|
During pre-contractural negotiations with franchisors, prospective franchisees should seek the following:
- A draft franchise agreement
- Professional legal and accounting advice with regard to terms of the franchise agreement
- A copy of the Franchising Code of Conduct
- A signed current disclosure document as set out in the relevant Annexure to the Code.
A requirement under the Franchising Code of Conduct is the provision by franchisors of a formal Disclosure Document.
The purpose of a disclosure document is to give a prospective franchisee current information that is material to the running of the franchised business so that they can make a reasonably informed decision.
The Code states that a franchisor must before entering into a franchise agreement and within three months after the end of each financial year after entering into a franchise agreement, create a disclosure document for the franchise.
The Disclosure Document
The disclosure document should include the following information:
- The name and registered office of the franchisor, and whether they are a member of the Franchise Council of Australia.
- The names, job descriptions and qualifications of the directors, executive officers and principals.
- A detailed resume of the business experience of the franchisor and its directors, secretary, executive officers and principals.
- A viability statement with key financial information about the franchisor.
- Details of any relevant debt, legal proceedings, or bankruptcies or insolvency’s concerning the franchisor or any of its directors, executive officers or principals.
- A summary of the main particulars and features of the franchise, e.g. logo, history of franchise system, trademarks, payment details, territory restrictions.
- A list of the components making up the franchise purchase, such as the franchise fee, stock, fixtures and fittings and working capital, with estimated individual costs detailed to reflect the full outlay. A summary of the items that could be leased and the estimated costs involved should also be included.
- Details of any financial requirements by the franchisor of the franchisee, such as a specific amount of non-borrowed capital towards the franchise purchase price.
- The number of existing franchises and company outlets. A list of existing franchisees should also be available.
- Where written projections are provided about the levels of potential sales, income, gross profit and net profit, details of the basis or assumptions on which the projections are made should be provided.
- A clear statement indicating whether or not the projections include depreciation, any salaries or wages for the franchisee and the cost of servicing loans.
- A statement as to whether the territory or site to be franchised has been subject to any trading activity, particularly a previous franchise. If so, the history and details, including the circumstances, of any cessation of the franchise.
It is important to remember here that the disclosure document is NOT the franchise agreement, although it contains a summary that refers the reader to certain sections of the franchise agreement.
You and your lawyer need to read everything contained in the franchise agreement itself before you sign it.
Features of the best practice franchise systems
The following is a list of the best practice features of a franchise system.
Consider these points when evaluating a particular franchise:
- A method for site selection
- The exclusive right to operate the franchise in the chosen territory
- Training for the franchisee before entering and during the term of the franchise agreement
- A democratically elected franchise advisory council including franchise representatives
- Internal system for dispute resolution
- Operational manuals made available to the prospective franchisee prior to entering into the franchise agreement
- Clearly stated terms, rights or renewal, transfer and termination of franchise agreement.
Frequently asked questions
It is important to know what to ask when entering into any kind of contractual arrangement. The following is a list of frequently asked questions that you may find useful.
1. Is a franchisee expected to pay fees to the franchisor prior to signing the agreement?
Some franchisors request that franchisees pay a deposit of several thousand dollars prior to signing a franchise agreement. However, this requirement varies from system to system.
2. What documents will a franchisor ask a franchisee to provide?
A franchisor may request that a franchisee prove that their finance has been approved. In addition, a franchisor may ask for evidence of the availability of working capital to operate the franchise.
3. Will a franchisee be expected to have prepared a business plan at this point?
As franchises are run according to a system, a franchisor may not want a business plan prepared. On the other hand, it may be a requirement when applying for finance through a financial institution. An accountant will be able to help a prospective franchisee do so.
4. What is a franchise fee payment?
A franchisee fee is generally a one-off payment made by the franchisee in consideration for the granting of the franchise licence. It is paid when the franchise agreement is executed.
What and how to gather relevant information
Much of the information you’ll need to gather in order to analyse a franchise will be acquired through the following:
- Interviews with the franchisor
- Interviews with existing franchisees
- Examination of the disclosure document and franchise agreement
- Franchise Ratings Australia will assess a franchise disclosure document by assessing key risks, benchmarking best practice and identifying potential areas of dispute
- Examination of the audited financial statements
- An earnings-claim statement or profit and loss statement
- Industry and trade-area surveys
- Organisational chart
- Newspaper or magazine articles about the franchise
- A list of the current assets and liabilities.
Source: MAUS Business Systems www.maus.com.au
View More Articles on Franchising
Want to browse for other articles?
DSBN Search Form
|
