Laws and Contracts

What are ‘Franchise Disclosure Documents’?

In many countries, franchisors must fulfil pre-contractual obligations by providing certain information. They do this by handing over franchise disclosure documents to potential franchisees on the following subjects: 

  • the mode of action and prospects of success of the franchise system,
    • information about the amount of work and capital that must be invested from the start-up phase to break-even,
  • figures from comparable franchisee-run businesses in the system,
  • type of know-how to be transferred as well as the intrinsic value of such know-how.

Thus, the franchisor should, for example, provide the following information before a franchise agreement is signed:

  • accurate information on expected turnover and profits as well as disclosing the basis on which such figures were calculated
  • accurate information on the number of franchisees who have failed (so-called ‘flop rate’)
  • exact number of existing franchisee-run businesses
  • accurate information on the average and/or typical costs of a franchise outlet
  • accurate information on the amount of the franchise fees
  • accurate information on market penetration of the licensed brand
  • accurate information on the competitive and market situation and a site analysis based on this information
  • accurate information on the purchasing advantages and/or the supply of products/services to franchise businesses by exclusive manufacturers (framework agreements)
  • accurate information on the probable or average amount of capital that a franchisee must invest
  • accurate information on the prospects of success of the marketing concept,
    • accurate figures about comparable franchise outlets in the system and the rate of fluctuation within the system,
  • accurate information on the industrial property rights owned by the franchisor,
  • accurate information on the training courses offered to franchisees,
  • accurate information on the current business figures of the top 3 franchisees (top third),
  • accurate information on any other ways that the franchise system’s contractual products may be distributed,
  • information on previous experience of the system’s businesses and/or of the franchisor’s branches acting as pilot and test businesses,
  • information on the amount of capital needed besides the entry fee including the amount of losses likely to be made during the start-up period (lean period) in order to be able to realistically assess the chances of making a profit.

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