How disclosures work in self-regulated markets

Any franchisor offering a “franchise” using only a franchise agreement without issuing a Franchise Disclosure Document will outrightly be taking advantage of potential franchisees’ gullibility.

Their argument of there being no such requirement simply adds to this belief because a responsible franchisor always follows international best practices. To mitigate that risk, three avenues are available-statutory regulation, self regulation or a combination of both.

Having looked at statutory disclosure requirements in the USA, it is important to note that the World Franchise Council prefers industry self-regulation.

For this purpose, guidelines for a disclosure document were determined by the International Institute for the Unification of Private Law (UNIDROIT) and finalized by an international committee of governmental experts in Rome in 2002.

Referred to as the Model Franchise Disclosure Law, it is from this law, together with WFC’s Principles of Ethics that franchise associations draw when preparing country code of ethics for sector self-regulation. It is not a binding international convention and franchise associations are free to make changes they consider necessary to cater for specific country needs.

Important, however is that UNIDROIT Model Disclosure Law is limited to business format franchises as the definition of a franchise requires namely, the granting of right to engage in the business of selling goods or services, the grant to be in exchange for direct or indirect financial compensation, a system which includes know-how and assistance, prescribes the manner in which the business is to be conducted and which includes operational control by the franchisor and a business associated with a designated trademark, service mark, trade name or logo.

The information required in the disclosure document is relatively standard but comprehensive. Eight key details that need to be given.

First are the key franchise details including legal, trade name, business address etc, statement by the directors certifying the viability of business and that debts can be paid as and when required.

Also, details of any material debt, criminal, civil or administrative proceedings in which the franchisor or a member of its management team was cited as the defendant, respondent or accused during the past five years must be given.

Second is a background of the franchise-operations history, including different names which might have been used in the past to carry out business.

Third are current franchisees in terms of name, telephone contact and physical outlet location details. Fourth is a summary of the franchise agreement, whose signing will be informed by the disclosure contents. Fifth are the franchisor’s obligations.

Sixth is financial information including initial franchise fees, establishment cost, other costs and total investment required.

Seventh are the ongoing payments-royalties and marketing fees while last is an auditor’s certificate certifying to have carefully studied the franchise offering and giving opinion on the same.

According to the WFC, the document must be available in the official language of the country. The disclosures must be clear, concise in a normative form that is understandable by a person unfamiliar with the franchise business and should not contain technical language.

There should be no factual or legal inconsistencies between the disclosure document and franchise agreement.

The potential franchisee must have at least fourteen (14) days “cooling-off” period to study, evaluate and question any fact on which they need elaboration.

No monies must be paid by potential franchisees before the fourteen (14) days have expired and also only once the agreement has been signed. The disclosure document must be updated at least annually or when a material change in the franchise system and/or franchisor has taken place.

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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