Frequently Asked Questions about buying and selling a franchise
Whether you’re a franchisor working to secure new franchisees, or a franchisee looking to buy into a franchise, you need to be familiar with the legal documents pertaining to buying and selling a franchise. Here’s the low-down on the Franchise Disclosure Document (FDD)….
What is a Franchise Disclosure Document?
It’s a legal document presented to prospective franchisees pre-sale. The Franchise Disclosure Document exists to help interested parties properly evaluate the franchise business opportunity, by disclosing all relevant information pertaining to the franchise business.
Must I have a Franchise Disclosure Document?
Under the Consumer Protection Act, No. 68 of 2008, which came into effect in early 2011, all franchisors are obliged to present a Franchise Disclosure Document to entrepreneurs interested in purchasing a franchise. Not making such a document available is an offence under the law.
What is in a Franchise Disclosure Document?
Says Entrepreneur Magazine, the purpose of a Franchise Disclosure Document is to ensure that a potential franchisee has sufficient accurate information to make an informed decision about whether to buy into the franchise, or not. To this end, a Franchise Disclosure Document should contain the following information:
- Contact details of the franchisor
- Names and details of all directors and shareholders
- A company profile, including a company history and organisational structure
- Description of the franchise’s services and products
- Details of support and training given to franchisees
- A statement as to the financial health of the franchise, and an auditor’s certificate
- Details of any legal action being undertaken against the franchise by any party
- Details of existing franchises, the dates they were established and a geographical breakdown
- Names and contact details of existing franchisees
- Details of franchise fees and franchise royalty fees payable
- Financial projections and a breakdown of the costs involved in buying and running a franchise, for example, set-up costs; working capital and legal fees
- A rundown of franchisor and franchisee obligations
- A summary of the franchise agreement.
Can I compile my own Franchise Disclosure Document?
Not advisable! Since it’s a legal document, it should be drafted by a qualified and competent franchise attorney.
Is a Franchise Disclosure Document different from a Franchise Agreement?
Yes. The Franchise Disclosure Document is issued pre-sale. The Franchise Agreement is the formal sales agreement between franchisor and franchisee; signed once the franchisee has evaluated the franchise opportunity and has decided to buy into the franchise.
What is a secrecy undertaking?
Requiring franchisors to disclose details of their franchise business to potential franchisees is to discourage fly-by-night franchisors. The flip side – unscrupulous prospective franchisees who take sensitive information to competing franchisors or use it to start their own business. To prevent misuse of trust, franchisors may require potential franchisees to sign a Secrecy Undertaking, i.e. confidentiality agreement.
Franchisors, please remember to keep your Franchise Disclosure Document up-to-date – the Franchise Association of South Africa advises franchisors to revisit FDDs annually.
