Franchising 101: Is my franchise subject to disclosure?

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Franchising 101: Is my franchise subject to disclosure?

Franchising 101: Is my franchise subject to disclosure?

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July 26, 2022

As franchise business models continue to grow in popularity, so too do the regulatory obligations franchisor need to follow.

Many jurisdictions have implemented a franchise law to regulate franchise relationships. Their main purpose is to protect the franchisee from entering into a franchise contract without full knowledge of the facts or from being subjected to disproportionately burdensome obligations. To avoid such situations, franchisors are obligated to provide the prospective franchisee with a franchise disclosure document.

Franchise disclosure countries

There are more than 30 countries in the world with franchise disclosure laws. These include 11 countries in Europe, the United States of America, Canada, Australia, South Africa, as well as some of the most important economies in South America such as Mexico, Brazil and Argentina.

In Asia-Pacific, there are 8 countries with franchise disclosure requirements including China, Taiwan, Vietnam, South Korea, Thailand, Micronesia, Indonesia and Malaysia.

The full list of countries requiring disclosure is available at the end of this article.

Typical contents of franchise disclosure documents

Typically, franchise disclosure documents must contain detailed information about the franchisor, its business model, the franchise system, the intellectual property of the franchisor and certain key rights and obligations between the parties. Commonly, certain provisions of the franchise agreement need to be summarized and explained in comprehensible language, free from legal jargon. In addition, the law may also oblige the franchisor to provide details on its corporate structure, trading history, ‘success rate’ of past and present franchisees, and market studies and analyses of the territory or area where the franchisee is to operate the business.

The exact content varies by country. So does the volume. In the United States of America, a franchise disclosure document can run to several hundred pages. In Europe, franchise disclosure documents tend to be shorter - typically between 10 and 15 pages long.

How long should I allow for franchise disclosure?

Franchise disclosure documents usually need to be provided no later than a prescribed number of days before signing the franchise agreement or any payments being made by the franchisee. This time period varies between two weeks and one month on average.

In addition to this so-called cooling off period, the franchisor needs to build into its time plan the time needed for the preparation of the document which can easily be between three and six months depending on the target jurisdiction.

Formalities

Additional common requirements include translating the disclosure document into the local language and registering it with local authorities.

Failure to make franchise disclosure

Disclosure is an important step to consider, when contemplating franchising your business, as it is becoming more and more frequently requested around the world. Non-compliance is often penalized with significant fines, and you may face damages claims from franchisees, arguing that they have been misled. Often a franchisee that has not received the required disclosure document has the right under local law to terminate the franchise agreement.

Next steps

Dentons has experience in drafting franchise disclosure documents in a variety of jurisdictions, please do not hesitate to contact us in case of assistance needed.

Babette.MWood@dentons.com

List of countries requiring disclosure: