How To Read A Disclosure Document

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In the franchise industry, one of the common document which is used to protect exclusive information of the brand owner is the Non-disclosure & Confidentiality Agreement. The franchisor uses this document to protect their exclusive information and any IP from being disclosed to the public who might abuse the information against the interest of the franchisor.

On the other hand, there are information which is necessary for the franchisor to disclose to potential franchisees or investors in order to make better evaluation and decision towards the feasibility of the business. These information are compiled and presented in a Disclosure Document (DD).

In the Malaysian Franchise Act, the Disclosure Document is one of the compulsory document to be submitted by Franchisors when registering with the Registrar of Franchise. In actual fact, the franchisor should present potential franchisee with a copy of their DD. However, this is not commonly practiced in Malaysia.
If you are fortunate enough to be provided with a copy of the DD prior to making a commitment to the franchisor, you need to know how to digest and understand the information provided.
Following is the information stated in a DD according to the template provided by Registrar of Franchise and as required by the Malaysian Franchise Act.

On the front cover, the name of the franchisor must be clearly stated. The objective of the DD is also defined on the front cover. Some of the information in the DD need to be updated from time to time, therefore the date stated on the cover of the DD should not be too outdated.

The content in the DD should be clear and specific, and helps in your evaluation process.

Item 1 – Background
This section is all about the background of the franchisor. The name of the franchisor company will be stated. If you are still unsure about the status of the franchisor, you may verify the name provided with the list of “licensed”/”authorised” franchisor which is provided in the Ministry of Domestic Trade, Cooperative and Consumerism website or www.myfex.gov.my.

This section will also define the company whether it is a home-grown Franchisor (Malaysian) or a Master Franchisee to foreign franchisor.

Information regarding the company such as date of incorporation, address, trade marks rights, business locations of company owned and franchised outlets will be clearly stated. In fact, the franchisor’s experience or track record in franchising will also be disclosed. This will help you to assess the credibility of the franchisor.

Item 2 – Detail of Personnel
In this section, the franchisor will provide the organisation of the company. This is where you need to understand the strength of the support team you have access to. If the organisation is lean and the franchisee family is fast growing, then you need to question the capability of the support team such as training, operation support or central purchasing unit.

The information regarding Board of Directors or senior management is provided in this section. This allows you to review their credibility and to understand their background and consider if you are comfortable in building a business relationship with this particular team.

Item 3 & 4 – Legal Action and Bankruptcy
Information disclosed in these sections will indicate if there is any law suits, legal action or bankruptcy status imposed on the franchisor or it’s Board of Directors. In a way, this information will allow you to look into their past management skill and past endeavour which will tell if they are the right people to bring this franchise concept forward.

Item 5 & 6 – Franchise and Other Initial Fees
In these sections, information pertaining to all fees charged by the franchisor and the justification for the fees will be provided. It will also explain if the fee is refundable or not. This is to help you understand what are the financial commitment expected.

The common fees would be the franchise fee, royalty and contribution to A&P Fund. Be mindful that some franchisor might charge a training fee, security deposit, inventory deposit and other initial set up cost i.e. design fee, service fee or administrative fee. There are also certain cases whereby the franchisor handles the property leasing and therefore rental deposits are collected as well. Ensure that all fees listed are justified and are acceptable.

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Item 7 – Initial Investment of Franchisee
In this section, more of the financial expectations are covered. The list of initial financial cost will be indicated in a breakdown of the set-up cost for better understanding and analysis. Some of the cost which are highlighted would be real estate, equipment, fittings & fixtures, fixed assets, construction cost, initial inventory, security deposits, bank collateral and other prepaid expenses.

However, the list provided are just to meet the requirement of the Registrar of Franchise. Therefore, there may be some other cost not disclosed. Hence, the potential franchisee should discuss further and request for definition of each cost i.e. what is included in fixed assets, initial inventory. Be mindful of other cost which is needed to be paid to third parties, vendor or suppliers as well.

Item 8 – List of Equipments to be Purchased/Leased from Franchisor
In some franchise model, it is the obligation of the franchisee to purchase or lease certain exclusive items or equipment from franchisor. A list must be provided by the franchisor for better and clearer understanding on this matter.

In this section, the franchisor must disclose if there is any raw material/proprietary items or other equipment to be purchased or leased from suppliers appointed by the franchisor.

If the franchisee is required to pay for any services to be rendered by the franchisor or any 3rd party vendor or service provider, it must also be disclosed in this section with clear definition of the services involved.

Should there be a profit margin in any of the sales or lease above, the franchisor must declare the percentage of margin.Do query on the cost of mateirals or equipment in the above lists in order to compare them with the market rate. Sometimes, with valid proof of a lower cost from other suppliers, price can be negotiated or franchisor might take action to re-evaluate the existing supplier and re-appoint a more suitable supplier.

Item 9 – Specification of Equipment to be Purchased/Leased
The franchisor must disclose if there is any requirement or specification on products, equipment or services to be sourced and purchased by franchisee.

If modification can be made to these specifications, the franchisor shall inform the franchisee how the modification can be applied.

Item 10 – Financial Arrangements
The franchisor may offer financial facilities to the potential franchisee i.e. soft loans/hire purchase for equipments, etc. these facilities must be listed and clarified in this section. Should there be any exclusive arrangement with any financial institution or “agents”, the franchisor must list the services provided and information of the relevant parties.

Most times, franchisor might not provide loan for the franchisee. However, with a good financial record and based on request, franchisor might assist in other ways i.e. providing hire purchase facilities on exclusive equipment or possibility of better credit terms on proprietary products.

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Item 11 – Obligations of Franchisor
The franchisor shall list down the obligations i.e support/services provided at different stages of the agreement. Pre-opening assistance and operation support must be clearly listed. This will help the franchisee to understand and determine their expectation of the franchisor, and avoid any misunderstanding on what is expected of the franchisor after entering into the franchise agreement.

This section include the role of franchisor prior to the commencement of operation i.e. in relation to assistance provided for selection of sites, renovation, hiring process or even sourcing of suppliers and purchasing of stocks. The franchisor is also required to list down the support/ assistance provided during operation i.e. operational support, on-going training.

The franchisor must indicate the expected time frame between execution of agreement and the commencement of operation. This is so that the franchisee understand and is able to plan his cash flow projection better.

In this section, the franchisor must also clearly state his responsibility in providing initial, and on-going training. All training programmes must be informed with the venue for training, duration of programme and the content. If a fee is charged, it must be indicated as well.

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Item 12 – Territorial Rights
Most of the time, there are misunderstanding and conflicts arising from territorial rights. Therefore, it is important that the franchisor provide crystal clear definition to the territory assigned to the franchisee.

In this section, franchisor must state the details on assigning territorial rights. Any specific exception or over-ruling of the territorial rights must be clearly indicated as well.

Item 13 – Trademarks and Intellectual Property Rights
In this section, the franchisor must display the trademark registered. This is considered one of the USP to the franchise concepts. It is compulsory for the trademark to be registered. Any specifics on the usage of the trademarks must be explained clearly in this section.

Item 14 – Full-Time Commitment by Franchisee
In this section, the franchisor has to indicate if the franchisee is required to commit full time to this business. In many cases, the franchisee is just an investor for many businesses and do not invest full time into one business. Sometimes, without proper management and focus, a business suffers in quality and profitability. Hence, most franchisors will require franchisee to commit full time in their franchise business.

Item 15 – Sale of other Services and Goods by Franchisee
The franchisor must clarify if the franchisee is restricted from selling other services and products apart from those in the franchise concept. In this section, the franchisor should explain and justify the need for such restriction.

The potential franchisee should be well aware of the offerings from the franchise business. If the products/service offerings are minimal, the franchisor should have a R&D team to develop new products or other remedy for this situation.

Item 16 – Renewal, Termination and Modification of Agreement
In this section, the franchisor states the term of franchise, which should be no lesser than 5 years as per the Malaysian Franchise Act. The terms and conditions for renewal, termination by either parties or modification by either parties must be clearly stated as well. Be mindful that apart from breach of contract, there are other reason for pre-mature termination.

In this section, the franchisor must state the obligations of both parties upon termination of agreement. In situation where death or disablement occur to either parties, actions steps must be clearly defined in this section as well.

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