Key Aspects of a FRANCHISE DISCLOSURE DOCUMENT

Beginning a new franchise can be extremely challenging, making the professional advice of a franchise lawyer invaluable.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

A Franchise Disclosure Document is a crucial legal document in Canada that provides a prospective franchisee with essential information about a franchise system (although it has become highly tailored to serve the franchisor's corporate purposes). The franchise disclosure document is intended to help the potential franchisee make an informed investment decision (while recognizing that it provides only what the applicable franchise legislation legal requires). The specific legislative requirements may vary slightly by province, the franchise disclosure document generally includes a wide range of information about the franchisor, the franchise system, and the financial obligations of the franchisee; with franchise legislation mandating such disclosure in numerous provinces, including Ontario, Alberta, British Columbia, Manitoba, New Brunswick, and Prince Edward Island.

A. The Legal Framework and Disclosure Obligation

• Purpose: The primary goal of the franchise disclosure document is to address the power imbalance between a franchisor and a prospective franchisee by providing the latter with comprehensive information before they sign a binding agreement or pay any fees.

• Delivery Requirement: A franchisor must provide the franchise disclosure document to a prospective franchisee at least 14 days before the earlier of:

  • The franchisee signing any agreement relating to the franchise.

  • The franchisee making any payment to the franchisor or their associate relating to the franchise.

• Rescission Rights: If the franchisor fails to provide a proper franchise disclosure document within the required timeframe, the franchisee may have the right to "rescind" or cancel the franchise agreement. This can result in the franchisor being required to refund all money paid, purchase back inventory and equipment, and compensate the franchisee for their losses.

B. Required Content of the Franchise Disclosure Document

The franchise disclosure document is a comprehensive document that must be delivered in its entirety at one time (with a few exceptions in certain provinces). It typically contains a number of key sections, including:

• Background Information:

  • Detailed history and business background of the franchisor, including its directors, officers, and any parent or affiliate companies.

  • Information on any past or pending litigation, including lawsuits, arbitrations, or legal proceedings involving the franchisor or its key personnel.

  • Details of any past bankruptcies or insolvency proceedings involving the franchisor.

• Financial Information:

  • Financial statements of the franchisor, typically for the most recent fiscal year. These are often required to be audited or reviewed by a certified public accountant.

  • Information about all fees the franchisee will be required to pay, including the initial franchise fee, ongoing royalties, advertising fund contributions, and other payments.

• The Franchise System:

  • A complete copy of the proposed franchise agreement and any other agreements the franchisee will be required to sign (e.g., leases, supply agreements).

  • A description of the training and support programs the franchisor provides. Information about the intellectual property of the franchise, such as trademarks, patents, and copyrights, and any legal disputes related to them.

  • Details on the products and services the franchisee may sell and any restrictions on sources of supply.

  • A description of any exclusive territory granted to the franchisee.

• Franchisee Information (the Franchisee List):

  • A list of current and former franchisees, including their contact information. This is a critical component that allows a prospective franchisee to conduct their own due diligence by speaking with existing or past owners.

  • Information on the number of franchises that have left the system in the last three fiscal years, which can be a red flag if the number is significant.

  • A statement on whether the franchisee is required to personally and directly participate in the operation of the business.

• Additional Disclosures and Certification:

  • Disclosure of all "material facts," which is a broad term for any information that would reasonably be expected to have a significant effect on the value of the franchise or the decision to acquire it.

  • A signed and dated Certificate of Disclosure, typically by one or more of the franchisor's officers or directors, which certifies that the franchise disclosure document contains no untrue information and includes all material facts and other required information.

C. Importance for Prospective Franchisees

The franchise disclosure document is a vital tool for due diligence. It is highly recommended that a prospective franchisee review the franchise disclosure document with independent legal and financial professionals, such as a franchise lawyer and an accountant. These professionals can help interpret the document, identify potential risks, and address problematic issues within that documentation.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

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Key Aspects of a Franchise Disclosure Document: A Franchise Disclosure Document is a crucial legal document in Canada that provides a prospective franchisee with essential information about a franchise system. The franchise disclosure document is intended to help the potential franchisee make an informed investment decision. Read more.

 

Key Aspects of a Franchise Agreement: A franchise agreement is a legally binding contract that governs the relationship between a franchisor and a franchisee, which is drafted strongly in favour of the franchisor (as they are in a position to heavily dictate the franchise arrangement that they offer to prospective franchisees). While the specifics can vary, there are several key aspects that are almost always included. Read more.

 

Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.