Running a franchise network is a full-time responsibility which requires the franchisor to perform various roles daily, while doing so, franchisors should not forget about their disclosure document after being drafted in the developmental stage of the network.
If you are a franchisor, whose financial year end runs from 28 February to 1 March, it is time to review and update your disclosure document.
Importance of a current and up-to-date disclosure document
It is very important to ensure that your disclosure document and processes comply with the relevant CPA legislation and FASA guidelines.
In terms of the Franchise Association of Southern Africa (FASA) Code of Ethics and Business Practices and the Consumer Protection Act, the information must be updated at least annually, but should material changes take place within the franchisor company then it should be updated too.
The Consumer Protection Act is the first legislation that has ever specifically asked for compliance in relation to franchising. Consumer rights are bestowed on franchisees; therefore, it is important to avoid misrepresentation and ensure compliance of the disclosure document with regards to content.
It is important to note that FASA members need to comply with both the CPA legislation and FASA code of ethics guidelines. If a franchisor is not a FASA member, documentation only needs to be CPA compliant, however it is best practice and in the interest of the franchisee to disclose all the necessary information to prospective franchisees before they commit to an opportunity and sign the franchise agreement. By having a CPA and FASA compliant disclosure document it adds a sense of credibility and trustworthiness to the franchise.
The document is intended to provide prospective franchisees with comprehensive information, relative to the franchise opportunity. Before a disclosure document is given to a prospective franchisee, the franchisor should review the information to ensure that its up to date and does not give the franchisee misleading information and provides a false perception with regards to the franchise.
The CPA and FASA guidelines include mention that the franchisor is obligated to:
- Create a compliant disclosure document
- Update the document annually for the new financial year
Updates that need to be made
Franchisors can save themselves legal costs by updating certain sections of the disclosure document themselves, if they need assistance, Franchising Plus specialises and can assist in writing and editing disclosure documents
The updates that the franchisor can make themselves, include the following:
- The growth in the franchisor’s turnover, net profit and franchised outlets for the financial year
- Any material changes in the franchisor’s financial position since the last auditor/accounting certificate has been issued. Full details of criminal and/or civil proceedings taken against the franchisor or its officers, either in the recent past or still pending
- Details of the number of existing franchisees and franchises
- Details of people who ceased to be franchisees during the past 3 financial years and the reason why people/entities have ceased to be franchisees
- Changes to financial requirements e.g. initial fee, setup cost, working capital, monthly royalties, etc
- Changes with regards to the franchisor entity and its executive officers
- Update the organogram if there have been any changes in the support system for franchisees
- Changes in obligations for the franchisor and/or franchisee under the franchise agreement
- Details of BEE rating certificate, if there have been any changes
- Changes in the financial projections/model for a franchise outlet. Include financial projections for the business to be franchised, together with an explanation of how the figures were arrived
- Any updates to trademark applications or registrations
- Any changes to the main clauses in the franchise agreement should be added e.g. restrictions, site selection, termination, renewal, assignment, main obligations, additional agreements, franchise fees, sale of the business, etc. A copy of the franchise agreement may be attached to the disclosure document.
How your accountant/auditor should assist in the update
In addition to the above required changes, a disclosure document needs to be accompanied by an accounting/auditor certificate from a person eligible in law to certify that*:
- The franchisor company is an ongoing concern,
- The business of the franchisor is an ongoing concern
- The franchisor will be able to meet liabilities i.e. considered to be financially sound and likely to be able to meet its financial obligations within the normal course of business
- The franchisor’s audited financial statements for the most recent financial year have been drawn up according to South African law standards
*Full wording can be found in section 3 (3) of the Consumer Protection Act Regulations
Contact Franchising Plus if you need any assistance
Franchising Plus can assist in drafting and updating disclosure documents, if you need assistance, Contact Us