What is a Franchise Disclosure Document?

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.

Author: Franchise Finder, Online Directory of Franchises and Business Opportunities in South Africa