A Disclosure Document (A Disclosure document gives all the necessary information which needs to be provided to the franchisee by the franchisor) is a key tool in researching a franchise and helping a potential franchisee make an informed decision about buying into a specific franchise system.
The document should include a feasibility study, exact expenses, start-up costs, the training furnished, employee requirements, and how long it will take for the franchisee to break even. You should also ask for the names and contact details of other franchisees who will be able to tell you whether for example, the actual performance of the business system meets its projected targets.
What should a disclosure document contain?
According to Eugene Honey, Partner at Bowman Gilfillan and a member of the Franchising Association of South Africa (FASA’s) executive council, the disclosure document should outline the salient features of the franchise, its characteristics, details and a feasibility study.
First, it will list the contact details of the franchisor, the names and details of the shareholders and senior employees of the franchisor, as well as the company’s background, history and structure. Next follows a description of services and products, together with the factors influencing success; the details of the franchisor’s initial and ongoing support and training; an outline of the contents of the procedural manual; total investment required (including a breakdown of the franchise royalties, administration fees and working capital) and a short feasibility study.
Details of other franchisees should be included. Any past and present financial difficulties of the franchisor and franchisee must be noted, along with the full details, requisites, equipment, layout and proposed sites for an average franchise outlet. Finally, the Disclosure Document will include a summary of the Franchise Agreement.
The purpose of a Disclosure document
The purpose of the document is to ensure that the potential franchisee has sufficient accurate information to help them assess the franchise operation, and make an informed decision about whether to enter the Franchise Agreement or not.
Will you need to sign a CA?
Although you would be required to sign the Franchise Agreement or a Confidentiality Agreement before you receive additional information. It’s not usual practice to sign confidentiality clauses this early because the information contained in a Disclosure Document is often not especially sensitive.
You should also ask for the names and contact details of other franchisees that will be able to tell you whether for example, the actual performance of the business system meets its projected targets.