An information statement is a two page document which must be given to a prospective franchisee as soon as possible after he or she expresses an interest in acquiring, or formally applies to acquire, a franchised business.
For example, an information statement must be provided to a prospective franchisee if they have completed a franchisor’s online application form for a franchise. The requirement for a franchisor to provide each prospective franchisee with an information statement was introduced as part of the new Franchising Code of Conduct, which took effect from 1 January 2015.
The content of the information statement is prescribed in the Franchising Code of Conduct rather than by the franchisor, therefore the information statement is a standard document that all franchisors must give to prospective franchisees.
What is in the document?
It contains frank, simple and easy to understand information which the regulator (and other industry contributors) believe is important to bring to a prospective franchisee’s attention. It is an essential document to read as it provides prospective franchisees with:
- Guidance on conducting due diligence prior to signing a franchise agreement.
- Awareness of the aspects of franchising where issues and/or disputes are more likely to arise.
- Information regarding how franchising is governed in Australia.
- Information regarding where a franchisee can seek further information regarding their rights.
- Awareness of arrangements typical to a franchising system so that a prospective franchisee can consider whether franchising is right for them.
What you need to do
Certain activities are identified in the information statement for the franchisee to complete prior to entering the franchise agreement, such as:
- Seeking independent legal, accounting or business advice in relation to the franchise documents.
- Conducting due diligence on the franchise system, including talking to current and former franchisees.
- Undertaking a specialist franchising or business course.
- Reading all of the franchise documents carefully.
Importantly, the information statement highlights the risks which franchisees may assume in a franchising relationship, such as the potential of unexpected expenses and that, like in any business venture, there is the potential for business owners (whether it is the franchisor or the franchisee) to fail.
Check all the documents
Prospective franchisees should review the franchisor’s franchise agreement and disclosure document against the list of considerations outlined in the information statement. For example, the following considerations should be addressed in the franchisor’s disclosure document:
- Whether the franchisee will have an exclusive territory.
- Whether the franchisee will have the choice of where to buy products sold in the franchise system.
- Whether the franchise agreement allows the franchisor to terminate the agreement even if there hasn’t been a breach by a franchisee.
If prospective franchisees are interested in reading the information statement before approaching franchisors, a copy can be obtained from the Australian Competition and Consumer Commission’s website.
Ultimately, the aim of the information statement is not to dissuade prospective franchisees from considering a franchise, but rather to encourage prospective franchisees to make informed decisions.
Entering into a franchise agreement is a significant commitment and often requires a significant financial investment, equal to or greater than for example, purchasing a home.
Prospective franchisees must conduct thorough due diligence and ensure independent accounting and legal advice is sought prior to signing on the dotted line.