Franchisee Basics: The 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 (FDD) is a detailed document that a franchisor provides the franchisee during the initial stages of purchasing a franchise. It is designed to provide franchisees with vital information that they need in order to make an informed decision prior to investing in a franchise opportunity. Prospective franchisees in Canada are given a minimum of 14 days to review the document prior to signing on with the franchise.

In Alberta, the requirements for a Franchise Disclosure Document (FDD) are governed by the Alberta Franchises Act (and in Ontario, it is the Arthur Wishart Act (Franchise Disclosure), 2000) and its accompanying regulations. The purpose of franchise disclosure legislation is to provide a prospective franchisee with all the necessary information (as legislatively mandated) to make an informed investment decision and to address the power imbalance that often exists in the franchisor-franchisee relationship.

Key attributes of a Franchise Disclosure Document (FDD) include:

A. Delivery and Timing 14-Day Rule

• A franchisor must provide a prospective franchisee with the FDD at least 14 days before the earlier of:

  • The signing of any agreement relating to the franchise.

  • The payment of any consideration (money or anything of value) related to the franchise, with some exceptions for fully refundable deposits.

• Substantially Complete: The FDD must be "substantially complete" to be considered valid. Any significant omissions or inaccuracies can give the franchisee the right to rescind the agreement.

B. Mandatory Content

The FDD must contain all "material facts" and other prescribed information. A "material fact" is defined as any information that would reasonably be expected to have a significant effect on the value or price of the franchise or the decision to acquire it.

The required information includes, but is not limited to:

• Information about the Franchisor:

  • The franchisor's legal name, business address, and any trade names.

  • A description of the franchisor's business and its history.

  • The business experience of the franchisor's directors, officers, and key executives.

  • Information about any litigation, bankruptcies, or other legal proceedings involving the franchisor or its management.

• Information about the Franchise System:

  • A list of all existing franchisees in Alberta, including their contact information.

  • The number of franchises that have closed, been cancelled, or not been renewed in the past year.

  • A description of the training, support, and assistance the franchisor will provide.

  • Details about the obligations and restrictions imposed on the franchisee, such as territorial rights, supplier limitations, and advertising requirements.

• Financial Information:

  • Financial Statements: The franchisor must provide financial statements, which must be prepared in accordance with generally accepted accounting principles. These statements must be audited or reviewed by a qualified accountant.

  • Initial Investment and Fees: A detailed breakdown of all costs a franchisee will incur, including the initial franchise fee, equipment costs, leasehold improvements, and working capital.

  • Ongoing Payments: A clear explanation of all recurring fees, such as royalty payments and advertising fund contributions.

• Copies of all Agreements: The FDD must include copies of all proposed agreements that the franchisee will be required to sign, including the main franchise agreement, lease agreements, and any other related contracts.

• Earnings Claims: If the franchisor provides any representations about potential earnings, they must be included in the FDD, along with the underlying assumptions and a clear statement about how the earnings were calculated.

C. Certificate of Disclosure

• A key component of the Alberta FDD is a signed certificate. This document must be dated and signed by at least two officers or directors of the franchisor (or one, if there is only one). The certificate serves as an acknowledgment that the FDD contains no untrue statements and does not omit any material facts required to be stated.

Consequences of Non-Compliance

If a franchisor fails to provide a proper FDD in a timely manner, the franchisee has the right to rescind the franchise agreement. This means the franchisee can cancel the agreement, and the franchisor must refund all money paid by the franchisee and compensate for any losses. This right of rescission can be exercised:

• Within 60 days after receiving the FDD (if it was provided late or was incomplete).

• Within two years after the franchise was granted (if no FDD was provided at all).

This provides a general overview of the FDD requirements in Alberta, further recognizing that franchise law is complex, and the specific requirements can vary. It is essential for both franchisors and prospective franchisees to seek legal advice from a lawyer that is knowledgeable in the applicable provincial franchise laws where the franchise will be located to ensure full compliance and to understand all obligations and rights.

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.

The Basics to Becoming a Franchisee: Embarking on the path of becoming a successful franchisee demands an incredible amount of time and effort, given that there are only a limited number of truly successful franchisees, with those that have set themselves apart and hit the pinnacle of franchise operations and profitability. This begins with understanding the core concepts of a business franchise. Read more.

 

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