Disclosures in legally-regulated markets

The Franchise Disclosure Document (FDD) underlies the Franchise Agreement. Prospective franchisees will receive the FDD together with the Franchise Agreement because it is the FDD that has information pertinent to deciding whether or not to sign the Franchise Agreement.

Given the importance of pre-franchise sale disclosures, it is important that African countries that are now moving towards franchising indigenous brands under our Africa Franchising Accelerator Project decide between government legislation or to rely on emerging franchise associations-or a combination of both- to regulate the sector.

The World Franchise Council advocates minimum government legislation and has issued a guideline law to be adopted by those wishing to entrench franchising laws.

Given this scenario, I will present the contents of the FDD in a government-regulated market (USA) then the World Franchise Council requirements regarding contents, which all WFC-member associations must subscribe to.

The contents and procedure for preparing and presenting the FDD in the USA was greatly informed by the pre-1978 situation where all sorts of ‘franchises’ emerged, some genuine but most not, leading to massive losses by prospective franchisees.

The 1978 Federal Trade Commission Law made it a requirement for all franchisors seeking franchisees to prepare an FDD-previously known as Uniform Franchise Offering Circular (UFOC) up to 2007-containing twenty-three “items” as follows. Twenty-one of these relate to the franchisor while two relate to the franchise itself.

Item 1 deals with the franchisor, their patents, their predecessors and their affiliates. This makes it difficult, if not impossible, for a franchise that failed in the past to later re-emerge under a different name. Item 2 presents the identity and business experience of the key persons.

Franchisees need to be sure that they are investing their time and money with forthright and adequately-experienced franchisors. Item 3 discusses the litigation history of the franchisor and any of its key executives-and their outcomes where available-current and past cases involving fraud, violations of franchise law or unfair or deceptive practices.

Item 4 discusses the franchisor and the executive officers’ incidences of bankruptcy and presents information that can enable franchisees to assess the franchisor’s financial ability to grow the franchise system.

Item 5 presents the initial franchise fees payable to the franchisor which include the cost of outlet set up (where franchisor hands over a turnkey operation), stocking and running the business-including royalties. Item 6 presents other fees and expenses.

These would include training and marketing fees. Item 7 deals with estimated initial costs such as cost of leasing sites, building up the outlets, equipment and stocking where franchisees are allowed to do this on their own.

Item 8 deals with restrictions on sources of products-does the franchisor restrict franchisees to stock only products from a franchisor-identified source? Item 9 delineates the franchisee’s obligations while item 10 presents the desired franchise financing arrangements.

Item 11 presents the obligations of the franchisor while item 12 defines the general franchise territories and the specific territory the franchisee would focus on.

Items 13 and 14 deal with the franchisor’s other intellectual property such as trademarks, copyrights and proprietary information, including how to deal with the latter.

Item 15 defines the obligations of the franchisee to participate in the day-to-day running of the franchise business while item 16 says whether the franchisee is restricted (and how) on the goods and services they will offer.

Item 17 spells out the conditions under which the franchisor may end a franchisee’s franchise and the franchisee’s obligations to the franchisor after termination. It also defines the conditions under which a franchisee can renew, sell or assign the franchise to others

The writer is the Lead Franchise Consultant at Africa Franchising Accelerator Project.

We work with country apex private sector bodies to increase the uptake of franchising by helping indigenous African brands to franchise. We turn around struggling indigenous franchise brands to franchise cross-border.

We settle international franchise brands into Africa to build a well-balanced franchise sector. We create a franchise-friendly business environment with African governments for quicker African integration.

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