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A franchise disclosure document is a critical aspect of purchasing a franchise. However, there are different requirements for what you should include, depending on different circumstances. This article will provide some background on franchise disclosure documents and explain areas that you may consider including in one.

What Is a Franchise Disclosure Document?

Firstly, doing proper research is critical to purchasing a franchise. Additionally, as a prospective franchisee, you must conduct due diligence on the franchise itself. In particular, you should determine whether your purchase is a reasonable financial opportunity.

The franchise disclosure document can aid you in this process. This document details important information about the franchise that you can rely on to help you make your decision. You will receive this document either before or alongside a franchise agreement.

However, you should not rely solely on the disclosure document to finalise your decision. Seek advice from franchise professionals. They can also look over the franchise disclosure document to see if your purchase will be financially beneficial for you.

Are Franchise Disclosure Documents Mandatory?

In New Zealand, there are no franchise specific laws outside of the general commercial law that all businesses must follow. Moreover, franchisors do not have a legal requirement to provide a franchise disclosure document to potential franchisees. 

However, if a franchise is a member of the Franchise Association of New Zealand (FANZ), they must provide a regularly updated disclosure document. This must be done 14 days before you sign the franchise agreement. Additionally, the document must comply with FANZ’s requirements and codes. This includes detailing information regarding:

  • dispute resolution;
  • a seven day cooling-off period after signing the franchise agreement;
  • a company profile;
  • details of officers within your franchise;
  • an outline of your franchise;
  • components of the purchase;
  • references; and
  • projections;
  • full disclosure of commissions or payment received with your recruitment; and
  • other relevant provisions that FANZ has mandated.

What Should I Expect in a Franchise Disclosure Document?

There are specific requirements that FANZ members must fulfil in their disclosure documents. Outside of these requirements, it is the franchisor’s decision what they include. Additionally, they may decide whether they have one at all. As a result, this document will vary from franchise to franchise. However, there are some provisions that all documents should generally include. In particular, a franchise disclosure document should include a franchise profile and a summary of its system.

Terms Within a Franchise Disclosure Document

The table below sets out definitions and other topic areas you may encounter.

Franchise profile

The document should include executive personnel details of the franchisor, including directors and other executive officers. These can include: 

  • contact details; 
  • job descriptions; and 
  • qualifications. 

It may also detail their relevant business experience for this style of franchise.

Summary of the system

An overview of the franchise system’s particulars, and how it works. This can include its history, how goods or services are sourced and provided, and details regarding how the franchise functions day by day. 

Intellectual property information

This provision would cover what intellectual property you would gain access to as a franchisee, such as trade marks important for marketing.

Location information

Geographical restrictions about where you can do business as a franchisee.

Threats or past litigation

This would cover information detailing any past or ongoing legal issues the franchise is dealing with. As a franchisee, you need to consider these scenarios carefully, particularly where issues like bankruptcy are involved.

Fees and cost structure

Details regarding what fees you will pay the franchisor. This clause may also include terms and conditions regarding product purchases and other costs as a franchisee.

The terms of your agreement

Information relating to how long your franchise agreement would last. It may also include terms and conditions relating to its termination, renewal, assignment, and goodwill. Look for mention of a cooling-off period as well.

Financial projections

Details of the prospective financial situation of the franchise and projected growth. You can use this to determine whether your purchase would be a financially viable investment.

Will There Be More In My Franchise Disclosure Agreement?

These are not the only areas that a franchisor may cover in their disclosure document. However it is important to be on the lookout for them. This document may also include information about: 

  • any commissions they receive upon your recruitment; 
  • possible references for you to follow up with; and 
  • dispute resolution information.

For instance, they may include the information of existing franchisees that you can contact for more information about being a franchisee.

Key Takeaways

In short, if the franchise you wish to purchase is a member of FANZ, there are certain requirements you may need to consider. If they are not a member, it is up to them to decide what they detail. However, you should see information about the executive personnel of the franchise and a summary of the system itself.

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

Frequently Asked Questions

What is a franchise?

A franchise is a way that businesses can grow their commercial activity into new locations or markets. A franchisor manages the overall company, while franchisees manage their local installations following the same business system.

What is a franchise disclosure document?

A franchise disclosure document details important information about the state of a franchise. Potential franchisees may receive one when considering whether to purchase a franchise.

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