Disclosure – how much should franchisors reveal?

Franchising in the UK has the advantage of not being burdened with onerous franchise specific legislation. Unlike many countries we have successfully adopted a system of self-regulation, effectively overseen by the British Franchise Association.

However, in my view a downside of this situation is that there is no mandatory requirement for franchisors to make formal disclosure about their business to prospective franchisees. Publishing a Franchise Information Memorandum, or Prospectus, with full disclosure of material facts to substantiate the pedigree and providence of the franchise model, is considered good practice, but not a ‘must have’.

It should be. I’m not advocating legislation, but I do suggest that serious franchisors should have have prepared a Prospectus that provides the material facts about the business. Good franchising is built on trust and so it follows that there really shouldn’t be anything hidden from those people who are being encouraged to invest their hard earned money in a franchise.

Being open and honest actually works in your favour. It demonstrates respect and trust. If you’ve got something to hide that might undermine the ability of a potential franchisee to build their business then it’s almost certain that you’re not ready to franchise. And there’s actually little point trying to hide material facts because the internet makes it so much easier for candidates to obtain information about companies. In which case, you’ll simply end up being viewed as untrustworthy and lose their interest anyway.

So, a well-structured franchisee recruitment process should include a carefully prepared Prospectus that helps provide candidates with a thorough and unambiguous understanding of the background, organisation, values, structure, finances and potential of the franchise. Typically, the Prospectus should include:

• Company history – insight into its formation and key milestones in its development. Make a statement about the company values.
• Management team – the key personnel and their experience
• Company financial health – key data about the turnover and profits that the company has generated. You may choose to include the latest audited accounts.
• Investment and fees – detail the investment profile of the franchise and declare all fees payable.
• Intellectual property rights – summarise the position regarding ownership of trademarks, software licences, patents
• Market conditions – information about the marketplace in which the business operates and its respective position – market share, USP
• Current franchise network – list the current franchisees and declare information about those exiting and the reasons. Include details of any company outlets
• Obligations – a summary of the respective contractual obligations of both franchisor and franchisee.
• Product supply – detail the arrangements regarding the supply of products and services to franchisees
• Restrictions – clarify the precise scope of the rights that the franchisee is being granted, making clear any restrictions that must be observed.
• Territories – explain the structure of the territories being granted. Is it exclusive or non-exclusive?
• Litigation – if you have any on-going litigation with a franchisee it is advisable to declare this.
• Support – summarise the support that is available to franchisees
• Renewal policy – what is the position at the end of the franchise term?
• Financial projections – provide a validated illustrative business plan to demonstrate the potential of the business, making it clear that no guarantee of performance is offered. Make sure an explanation about the basis of the data is included.

The fact is that candidates are now much better prepared when evaluating a franchise opportunity. Therefore, most prospective franchisees will ask questions about all of the above issues anyway. So, its better to have pre-empted them and a Prospectus is the ideal way of doing so.

If you would like advice about preparing a Franchise Prospectus, or on any other aspect of franchisee recruitment please contact Franchise Intelligence – 023 8027 5710.

Connect with Clive Smith Franchise Intelligence Senior Franchising Consultant