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The legal importance of disclosure documents in franchising

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The legal importance of disclosure documents in franchising

Although international best practice and FASA has for many years dictated that competent disclosure should be given to franchisees this has previously not been law in South Africa. Now the Consumer Protection regulations have legislated that Disclosure Documents must be furnished to franchisees at least fourteen (14) days prior to the signing of a franchise agreement.

As a minimum a disclosure document must contain:

  • The number of individual franchised outlets
  • The growth of the franchisors turnover, net profit and the number of individual new franchised outlets for the immediately preceding year;
  • A statement of confirmation that the franchisor is able to pay its debts as and when they fall due;
  • Written financial projections of the franchised business or of franchisees of a similar nature, together with particulars of the assumptions upon which these representations are made.

The disclosure document must be accompanied by an accounting officer or auditor's statement confirming inter alia that the business of the franchisor is a going concern that it is able to meet its current and contingent liabilities, as well as its financial commitments and that the franchisors annual financial statements have been prepared in accordance with generally accepted accounting practice.

Legal advisors warn that franchisors open themselves up to contractual problems if their Disclosure Documents do not conform to CPA regulations and are not regularly updated.