Preparing to Franchise in Nigeria — Contents of Typical Franchise Disclosure Documents

Patents Law Volume 2 Number 12

Patents No. 12

(Contents of Franchise Disclosure Documents)

A few weeks before a potential franchisee signs a franchise agreement, he will receive a Franchise Disclosure Document (FDD) drafted by lawyers on behalf of the franchisor. The FDD is different from the franchise agreement as it is presented prior to the signing of the agreement and gives the potential franchisee the opportunity to review detailed information about the franchise.

Not only is it crucial for the potential franchisee to thoughtfully study and research the franchise opportunity, it is important for him to carefully read and understand the FDD before signing or investing any money. Below are some of the contents of a typical FDD:

1. Information Relating to the Franchisor, Its Subsidiaries and Directors

The FDD will include an overview of the franchisor’s history and ownership. Information provided will specify the length of time the franchisor has been involved in the type of business offered and that the business format being offered has been tested over an extended period of time in specific territories.

2. Full Details of Criminal or Civil Proceedings Against the Franchisor, Directors and Arbitration Awards

The FDD will provide detailed information about any litigation involving the franchisor and its directors. Any felony or fraud convictions of the franchisor’s top executive officers should be disclosed in the FDD. The FDD should also contain information on whether the franchisor has taken legal action against entities infringing on its trademarks or against franchisees not in compliance with quality standards. It is always a good idea to be cautious especially in cases where there are multiple lawsuits filed by franchisees alleging fraud or misrepresentation on the part of the franchisor.

3. Trademarks, Copyrights, Patents and the Right to Use Other Intellectual Property

A typical Franchise Disclosure Document will contain detailed information about the intellectual property associated with the franchise. This includes trademarks, service marks, trade names, logos, copyrights, patents, and proprietary systems that the franchisee will be permitted to use.

The FDD should clearly indicate whether the franchisor owns the intellectual property or is licensed to use it. It should also disclose whether the intellectual property is registered, pending registration, or subject to any disputes. This is particularly important because the franchisee’s business operations often rely heavily on brand recognition and proprietary systems developed by the franchisor.

The FDD may also specify restrictions on how the franchisee can use the intellectual property, including branding guidelines, advertising requirements, and limitations on modification of trademarks or marketing materials.

4. Initial Fees and Other Payments

The FDD will disclose all fees the franchisee must pay to the franchisor. These may include initial franchise fees, training fees, equipment costs, software fees, and other upfront payments required before the franchise begins operations.

In addition to the initial fees, the FDD will also disclose ongoing payments such as royalty fees, advertising contributions, technology fees, renewal fees, and other recurring payments. These costs can significantly affect the profitability of the franchise.

5. Estimated Initial Investment

The FDD typically includes a breakdown of the estimated initial investment required to start the franchise. This section may include the initial franchise fee, equipment and supplies, leasehold improvements, inventory, licenses and permits, insurance, professional fees, and working capital. This information helps potential franchisees understand the financial commitment required.

6. Restrictions on Sources of Products and Services

Some franchisors require franchisees to purchase goods, equipment, or services from approved suppliers or directly from the franchisor. The FDD will outline these requirements and disclose whether the franchisor receives any financial benefits from these arrangements.

7. Franchisee Obligations

The FDD will include a summary of the franchisee’s obligations under the franchise agreement. These obligations may include operating standards, training requirements, reporting requirements, insurance obligations, maintenance of quality standards, and participation in marketing programs.

8. Territory Rights

The FDD should specify whether the franchisee will receive an exclusive territory or whether the franchisor reserves the right to open additional outlets within the same area.

9. Training and Support

Franchisors often provide training and ongoing support to franchisees. The FDD will outline the type of training provided, the duration, and whether additional training fees apply.

10. Renewal, Termination and Transfer

The FDD will describe the conditions under which the franchise agreement may be renewed, terminated, or transferred.

11. Financial Performance Representations

If the franchisor provides financial performance information, the FDD must disclose the basis for these representations.

12. Financial Statements

The FDD will typically include audited financial statements of the franchisor. These statements provide insight into the franchisor’s financial stability.

Franchise Disclosure Documents and Nigerian Regulatory Framework

Unlike jurisdictions such as the United States, Nigeria currently does not have a specific law regulating franchise disclosure documents or franchising generally. However, franchise arrangements in Nigeria are regulated through a combination of contract law and the National Office for Technology Acquisition and Promotion (NOTAP) Act.

Franchise agreements, particularly those involving foreign franchisors, are regarded as technology transfer agreements. As a result, such agreements must be registered with NOTAP. These agreements typically involve:

• Use of trademarks.
• Use of patented inventions.
• Supply of technical expertise.
• Training and managerial assistance.
• Supply of machinery or equipment.
• Transfer of operational know-how.

Because franchise arrangements commonly include these elements, they fall within the regulatory scope of NOTAP. Registration with NOTAP is particularly important because failure to register may prevent franchisees from remitting payments such as royalties and franchise fees to foreign franchisors through authorized banks in Nigeria.

Proposed Franchising Regulation in Nigeria

There have been efforts to introduce franchise-specific legislation in Nigeria. A Franchise Bill has been introduced and passed by the Senate, and is currently pending presidential assent.

The proposed legislation would:

• Require franchisors to provide a disclosure document.
• Require disclosure at least 14 days before signing.
• Require registration of disclosure documents with NOTAP.
• Require disclosure of material facts.
• Provide a cooling-off period for franchisees.
• Introduce penalties for non-compliance.

If enacted, this legislation would significantly strengthen franchise disclosure obligations in Nigeria and provide greater protection for potential franchisees.

Conclusion

A Franchise Disclosure Document is an essential tool for anyone considering investing in a franchise. It provides critical information about the franchisor, the costs involved, and the risks associated with the franchise opportunity.

Although Nigeria does not currently mandate franchise disclosure documents, the role of NOTAP and general contract principles make transparency essential. Prospective franchisees are encouraged to carefully review disclosure materials and seek professional legal advice before entering into any franchise arrangement.

As franchising continues to grow in Nigeria and regulatory reforms are being considered, the importance of Franchise Disclosure Documents will continue to increase.