Looking to invest in a franchise. Then our Buying a Franchise podcast is for you. Join us as we go through all of the franchise basics and help you on your journey to finding your dream franchise. Here at Inside Franchise Business, we acknowledge the traditional owners of country throughout Australia. We pay our respects to elders past and present.

Amie (00:30):

Hello and welcome. My name is Amie Larter, and this is the Buying a Franchise podcast, vital listening for anyone interested in buying it’s in the process of buying a franchise as usual, I’m joined by Sarah Stowe, editor of Inside Franchise Business, Australia’s leading franchise hub to help us guide through everything we need to know about the franchise buyer’s journey. Welcome Sarah.

Sarah (00:54):

Hi Amy. Thanks for having me. It’s great to be here.

Amie (00:56):

As always, Sarah, I am very keen to pick your brain about the knowledge we need to know. And today we’re going to talk about what you’ve described as one of the vital parts of the buying process, the disclosure document. Now that’s a lot of importance you’re placing there on one document, Sarah, so you’re gonna need to elaborate for me. What is the disclosure document?

Sarah (01:20):

Yeah, it is a bit of a heavy load, isn’t it? I’ve sort of, um, really built this one up, but it is important. Um, disclosure document is a key document that a franchisor must provide a prospective franchisee. Now it’s different from the franchise agreement that prescribes the rules and regulations of operating the business.

If I was to put it simply, I would say the disclosure document reveals who the business really is and how it operates. Um, if I explain, in the disclosure document, there will be information about the franchisor and any key executives and how much experience they have. There will be details about the franchise’s financial position and more insights into operating the business that could be marketing, well it will be marketing costs, whether you are free to buy goods and services from any supplier, any historical or possible future earnings, it’s really colouring in the details if you like of what’s been outlined in another document that franchise buyers receive the key fact sheet.

Amie (02:21):

Okay. So you’ve mentioned the franchise agreement. You’ve mentioned the key fact sheet. There’s quite a few documents mentioned, but can you dig a little deeper into the information that’s found in the disclosure document?

Sarah (02:32):

There are more than 20 different elements included in this document from the basics of how and when you can contact a franchisor to its financial reports. Um, for instance, reading the disclosure document will tell you how many franchisees have left a group, the number of franchise businesses that were transferred to new owners, franchises that ceased to operate, agreements that were terminated by either the franchisor, or the franchisee, uh, as well as franchisees who did not extend their agreement or whose business was brought back by the franchisor.

Any ongoing litigation or disputes between franchisees and franchisors will also be outlined in this document.

Amie (03:13):

Right. So, so what you’re saying is the disclosure document can be useful, I suppose, to a franchise buyer in understanding how would I phrase it, the, the level of dissatisfaction among franchisees and how many franchisees are leaving the network?

Sarah (03:29):

That’s right though, obviously there will never be a 100 per cent satisfaction rate. You don’t get that anywhere. <laugh> um, but when the…

Amie (03:37):

I’m sure not, but…

Sarah (03:38):

…When the discontent has, uh, actually become a dispute and then there are lots of disputes listed, or there have been a number of agreements terminated, those are clearly red flags to a potential franchisee.

Amie (03:50):

All right, Sarah. So you’ve mentioned the disclosure document provides information about the franchise’s financials, which I’m sure a lot of people find a very interesting element of the document. This sounds, you know, fairly important. Can you tell us more about this element?

Sarah (04:05):

Um, well, yeah, it is, it is important Amie, because when it comes to the franchisor’s capacity to operate a viable business, and that’s a business that you are gonna be buying into, it’s obviously important to know that it has the funds to actually back up, um, to back this up.

So there must be a statement in the disclosure document, which has been signed by a director of the business that they have reasonable grounds to believe the franchise will be able to pay debts as they fall due.

The document must include the franchisor’s financial reports for the past two years. Um, but if there hasn’t been operating that long, if it’s a new business, a statutory declaration of solvency by a director with a supporting report from an independent auditor must be included instead.

Amie (04:47):

Okay. So franchisees can be reassured that all is well with the franchisor’s finances?

Sarah (04:51):

As much as it’s possible to make that judgment. And it, and it’s a fair balance as well to the expectations that the franchisor has, that the franchisee will have the finances to run their own business, two sides of the same coin.

Um, but there’s more to the document than just the, the financial aspects and, and franchise, all franchisees who may have left.

There are also details of who owns the franchisor’s intellectual property, because there may be one or more trading entities that are actually associated with the business. And it’s useful to know which one holds the intellectual property rights, intellectual property, or IP, as it’s often abbreviated to, um, refers to the logos, the designs, the slogans that are associated with the brand and the disclosure document outlines how the franchisee is allowed to use that, um, which is an essential part of, of running the business. So importantly, you’ll find details too, of the term of agreement, any options there may be to renew the contract as well as upfront costs to buy the business and any recurring fees a franchisee may have to pay.

Amie (05:54):

1. So obviously you can see the franchisor’s financials, um, I’m sure on the back of that everyone would be interested in what sort of costs would be included in this document, Sarah, and kind of what they’re looking at from a, a financial perspective for themselves.

Sarah (06:10):

Yeah. I mean, the, the franchisor has to include the establishment costs. So those are the details of, of essentially what it’s going to cost a franchisee, um, to set up the business. How much it will be, or, but it may in fact, be it’s may in fact be a complex calculation. And so you need to require the, um, franchisor, uh, needs to supply the formula that’s used to work out that particular payment. They also need to show who the franchisee has to pay when the payment’s due, whether it’s refundable. And if so, under, under what conditions.

Um, also in the document are outlined the costs of fixtures and fittings, any decorating or remodeling costs. Other important information that has to be included is the inventory that’s required to start trading as well as any security deposits, insurance licenses, or other prepaid expenses required.

Um, and particularly useful, I think, is to see the amount of working capital that a franchisee needs included in the document. So that franchisees are well prepared, um, for the initial trading period with, um, enough money to, to, uh, tide them over the tough times.

Amie (07:16):

It makes sense. Another element, um, I’m sure that comes into this – lots of franchisees will be occupying premises to operate their business. Does the disclosure document provide any insights into this particular area?

Sarah (07:29):

Yes, it does. Um, obviously if you have premises, um, you’ll require a lease or occupancy license and, and the details of what is required, um, will be outlined in the document. Some franchisees actually purchase a territory rather than, um, a particular vocation and the territory is an area in which they can operate. And the disclosure document, um, obviously details whether or not the assigned territory is exclusive or non-exclusive.

And that really means that the franchisee will have certain rights depending on the type of territory. So that is, is vital information to know.

The disclosure document also reveals any rules and restraints around supplies of goods and services, equipment, and fit out items. Whether, for instance, franchisees have to use a particular supplier for certain goods and whether they have access to the whole range or just select items. Um, the franchisor also has to include details of any rebates they receive from suppliers or whether or not they are passed on to the franchisee.

Amie (08:27):

Right. So this document it’s really quite precise in it details, isn’t it, Sarah?

Sarah (08:32):

It is, you know, unfortunately it probably sounds like a la, rather long list, but it’s, the details are, um, particularly pertinent. And that’s why it’s such a useful tool. There’s more detail, um, in, in other areas too. So things like online sales and how the franchise will and franchisee share in that revenue, there’s a whole section on marketing and cooperative funds, which explains who manages these funds and what they can be used for because there are strict guidelines under a code of conduct. Um, and this just clarifies the details for the franchisee.

Amie (09:05):

Okay. So we’ve talked about the details around setting up the business. Does the disclosure document reveal any facts about the end of the business agreement, which I’m sure that many people aren’t even really thinking about when it comes to, you know, this part of the process?

Sarah (09:18):

Well, that is so true. I mean, I think it’s probably one of the most overlooked areas is how are you going to get out of the business? Um, but there is you’re right. There is a section on ending the franchise agreement, um, and that provides details of the process that will apply and various options. It’s really about the processes rather than the, the specifics. Um, and that includes whether the franchisee has the opportunity to renew the equipment, um, whether they can sell it on, um, whether the franchisor actually has the first right of refusal.

Amie (09:46):

Okay. And so this is all very detailed and there is a lot to learn and there’s a lot to read and there’s a lot to, um, you know, really understand. And I think for some people, you may not be across everything. Um, what’s your advice for people if there are elements of the disclosure agreement that they’re not quite across?

Sarah (10:09):

Um, well look, I think, I think whether or not you feel that you are confident with the information in the disclosure document, I would absolutely recommend that any franchise buyer who is at the point of getting all these documents, um, actually runs them buy a franchise, lawyer.

And I say a franchise lawyer rather than the, sort of the local solicitor, because there are a lot of nuances within, um, the industry and, and the legal aspects that someone who’s a specialist really understands.

And that’s important when you are committing to, um, an investment and, and essentially signing a business contract. So I think, um, getting advice, uh, from a legal expert would be, uh, absolutely, uh, the best thing that you could do, whether or not you, you feel you’ve grasped the content.

Amie (10:57):

Excellent. And last, but certainly not least when in the process is this document provided?

Sarah (11:05):

Uh, yeah, that’s, that’s a really good question, Amie. Um, it’s a, because it’s a document that the franchisor has to provide to anyone who, who is considering buying into, renewing or extending their franchise agreement, um, there are some, um, parameters around this.

And it’s one of six documents that a potential franchisee actually gets before they commit to buying the business. Um, so they get it before.. as a franchise buyer, you would, you would get these documents before you make any, uh, kind of commitments to sign any agreement.

And it’s important to note that the franchisor has to give franchise buyers a minimum – and I stress it’s a minimum – of 14 days to read and review the documents. So it’s really important, um, that that’s observed. I mean, it has to be observed legally, but that gives, uh, a franchise buyer and their, uh, advisors plenty of time to review the documents, to ensure that they understand and can make any suggested changes that they want to make uh, within plenty of time, there cannot be any pressure from the franchisor, um, to try and speed that up. That is, uh, that’s, that’s against the code, which, um, under which franchising, um, operates in Australia.

So it’s something that needs to be read very carefully by the franchise buyer and their advisors.

Amie (12:23):

Okay. Um, so it sounds like the disclosure document is one of the, one of the most important tools as a prospective franchisee and Sarah, you have <laugh>, you’ve convinced me of it. I wasn’t convinced going into this, but you’ve convinced me now with that level of detail, that this is where you are really going to find, um, the crucial information needed to make a decision… um, and have the right information at your fingertips when evaluating the potential of the business.

So thank you for chatting through some of the key details with me today, Sarah,

Sarah (12:56):

Thank you, Amie. It’s been a, it’s been a real pleasure.

Amie (12:59):

<laugh> in the show notes below. We’ve got links and references if you want to follow this further and get more in-depth information before you continue your journey to buy a franchise, if you are some way into your franchise search, you might be ready to check out the Franchise Handbook that’s available on our website – practical tips that can help you navigate the journey smoothly.

Visit franchise business.com.au for more information. And we hope you can join us on another Buying a Franchise podcast. Thanks for listening.

(13:30):

Thanks again for listening to our Buying a Franchise podcast. Each episode, we uncover more tips and expert advice to streamline your franchise journey. So don’t forget to subscribe and as always visit franchisebusiness.com.au to download your free Franchise Handbook and access even more great franchising info.