Issuing the Disclosure Document

Posted by on Nov 3, 2014 in Blog | Comments Off

The franchise disclosure document (FDD) contains a lot of confidential company information including, financial projections showing potential business unit performance for franchisees, franchisor financial information, supplier lists, franchisee lists, details pertaining to the franchise agreement, and business operational information. For this reason the franchisor should not issue the FDD to all individuals who come knocking and express interest in the business opportunity.

It is advisable to qualify the lead first and the franchisor should therefore ask prospective franchisees to complete the franchise application forms and provide proof that he or she has the required funds available before taking the enquiry any further. In fact, the franchisor may even consider conducting a formal interview at this stage in order to evaluate the suitability of the prospect and determine if he / she will be a good “fit” for the franchise network.

Only once satisfied that the prospect is serious, has access to the required funds, and meets the requirements of the brand should the FDD be issued to the prospect. An important point to note however is that there are two “cooling off” periods that should be adhered to and it is therefor strongly advised that the prospect be asked to sign acknowledgement of receipt of the FDD. The form should be dated so that the issue date is recorded. The first cooling off period (or business assessment period) is fourteen (14) consecutive days and prospective franchisees are given this time to evaluate the franchisee offering and business opportunity of the franchisor. He / she should be requested to study the document carefully.

During this period the franchisor may not ask the prospect to sign any (nor accept any signed) binding document or pay over any money sooner than 14 days after having received the FDD. Prospective franchisees are also encouraged to seek professional advice regarding the franchise opportunity by consulting with their attorney and / or accountant.

In addition to the above and in light of the recent promulgation of the Consumer Protection Act 68 of 2008, on signing of the Franchise Agreement, the new franchisee must then be given an additional ten (10) business days cooling off period in which to re-assess the franchise agreement and franchise offering.  Please note that all fees due by the franchisee on signature of the franchise agreement should be paid into the franchisor’s trust account or the trust account of his attorney / accountant until the ten-day period has lapsed. The franchisee should then be required to notify the franchisor of his/her intentions regarding acceptance of the business opportunity on the eleventh day, in writing.

Should the franchisee wish to proceed, the fees payable can then be released to the fanchisor’s bank account. Where the franchisee declines the franchise business opportunity, the FDD, franchise agreement and any other documents issued to the franchisee must be returned to the franchisor and the prospect must be refunded all monies due to him/her (the franchise fee).