08 Jan How to prepare your first disclosure document
Firstly, let’s consider where this step fits in the overall process of establishing a franchise system.
If you are preparing a disclosure document for the first time, then you are not yet in the business of franchising. You can’t sign up your first franchisee to your system until you have prepared a franchise disclosure document.
In the scheme of things, the disclosure document is the third document that you will prepare. The operations manual is the first document to prepare. The next is the Franchise Agreement, then the disclosure.
How do you prepare your Franchise Agreement? Well, that is a job for a lawyer. You will need to use a lawyer who does this kind of work all the time. We can help you with this job. The industry is constantly changing, as is the code which governs the industry. You can buy template franchise agreements online. A search in Google will produce a number of results. Most of these websites will not produce documents that are current or relevant to Australia.
Of course everyone starts the task of drafting any document with a template. The most difficult and time consuming part is making sure that the template is modified to cover the correct issues in the way needed in your particular industry and, in your particular franchise model.
So let’s assume you have a franchise agreement that sets out the future agreement between you and your franchisees. You therefore also have your operations manual and you have a very good understanding of the way that the system is intended to operate. There are other agreements that you will need as well such as a prior representations deed and a deed of restraint of trade. You are happy with all of these.
The next step is to turn to the annexure at the back of the Franchising Code of Conduct. There are two annexures in the back of the code. You should use Annexure 1. Included here is a link to the franchising code that was current at the time of writing this article.
Clause 1 of the annexure sets out the way that the first page of the disclosure document must look. Be aware, this first page does change from time to time, so you need to keep checking to see that the first page includes the content and form required by the code.
Clause 2 is the beginning of a series of questions which must be answered. The preparation of the disclosure is a matter of answering each of these questions. You cannot change the order in which you answer the questions. Your disclosure document must stick to the order required by Annexure 1.
Many of the questions that need to be answered in order to prepare the disclosure document seem to be very simple and can be answered quickly and easily. Other questions raised by the annexure seem on the surface to require a simple answer, but can hide a sting if not answered with care. Remember that disgruntled franchisees will rely upon any inaccuracies in the disclosure document to try to avoid complying with the franchise agreement or to base a claim for misrepresentation and damages.
There is some good news! If your franchise system is new then there will be many sections of the franchise agreement that are indeed very easy to complete. As the years go by and your system grows, complexity will increase.
Remember that you or your lawyer will need to track changes throughout the year so that a new franchise agreement can be prepared in the following year.
We suggest that before you see a lawyer about drafting the disclosure document that you attempt to prepare it yourself. It is important that you understand how the disclosure works and you will be in a better position to provide instructions to your lawyer if you have looked at each question and considered the appropriate answer before you seek help. Your lawyer will be able to answer the more difficult questions, and point out where more detail may need to be included.
If you have any questions about drafting any franchise documents including your disclosure document please contact J J Riba & Company.
126.96.36.199 – The process of setting up a Franchise System
The most commonly asked question that we receive is – what are the steps in setting up a franchise? The short answer is that you will need a good team of people to help you with each of the steps set out below. The first step is deciding if you should move ahead with the idea at all.
Step 1 – Determine if your business is ready for franchising:
• Is the business well established?
• Is there potential for expansion?
• The business needs to be thoroughly market tested and proven to be successful.
• Is the business adequately differentiated from its competitors?
• Are systems in place to allow it to be duplicated? Each Franchised business can’t rely on you personally in order to operate successfully.
• Is your business profitable?
• Can the average Franchisee make a good return on their investment after paying Franchise fees
Step 2 – Determine if franchising is what you want. Does it help you achieve your goals? Are you the right person for the job?
Step 3 – Ensure that your intellectual property is adequately protected. Register trademarks if required. Establish the correct entities for proper protection in this regard including separate entities to hold trademarks, enter franchise agreements, enter leases etc.
Step 4 – Document your operating procedure (i.e. Write your operations manual). Use the process to continue to refine your procedures. Are you using best practice? What can be improved? You do not want your franchisees to repeat mistakes made by you as you built your own business?
Step 5 – Work with your advisers to prepare relevant documentation including Franchise Agreements, Disclosure Documents, Prior Representations Deeds and Security documentation, if applicable. You will need to consider how your system will operate. Consider, for example, the following:
The Franchise Fee:
• What fees will you charge (Initial fee? Ongoing Fees? Promotions Levy?)
• How will you calculate your royalty? Flat or percentage rate or a combination?
Territory and Term:
• How long will you offer the Franchise for?
• Will you give an option to renew? Remember people need sufficient time in the business to be able to make their money back
• Will you offer exclusive territory?
• Will you be permitted to operate in a similar business within the territory?
• What will you provide?
• Who will do the training?
• Where will the training take place?
• How much training is needed for your franchisee to be in a position to operate the business successfully?
• At whose cost will the training be provided?
• Stock control and Performance Criteria.
• What sort of control will you maintain over stock?
• Will you establish performance criteria?
Step 6 – Develop your marketing campaign. Who will you recruit? How do you determine the best franchisee? Ensure that you speak with other Franchisors in relation to recruitment of Franchisees and read available information. Don’t rush the recruitment process. Quality Franchisees are vital particularly in the early phase of the System Development.
Step 7 – Start operating your Franchise and keep operating your pilot business. Continually look for improvements in the way you operate your business and in the operations of the Franchise System.
Remember – it’s a process!