DISCLOSURE DOCUMENT CHECKLIST

Craig Shapiro has prepared a useful checklist to guide you in drafting a suitable disclosure document.

Although the Franchise Association of South Africa (“FASA”) has for many years required that its franchisor members provide upfront disclosure to prospective franchisees, and even though this is in line with best international practices, this was, as you may be aware, not previously a statutory or legal requirement in South Africa.

This changed on 1 April 2011 with the coming into operation of the Consumer Protection Act (“CPA”) in terms of regulation 3 of which every franchisor must provide a prospective franchisee with a compliant disclosure document, at least 14 days prior to the signing of a franchise agreement. 

DISCLOSURE DOCUMENT CHECKLIST

Every franchisor must provide a prospective franchisee with a disclosure document, dated and signed by an authorised officer of the franchisor, at least 14 days prior to the signing of a franchise agreement.

1.                   The disclosure document must, as a minimum, contain the following:-

1.1                                       the number of individual outlets franchised by the franchisor;

1.2                                       the growth of the franchisor’s turnover, net profit and the number of individual outlets, if any, franchised by the franchisor for the financial year prior to the date on which the prospective franchisee receives a copy of the disclosure document;

1.3                                       a statement confirming that there have been no significant or material changes in the company’s or franchisor’s financial position since the date of the last accounting officer or auditor’s certificate, or certificate by a similar reviewer of the company or franchisor, that the company or franchisor has reasonable grounds to believe that it will be able to pay its debts as and when they fall due; and

1.4                                       written projections in respect of levels of potential sales, income, gross or net profits or other financial projections for the franchised business or franchises of a similar nature with particulars of the assumptions upon which these representations are made.

2.                   Each page of the disclosure document must be qualified in respect of the assumptions contained therein.

3.                   The disclosure document must be accompanied by a certificate on an official letterhead from a person eligible in law to be registered as the accounting officer of a close corporation, or the auditor of a company, as the case may be, certifying that—

3.1                                       the business of the franchisor is a going concern;

3.2                                       to the best of his or her knowledge the franchisor is able to meet its current and contingent liabilities;

3.3                                       the franchisor is capable of meeting all of its financial commitments in the ordinary course of business as they fall due;

3.4                                       the franchisor’s audited annual financial statements for the most recently expired financial year have been drawn up— -      in accordance with South African generally accepted accounting standards; -      except to the extent stated therein, on the basis of accounting policies consistent with prior years; -      in accordance with the provisions of the Companies Act (No. 61 of 1973 or any legislation which replaces this Act), and all other applicable laws; and -      fairly reflecting the financial position, affairs, operations and results of the franchisor as at that date and for the period to which they relate.

4.                   The disclosure document must be accompanied by—

4.1                                       a list of current franchisees, if any, and of outlets owned by the franchisor, stating, in respect of any franchisee—

4.1.1                                                          the name under which it carries on business;

4.1.2                                                          the name of its representative;

4.1.3                                                          its physical address; and

4.1.4                                                          its e-mail and office telephone number, together with a clear statement that the prospective franchisee is entitled to contact any of the franchisees listed, or alternatively to visit any outlets operated by a current franchisee to assess the information disclosed by the franchisor and the franchise opportunity offered by it;

4.2                                                         an organogram depicting the support system in place for franchisees.

Bowman Gilfillan Attorneys

+27 11 669 9000

www.bowman.co.za