory to issue in New Zealand, it is very beneficial. A franchise disclosure document outlines essential information about the franchise and the location you will be operating from. If your franchisor is a Franchise Association of New Zealand (FANZ) member, they must provide you with a franchise disclosure document. This article will outline some key terms you should look for in your franchise disclosure document. 

Franchisor’s Business Experience

Your disclosure document should contain relevant information on your franchisor’s business experience and how their franchise came to be. Often, the franchisor may outline previous experiences in franchising and how long their current franchise has been operating. Indeed, this will give you a good idea about how reputable the business is and how this can impact your profitability.

Usually, franchisees prefer to buy a franchise from a large company that offers less risk and higher chances of success.

Moreover, understanding your franchisor’s experience will help you gauge how they are as a person and whether you can build a good franchise relationship with them. Further, this information will help you comprehend whether your franchisor can provide adequate support and training. 

Financial Information

Access to certain financial information is crucial to understanding how financially stable the franchise business is. Further, it can help you discern whether it is likely to remain stable in the future. The disclosure document should clearly state any risks or previous issues within the franchise. This may include bankruptcies or receiverships. As a result, you will be able to ask questions about any red flags that you identify. Doing this can help determine whether becoming a franchisee is a good investment.

Additionally, the disclosure document may include financial projections. This information will help you understand how your franchise may perform and what targets you need to achieve to replicate your franchisor’s or other franchisees’ success. In some scenarios, your franchisor may detail specifically what financial targets they want you to accomplish within a particular timeframe. 

Lastly, your disclosure document may contain financial information regarding fees. These fees might be: 

  • initial; 
  • one-off; or 
  • ongoing fees. 

Depending on your franchisor’s system, ongoing fees may also include training and marketing fees. It is essential to look for this clause to ensure you have enough capital to cover franchise fees and invest in your franchise. Sometimes, your franchisor may also detail how much capital you need for the initial investment and day-to-day expenses.

Franchise System

The disclosure document should summarise their franchise system and its particulars. Generally, you may find an outline of the following:

  • equipment manuals;
  • operations;
  • intellectual property;
  • how the system works;
  • how your franchise will receive goods; and
  • suppliers. 

Furthermore, your franchisor may provide you with a franchise manual that outlines how their system works and any relevant training you and your employees can attend. This can be beneficial, especially if you encounter new equipment or processes for the first time. 

The document may outline the franchisor’s intellectual property and what protects it. This might include: 

  • trademarks;
  • patents; and
  • copyright. 

Additionally, they may outline any past litigation issues. Often, intellectual property without protection raises a red flag as it is a franchise’s most valuable asset. Therefore, it must have some degree of protection. For example, your franchisor should register trademarks, including brand name and logo. This gives them exclusive rights to their trade mark. 

Moreover, you should note that your franchisor needs to provide you with a license to use the franchise systems and intellectual property in your franchise. Often, your franchise agreement will cover this. 

Territory

Your franchise disclosure document will most likely outline the territory in which you can operate. This information ensures that you do not open a franchise in an area with an existing one, creating unnecessary competition. In addition, it is essential to read this clause carefully to understand whether your franchisor can limit or extend your territory boundaries. Moreover, this clause may allow your franchisor to open another franchise in the same territory. You may wish to avoid this, so it is best to double-check.

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Key Takeaways

As a potential franchisee, looking out for these key terms in your franchise disclosure document is essential. Firstly, you may want to check your franchisor’s business experience to understand whether investing in their franchise is a good idea. Secondly, you can look at their financial information to understand what fees you need to pay and whether the franchise business will be profitable. Thirdly, you need to understand the franchise systems and ensure that the business’s intellectual property has protection. Lastly, you should note your territory and whether the franchisor can grant a new franchise in the same area.

If you need help reading over your franchise disclosure document, you can contact our experienced franchising lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page

Frequently Asked Questions

What is a franchise disclosure document?

A franchise disclosure document outlines vital information about the franchise and the franchisor. This clarifies information for both parties and will help franchisees make an informed decision. 

Is a franchise disclosure document required to be issued in New Zealand?

The document is not compulsory unless your franchisor is a part of FANZ. However, it would help if you dealt with franchisors that are members of FANZ, as there are specific membership requirements that apply to franchisors. This includes the requirement to issue disclosure documents to prospective franchisees.

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