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Business Tips – Disclosure Documents

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Please note that this pertains to the Franchise Association of Southern Africa and Best Practice requirements.

Last week we looked at the ‘how to’ of researching, for the purpose of purchasing, a Franchise, and one of the suggested requirements was getting a disclosure document and ensuring that this is updated on an annual basis.

Starting at the beginning – what is a disclosure document? As its name suggests it is a document that discloses certain information about the company – in this case, the company that you are wanting to purchase a franchise from. The Code of Ethics and Business Practices of the Franchise Association of Southern Africa (FASA) lays down the minimum amount of information that a Disclosure document should provide. This is (but not limited to):

• Full and traceable information about the franchisor company, including contact details and details of all professional affiliations. This information can be checked on the internet, with the FASA, with their auditors (whose information should also be included with the finances). In fact, if you want to, go and visit them at their head offices and ask for a copy of their published financials – most medium to large companies will have this information at reception.
• Details of the qualifications and business experience of the franchisor and their officers in the type of business being offered as a franchise. Don’t forget to have a look at their BBBEE requirements and collaborations – the last thing that you need is that their BBBEE alliances are purely ‘window dressing’ as this could have serious implications down the road.
• Details of any criminal or civil action against the franchisor or his officers, either taken during the past three years or pending. Be sure to look at the things that matter. If the CEO has several traffic fines and/or offenses pending that’s one thing and in my opinion not really of a serious nature. That said however if he has any hint of white/blue collar crime or anything to do with fraud or money laundering – that’s serious stuff.
• Full details of the franchise offer and the underlying business. This should include things like the royalties, cost of the actual business, cost of the fixtures & fittings (if they are in a retail or food chain type environment), cost of stock, etc.
• Full details of the obligations of the franchisor vis-à-vis the franchisee. This should encompass all the expectations that the franchisor has in terms of what has to be met. Things like the franchisee needs to be VAT registered (even if they do not meet the minimum VAT requirements at this time). Minimum turnovers, keeping the branding uniform, procedures with placing and receiving orders, and so on.
• Full details of the obligations of the franchisee vis-a-vis the franchisor. This should include things like policies and procedures, product training, supplying of stock, head office support, and back up, and so on.
• An explanation of the most important clauses of the franchise agreement, including restrictions placed on the franchisee. This would include issues that were ‘out of the norm’ in terms of a franchise agreement and the restrictions would include things like stock only being purchased from the franchisor and so on.
• Financial projections for at least two years and an explanation of the basis on which these projections were calculated. Remember though, that if this is a new Franchise the financial projections would be based on expectations of the marketplace as opposed to what the marketplace has delivered previously. It would also be quite a good idea to get these actual figures of what some of the other franchisees are actually achieving currently. That will give you a more realistic idea of what is happening.
• Full details of all payments, initial and ongoing, the franchisee will be expected to make, and what they can expect to receive in return for these payments. This should include all the start-up costs as well as ‘start-up costs’ for new products or new line items or new products.
• A list of existing franchisees and their contact details. Don’t be afraid to contact some of these people to hear what they have to say about the franchisor and the manner in which their business is run.
• An auditor’s certificate certifying that the franchisor’s business is a going concern and able to meet its obligations as they fall due. Be sure to ensure that the auditor is registered to the SA Institute of Accountants (or a similar body), their registration or membership number should appear on their paperwork.
• A statement by the franchisor to the effect that to their best knowledge and belief, the financial situation of the franchise company has not deteriorated since the day the auditor’s certificate was purchased. This statement should be signed by one of the directors of the company – certainly by someone who is an authorized signatory of the company.

These points are the minimum of what should be in the disclosure document. That said, there is nothing to stop you from requesting additional information, in writing, if you feel the need to.