The nitty-gritty of the disclosure process

Thursday May 16 2019



Wambugu Wa Gichohi

Wambugu Wa Gichohi 

The Franchise Disclosure Document (FDD) underlies the Franchise Agreement. It is prepared and shared by franchisors during the franchise opportunity offer to enable potential franchisees make informed investment decisions.

It is an international best practice to be followed whether or not a franchisor is bound by law or a code of ethics in a world-recognized franchise association.

Before looking at its contents, discussion of how the FDD is generally handled is apt. Where the franchisor belongs to a franchise association recognized by the World Franchise Council-(WFC), the franchisor prepares and deposits the FDD with the franchise association and any other relevant regulator.

These entities check it for compliance and communicate to the franchisor. U

pdates are also deposited with these entities before a certain date as may be applicable per country.

Prospective franchisees then receive the FDD together with the Franchise Agreement because the FDD contains information pertinent to deciding whether or not to sign the Franchise Agreement.

Given the importance of pre-franchise sale disclosure, it is a requirement for WFC member association franchisors to allow prospective franchisees a “cooling off” period of at least 14 days before signing the Franchise Agreement. In case of franchise renewal, the franchisee must receive an updated FDD (and the Franchise Agreement to be renewed) at least three months before expiry of current franchise period.

Guidance from consultants on interpretation is highly recommended for prospective franchisees.

Prior to the 1978 Federal Trade Commission (FTC) Rule in the USA, dishonest franchisors easily took advantage of potential franchisees by not disclosing the true nature of the franchise offer. This made franchising a shady business.

The WFC was established in 1994 to promote growth of franchising internationally and to facilitate best practices in franchise association management among its members. Best practices include a Code of Ethics which associations derive from the WFC’s Principles of Ethics and which association members must subscribe to upon joining.

Pre-franchise sale disclosure is prescribed in the associations’ Code of Ethics. Hence, even with no legislative regulation, franchise associations act as self-regulators.

Unfortunately, in countries with no strong franchise associations or franchise legislation-most of Africa-the situation hasn’t changed much from the pre-1978 USA.

Franchising can still be a murky game-a European-based company attempted to sell me a franchise for travel in private jets, tied to land ownership in the UK but they melted away upon my asking about their franchise association membership! It is important though, to note that there is nothing inherently wrong with the structure of franchising. It is the lack of regulation (legislative or self-regulation) that enables unscrupulous individuals to create and perpetuate scams in the name of running a franchise.

There are still options that can be used to enforce pre-franchise sale disclosures in Africa, including South Africa where some franchisors do not join the franchise association. Tying franchisors borrowing from banks to deposit the FDD with the bank’s loan office as part of the bank’s risk mitigation would weed off dishonest franchisors.

Additionally franchisees should insist on an FDD before engaging, but this is unlikely if they do not, in the first place, know of the need for one.

The days of unscrupulous franchisors who rely only on a franchise agreement to engage franchisees are numbered as we roll out the Africa Franchising Accelerator Project across Africa.

Two of our project components address disclosure, namely developing strong franchise associations and minimum franchising legislation as per the WFC guidelines-with a condition that it is illegal to conduct franchise business unless one is a member of a WFC-recognized franchise association.

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.

wambugu.wagichohi@worldaheadafrica.com, franchising@tpsftz.org

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