Prospective franchisees are often advised to engage franchising lawyers to review franchise agreements and disclosure documents. But if disclosure documents generally all look the same and are in a standard format prescribed by legislation, what is it that a franchise lawyer will focus on? The secrets are revealed below.
1. Is the document current? Disclosure documents must be updated annually, within four months of the end of the last financial year. The preparation date must appear on the first page and so it is immediately apparent whether the disclosure document is up to date.
2. Is the document complete? A compliant disclosure document must be signed by the franchisor and must attach copies of the Franchising Code of Conduct, the franchise agreement in the form in which it is to be executed by the franchisee, and certain financial reports or audit reports of the franchisor.
Although all headings and questions in a disclosure document are prescribed by law and should therefore be identical, substantial variation is found in the manner in which different franchisors respond to those questions.
As a franchise lawyer, I pay attention to the overall feel of the document, its general compliance with the format set out in the Code and the quality of information provided. I find that full, frank and well-written responses are often indications that the franchise is a well-established system and/or governed by a conscientious franchisor.
3. Items 2 and 3 of the disclosure document provide highly relevant information regarding the people behind the franchisor, including its officers and associates and their qualifications and relevant business experience.
4. Details of whether the franchisor or its directors have been involved in any relevant litigation should appear at Item 4. Franchisees should familiarise themselves with such information and make further enquiries if applicable.
5. Item 6 provides details of current franchisee numbers in each state, territory or region and details of franchises that have ended in the past three financial years. The information disclosed here may prompt further enquiries as to the circumstances surrounding franchisee exits. Contact details of former franchisees should also be provided (unless those franchisees have requested for their details to remain private).
6. Item 8 contains important details in relation to the extent (or perhaps limitation) of the territory in which the franchisee will be entitled to operate. I always cross-check these details with the corresponding contractual obligations in the franchise agreement to ensure they are consistent and the franchisee is aware of their rights.
7. Items 12, 13, 19 and 20 all contain certain financial information in relation to payments the franchisee can expect to incur, any projections or earnings information provided by the franchisor, and the franchisor’s financial reports or audit report. Franchisees should seek accounting advice for these figures but lawyers will check whether the information provided seems complete and compliant with the Code.
8. Particular consideration should be given to items 15, 16 and 17 which point to key obligations and conditions of the franchise agreement to ensure the franchisee is aware of their main rights and obligations.
9. Item 17C clarifies what franchisees can expect to occur at the end of the finite franchise agreement term so there are no surprises and franchisees can make timely plans.
10. Item 18 reveals whether franchisees will be required to sign any collateral agreements (such as occupancy or confidentiality agreements). This knowledge enables franchisees to request and review copies of any such related agreements and obtain a global picture of the entire transaction they will be entering into.
This is just a summary of certain key issues franchising lawyers will pay particular attention to, but franchisees and their advisers should thoroughly review all documents provided by the franchisor.
Esther Gutnick , senior associate, Mason Sier Turnbull lawyers [pictured]
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