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Appendix 1


Discussion Document

[ Last Updated 7 August 2008 ]


Within this section…

The following clauses have been taken from FANZ's Code of Practice. The FANZ Code also covers other important issues including standards of conduct for members, the requirement for contractual compliance with the FANZ Rules, Code of Practice and the Code of Ethics, "Cooling Off" provisions and dispute resolution processes, as well as independent advice certification and scrutineering processes. A copy of the full FANZ Code [external website] can be accessed from their website.

Franchising Association of New Zealand Incorporated Code of Practice

14. DISCLOSURE DOCUMENTS

14.1 Franchisor Members will provide disclosure by way of a Disclosure Document in accordance with the provisions of this Code.

14.2 The Disclosure Document will be updated at least annually and be provided to all prospective Franchisees at least fourteen (14) days prior to signing a franchise agreement (or, if preceded by the signing of a preliminary agreement, fourteen (14) days before the prospective Franchisee becomes bound by the preliminary agreement to proceed. A Disclosure Document is required to be provided to an existing Franchisee in conjunction with the renewal of the franchise agreement within one month of being requested by the Franchisee.

14.3 The Disclosure Document is to comply with such of the contents of this Code as are applicable to the relevant franchise system and the contents of the Disclosure Document shall set a minimum standard which may be exceeded by supplying more information than is necessary.

14.4 The financial disclosure contained within the Disclosure Document shall be updated on an annual basis, and shall be provided to any existing Franchisee at any time upon request by the Franchisee.

14.5 Franchisors shall be at liberty to add further comment to further explain or clarify the financial disclosure, eg where the Franchisor is a company which is part of a group of companies and the basic information may not present the financial position most appropriately.

14.6 Where a Franchisor and a Master Franchisee/Sub-Franchisor both enter into a contractual arrangement with a Franchisee, the Disclosure Document will contain material information in relation to both the Franchisor and Master Franchisee/Sub-Franchisor including financial disclosure relating to both the Franchisor and the Master Franchisee/Sub-Franchisor.

14.7 Where the Franchisor is not in a direct contractual arrangement with the Franchisee and the Franchise is granted only by the Master Franchisee/Sub-Franchisor then the Disclosure Document need only contain information relating to the Master Franchisee/Sub-Franchisor and to the franchise system generally.

14.8 Financial disclosure shall be provided by a vendor Franchisee which is a member of the Association to an approved purchaser of that Franchisee's business and such financial disclosure will include the accountant's or auditor's reports as the case may be.

15. DISCLOSURE DOCUMENT CONTENTS

Each Disclosure Document will contain the information required to be shown as set out in Appendixes A and B.

Appendix A

Disclosure Document Contents

Each Disclosure Document will contain the following information (and Members are encouraged to show the information in the following order):

  1. Name and registered office of the Franchisor. State if a member of any other relevant trade or industry association
  2. Names, job descriptions, qualifications (if any) of the Franchisor's directors/executive officers/principals.
  3. A detailed resume of the business experience of the Franchisor (and any related entities) and its directors/secretary/executive officers/principals including:
    1. Length of experience in the type of business offered in the franchise.
    2. Length of experience in operating or offering the franchise.
    3. Length of experience in operating or offering other franchises and a description of those franchises.
  4. A viability statement with key financial information in respect of the Franchisor from the Franchisor's directors/principals in accordance with Appendix B (provided that the requirement to supply the information specified in paragraph (a) of Appendix B does not apply if the statement provided in paragraph (b) of Appendix B is supported by an independent audit provided by an auditor within the preceding 12 months and a copy of the auditor's report is supplied). The information and statements set out in Appendix B shall not be required to be provided by a Franchisor which is a wholly owned subsidiary of a public company whose shares are publicly traded on the New Zealand Stock Exchange where:
    1. The Franchisor or its parent company has obtained from the New Zealand Securities Commission an exemption for the provision of separate accounts for subsidiary companies; and
    2. The Franchisor provides in place of the information and statements set out in Appendix B the audited annual report of the parent company containing consolidated financial statements including those of the Franchisor.
  5. Details of any bankruptcies, receiverships, liquidations, or materially relevant debt recovery, criminal, civil or administrative proceedings which are current or have occurred or for which judgment has been entered against the Franchisor (and any related entities) or any of its directors/executive officers/principals within the last five (5) years.
  6. A summary of the main particulars and features of the franchise including:
    1. The nature and period of existence of the franchise system and how it has developed.
    2. Examples of any trade mark, logo, symbol, etc used to market the Franchisor's goods or services and steps taken to protect these and details of any threatened or pending litigation in relation to these.
    3. Details of payments to be made by the Franchisee to the Franchisor (including the method of calculation if applicable, and the amount to be refunded by the Franchisor if the Franchisee terminates the franchise agreement within the cooling off period).
    4. Particulars of any restrictions imposed on the Franchisee (eg territorial, or the offer of competing franchises).
    5. A summary of the terms and conditions for the purchase of services, goods, fixtures, property, etc from the Franchisor and the situation applying if the source of goods/products supplied by the Franchisor fails, plus relevant comments/conditions with respect to rebates etc from suppliers.
    6. The basis of Franchisor's involvement/approval for site selection.
    7. A summary of the terms and conditions relating to termination, renewal, goodwill and assignment of the franchise.
    8. A summary of the main obligations of the Franchisor (including initial and ongoing training to be provided).
  7. A tabulated list of components making up the franchise purchase eg franchise fee, stock, fixtures/fittings, working capital, etc with (estimated) individual costs, totalled to reflect the full outlay. A summary of those items which could be leased and (estimated) costs involved.
  8. Details of any financial requirements by the Franchisor of the Franchisee, eg a specific amount of non-borrowed capital towards the franchise purchase price.
  9. Regarding franchises, Franchisees, and outlets:
    1. The number of existing franchises, the number of outlets, and details of Franchisor owned outlets. A list of existing Franchisees (including address and phone number of each and year commenced business) should be available for reference purposes. Should a full list be impractical then a list of all Franchisees in each city or town or region (as appropriate to the circumstances) should be provided.
    2. The number of franchises terminated or not renewed over the past year.
    3. Details of any current unresolved litigation with any existing or former Franchisees.
  10. Regarding financial projections provided:
    1. Where written projections are provided with respect to levels of potential sales, income, gross/net profits or other financial projections etc from the franchise or franchises of a similar nature particulars of the basis/assumptions upon which the representations are made shall be provided.
    2. Each page of the projections should be qualified with respect to its basis/assumptions, for example:

      These figures represent ACTUAL performance by either the Franchisor or a Franchisee. There is no guarantee that you will achieve these figures and nor is it intended that you should rely on them as a guarantee.

      OR

      These figures indicate the gross profit margins and revenue expenses at stated turnover levels which have been experienced by (the Franchisor in its own operations) or (the Franchisees on average in the last profit and loss accounts which have been supplied to the Franchisor). There is no guarantee that you will achieve the same results, nor is it intended that you should rely on them as a guarantee.

      And Franchisors should be aware that the issue of these warnings does not, by itself, provide protection from legal claims.
    3. A clear statement whether or not depreciation and any salary/wages for the Franchisee and the cost of servicing loans are included.
  11. A statement as to whether the territory or site to be franchised has been subject to any trading activity, particularly a previous franchise in the same franchise system within the previous 5 years, and if so, the history and details including the circumstance of any cessation of the franchise.
  12. A statement in it indicating that "this Disclosure Document should help you make up your mind. While it includes some information about your Franchise Agreement, do not rely on it alone to understand your Franchise Agreement. Read all of your Franchise Agreement carefully. Buying a franchise is a serious undertaking. Take your time to decide. You are also required to have the Franchise Agreement explained to you by a solicitor experienced in franchising and you should seek financial advice on the franchise proposition from an accountant experienced in franchising."
  13. A Certificate in the following form or to the same effect "The Directors (or, if the Franchise is not owned by a Company, the "Proprietors") of the Franchisor have reasonable grounds to believe that the Franchisor will be able to pay its debts as and when they fall due and the Franchisor is solvent as at today's date." Each Director or Proprietor providing the certificate should sign it, date it and add his or her name legibly underneath their signatures and their office (eg "Director" or "Proprietor").
  14. Each Disclosure Document should also be signed and dated at the end by the same persons as are required to execute any Franchise Agreement for the Franchisor each of whom shall also add his or her name legibly underneath their signatures and their office (eg "Director" or "Proprietor").

Appendix B

Franchisor Financial Data Certificates

(a) Franchisor Financial Data

The Franchisor will supply the Franchisee with at least the following minimum Key Financial Data extracted from accounts prepared in accordance with generally accepted accounting practice, together with a signed Statement as below:

Key Financial Data concerning [name] the franchisor, for the last two financial years, extracted from accounts prepared in accordance with generally accepted accounting practice:

/ /20 / /20
Current assets $ $
Non-current tangible assets $ $
Non-current intangible assets $ $
Total assets $ $
Current liabilities $ $
Non-current liabilities $ $
Shareholders' equity (proprietors/trust funds, if applicable) $ $

(b) Franchisor Financial Data Certificates

(To be placed at the end of the Franchisor Financial Date section of the Disclosure Document)

We certify that there have been no significant material changes [or as the case may be] in the Franchisor's financial position since the (latest date above) and the Franchisor has reasonable grounds to believe that it will be able to pay its debts as and when they fall due and the Franchisor is solvent as at today's date.

Dated ___________________________

Signed for and on behalf of the Franchisor

Signature: _________________________
Position:* __________________________
Signature: __________________________
Position:* __________________________

Note: The position of all signatories must be shown eg "Director" or "Proprietor":
Where the Franchisor is a company with two or more directors at least two directors need to sign; where there is only one director, that director must sign. Where the Franchisor is a partnership or a trust a minimum of two partners or trustees must sign; where there is only one partner or trustee that partner or trustee must sign. Where the Franchisor is a sole trader he or she must sign.

Reproduced with the permission of FANZ.


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