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The Role of Disclosure in Franchising

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In franchising, transparency is paramount. Both franchisors and franchisees rely on comprehensive, accurate information to make informed decisions. As a franchisor, you will require prospective franchisees’ disclosure and honesty during the recruitment process and for the duration of the franchise agreement. Likewise, franchisees will rely on you to disclose information about your brand and franchise system to help them decide whether your franchise opportunity is right for them. This article will further explain disclosure, its role in UK franchising and the benefits of ensuring prospective franchisees are well-informed. 

Disclosure Requirements in UK Franchising 

In the UK, no specific laws regulate the franchising industry. This means that franchisors are not required to share specific information about their franchise with prospective franchisees. The UK’s stance is unlike that of other territories, such as the US. In the US, franchisors must produce a disclosure document that shares information about several pre-determined points. 

However, it is best practice to share information with franchisees. This way, they can make an informed decision about whether your franchise opportunity is right for them. Additionally, if you do not present the opportunity accurately and honestly, you can still face legal consequences. 

Power and Misrepresentation 

There is often an inherent power imbalance between franchisor and franchisee in franchise relationships. Franchisors typically hold more power as they own their brand and business concept. As a franchisor, you:

  • dictate the terms of the franchise agreement; 
  • set operational standards; and 
  • control crucial aspects of the franchisee’s business operations. 

On the other hand, franchisees rely on you to access essential elements such as:

  • your brand;
  • training;
  • support; and 
  • marketing resources. 

This power asymmetry can sometimes lead to franchisees feeling disadvantaged, particularly if they perceive that you have mistreated them. 

Due to the power imbalance, a common legal dispute that arises from franchise relationships is misrepresentation. Franchisees might claim that a franchisor misrepresented the franchise opportunity to them. Therefore, you should provide complete and accurate information about a franchise opportunity to prospective franchisees. This way, you can empower franchisees to make the right decision and mitigate the risk of misrepresentation. 

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The Mutual Benefit of Franchisor Disclosure 

Franchisors often worry that sharing specific information about their franchise network might put prospective franchisees off investing and hesitate to disclose it. However, this concern highlights exactly why disclosure is necessary. It can help franchisors find the most suitable candidates for their network. If one prospective franchisee turns your opportunity down, you will be a step closer to finding a candidate that genuinely aligns with your brand’s goals, values and requirements. 

Beyond mitigating the risk of legal disputes, proper disclosure will help you to attract well-informed and suitably qualified franchisees. By providing comprehensive and transparent information about a franchise opportunity, you can build trust with prospective franchisees. Thus paving the way for strong partnerships with them. This transparency can reduce the likelihood of surprises or misunderstandings after franchisees enter the franchise agreement. Additionally, it can increase the chances of your franchisee’s long-term success. 

Franchise Disclosure Document

It is optional but best practice to provide prospective franchisees with a franchise disclosure document. This is to be given alongside your franchise agreement and franchise operations manual. 

As a franchisor, you should disclose complete and accurate information about aspects such as:

  • the financial performance of existing franchise units; 
  • franchisee fees; 
  • the terms of the franchise agreement;
  • whether you or your business is involved in any previous or ongoing legal disputes;
  • territory rights; 
  • training and support; 
  • renewal and exit provisions; and
  • any other material information that may impact the franchisee’s decision to invest.

You will likely disclose information in the disclosure document that you would not want the prospective franchisee to share with others. If this is the case, consider drafting a non-disclosure agreement. This additional contract would prevent them from sharing specific information. Additionally, if they do disclose this information, you can pursue legal remedies. Before providing the franchise disclosure document to a prospective franchisee, you should present the non-disclosure agreement to them to sign. A lawyer can help you draft essential legal documents such as this, protecting your business’s interests. 

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Key Takeaways

While the UK does not have specific disclosure requirements for franchisors, you should be honest and transparent with franchisees and potential candidates to mitigate the risk of future legal disputes. Proper disclosure can also enhance your ability to attract committed franchisees. 

A franchise disclosure document is valuable for sharing essential information about the franchise opportunity and establishing expectations. By sharing this information with prospective franchisees, you can set up your relationship for long-term success. A lawyer can advise you on disclosure best practices and how you can protect your business interests when sharing such information. 

If you need legal advice about your disclosure obligations as a franchisor, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.  

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Jessica Drew

Jessica Drew

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