When buying a franchise the information that your franchisor gives you when you are entering their system is extreme. And that’s a good thing, because you can never do too much research when you are buying a franchise. The mind field though is how can you possibly know what to do with it all.
After you complete the initial franchise application form you receive a big bundle from the franchisor. You are now entering a minimum 14 day disclosure period, but take as long as you need to here. It is important that you know all you need to know about the system you are about to buy into.
Let me give you a brief outline on all the documents you will receive and what you should do with them.
The first document you will receive is the Information Statement. This document must be given to you, the enquirer, when you are considering entering into a franchise agreement. This document is gold as it gives you information about franchising. Tells you what you need to do before entering into a Franchise Agreement, it also outlines the risks of franchising and potential unexpected expenses you may have to budget for.
You will also receive a Disclosure Document. This document contains details about the franchisor, their trademarks, lists of existing and past franchisees, details of the marketing or any co-operative funds administered by the franchisor. It also goes in financial requirements, costs to you the franchisee, any impending capital expenditure, franchise sites and territories, product supply, confidentiality requirements and any legal proceedings that are underway. Most importantly the disclosure document contains all the financial details of the franchise system. You need to know these details as you are essentially investing in this brand for at least the term of your franchise agreement.
I know the Disclosure Document is a big document, but it is important that you read and understand what it contains. Your lawyer will help you here. Basically it should contain all the information that the franchise has told you about. It is a great place to start your research and due diligence on the franchise.
The Franchising Code of Conduct will also be given to you. You can also download this from the ACCC website. This document is the guide by which franchising in Australia is governed. The code was recently updated and is there to protect the relationship between the Franchisee and Franchisor. It is good to know your rights and responsibilities as a franchisee and knowing the Code of Conduct is a good place to start. You can even research this document before you enquire about any franchise.
The Franchise Agreement is usually the only document that the potential franchisee expects to receive. In essence this is the contract between you and the franchisor. It sets out everyone’s rights and responsibilities.
It is usually given to you in a draft format the first time. This draft franchise agreement is what you need to take with you for the initial lawyers appointment. There is the opportunity to make some changes to this draft agreement within the initial pre-entry disclosure period. Please do not sign this document until you have consulted with your Lawyer, Accountant and business advisor.
You may also be given other documents such as:
- Confidentiality agreement
- Security agreement
- Business restriction agreement
- Intellectual property agreement
- Lease and Hire purchase agreements for your store, products and equipment.
But the most important thing to do with all these documents is to use them and all information they contain to conduct your Due Diligence. It is essential!
The Centre has a free online course to help you do you Due Diligence. Click here to access.