Disclosure and Agreement

What is the Disclosure Document?
The purpose of the Disclosure Document is to give the potential purchaser a full and fair explanation and other details about the intended business operation. By making this clear at the beginning, the potential franchisee and his or her advisers would be able to arrive at a full decision as to whether proceed or not.

The Disclosure document should contain a full outline of the franchise including:

  • The history of the system.
  • Trademarks involved.
  • Details of payments that need to be made to the franchisor.
  • The terms and conditions of the purchase of goods.
  • All conditions relating to termination, renewal or reassignment of the franchise.
  • Summary of the main obligations of the franchisor.
  • Commissions and how they are calculated.
  • The financial aspects of the business including its history and working capital requirements etc.
  • References from existing franchisees as well as other people the franchisor deals with.
  • The projections the franchisor has for that particular franchise business.

What is the Franchise Agreement?
This agreement is a legal contract which sets out the arrangements between the two parties – the franchisor and the franchisee. This sets out their rights and obligations and defines the length of time the franchise arrangement would last for.

It also sets out the territory involved and many other essential terms and conditions that the partnership type arrangement involves. It has to set out the strict obligations that the franchisee has to comply with otherwise there would not be a deal.

The franchise agreement should be very comprehensive and cover as wide a range of areas as possible so there are no areas left unclear in the mind of the franchisee as well as the franchisor. The franchise agreement is absolutely essential because it is the document under which either the franchisor or franchisee would sink or swim.

Details Contained in the Franchise Agreement
Some of the points that need to be covered in the Franchise Agreement include the following:

  1. Franchise Fee. What is the cost of the franchise, how it made up, what commissions or royalties is are payable etc.

  2. Termination. How can the franchise be terminated, what are the terms and are they reasonable.

  3. Promotion. Are you able to do your own advertising and promotion or does it all have to come through and be part of the group advertising run by the franchisor?

  4. Commissions & Royalties. What are the full details of the royalties that you have to pay and how is this figure calculated?

  5. Financing. Are there any financing arrangements available with the franchise?

  6. Support & Training. What is the support and training provided by the franchisor?

  7. Selling. Are you able to sell your business freely or do you have to obtain permission before selling? Do you have to give the franchisor first refusal at a fixed price or is the price that is used one that is set by the market or valuation?

  8. Intellectual property. If there are patents or trademarks involved are they fully secured and can they be transferred to a new owner?

  9. Territory. Is there an exclusive territory involved? Would having an exclusive area be an advantage or disadvantage to you?

  10. Plant & Equipment. Do you have to purchase the plant and equipment from the franchisor or can you secure these from somewhere else at better prices?

  11. Insurance. Do you have to buy insurance through the franchisor or can you arrange insurance yourself?

  12. Prices. Are the prices for your products and services fixed by the franchisor or can you set them yourself to meet the market?

  13. Competing. Are you able to retain ownership in a similar business while the franchise is in force or would you come under a no competition clause which prevents you from operating something similar?

  14. Disputes. Does the agreement provide for a method of solving disputes such as negotiation or arbitration?

  15. Quiet Use. Are you able to quietly carry on your business without interference or are there times where the franchisor is able to enter your premises for whatever reason he or she deems necessary.