Franchising Code of Conduct – Part 2

We recently discussed the obligation on the parties to a franchise agreement to act in good faith that is enshrined in the Franchising Code of Conduct and the timing requirements of providing your franchisee with a disclosure statement.

But what must be included in the Disclosure Statement?

The prescribed form of the Disclosure Statement is set out in Annexure 1 to the Code.

Some of the key elements that must be contained in the Disclosure Statement are:

  • A summary of the relevant business experience of the franchisor and each officer of the franchisor for the past 10 years;
  • Details of any current legal proceedings against the franchisor (and details of any convictions against the franchisor or a director or associate of the franchisor) in the last 10 years;
  • For each marketing or other cooperative fund that the franchisee may be required to contribute: the kinds of persons who contribute to the fund (for example, the franchisee, franchisor or outside supplier), the amount, who controls or administers the fund(s), whether the fund(s) is audited and if so, by whom, how the fund’s financial statements can be inspected by the franchisee and whether the franchisor must spend part of the fund on marketing, advertising or promoting the franchisee’s business.
  • Description of the trade mark used to identify the franchise system, details of the franchisee’s rights and obligations in connection with the use of the intellectual property and details of any agreement that significantly affects the franchisor’s rights to use the intellectual property.
  • Whether the franchise is for an exclusive or non-exclusive territory or limited to a particular site.
  • If the franchisor requires a payment before the start of the franchise agreement: why the money is required, how the money is to be applied, who will hold the money and the conditions under which the payment will be refunded.
  • Establishment costs: including real property type, location and building size details, equipment, fixtures, decorating costs, inventory and other payments required by a franchisee to begin operations and each recurring or isolated payment payable by the franchisee to the franchisor or an associate of the franchisor; and
  • Earnings information for the franchised business, projected earnings, the assumption on which those projections are based and a statement of the franchisor’s solvency and financial reports for the last 2 completed financial years.

An Information Statement to prospective franchisees must also be provided in the form prescribed by Annexure 2 to the Code. This Information Statement does not replace your own financial and independent legal advice but is a starting point for considering the risks and rewards of becoming a franchisee.

You’ll find that the team at Conditsis Lawyers is here to demystify the franchising process.

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