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Franchise Tutorial 4: Intro to Disclosure Documents

Disclosure Documents are a summary of information on the franchisor, its executive team and its franchise agreements. The document is provided to potential franchisees so that they may make a more fully informed business decision. In Canada, franchise systems are required by law to provide a Disclosure Document to prospective franchisees in provinces where franchise legislation is enacted. (Click here to learn more about provincial franchise legislation.) Although franchise systems are only legally required to provide Disclosure Document in these three provinces, many franchisors provide a disclosure document across all of Canada to assist prospective franchisees in learning about the franchise opportunity. Franchise members of the Canadian Franchise Association are required to provide a Disclosure Document as part of the Canadian Franchise Association's Code of Ethics.

Franchisors have different application processes for franchisees but will typically provide the Disclosure Document to prospective franchisees once they have been qualified as a potential franchisee and have shown serious interest in the franchise opportunity. It is not a public document and is usually only available to serious investors.

When a franchise system fails to provide proper disclosure within the provinces where disclosure is legally required, potential franchisees may have the ability to rescind the franchise agreement for up to two years from when the franchise was granted. In the event that the agreement is rescinded, the law may also provide that potential franchisees will be compensated for all losses incurred in acquiring, setting up, and operating the franchise business. Be sure to speak with your franchise lawyer for details.

The Disclosure Document must meet legislative requirements and disclose all material facts regarding the franchise opportunity and the franchise system's history. There are required statements pertaining to risk and seeking legal and financial advice. To learn specifically what legislative requirements are you can visit the Advocacy section of the Canadian Franchise Association website.

A typical Table of Contents of a Disclosure Document might read as follows.

Corporate name of the franchisor
Nature of the business
Business experience of the directors and officers of the franchisor
Previous convictions, civil actions, administrative proceedings, bankruptcies or liabilities of the franchisor, its directors, officers and associates
Initial Investment required
Other fees payable under the franchise agreement
Estimate on working capital, annual operating costs
Earning projections
Training provide with outline of initial training program
Financing arrangements
Assistance provided by the franchisor
Franchisees obligations
Marketing fund, use of, past spending, projected spending
Restrictions on what and to whom franchisees may sell
Special licences required
Volume rebates and discount policies
Obligations to participate in the actual operations of the franchised business
Trademarks, patent and copyright information
Territories available
Term, renewal, termination and transfer of the franchise
Policies regarding dispute resolution

In addition, the disclosure will typically have the following in attachments:

List of existing franchisees with contact information
List of terminated, not renewed or cancelled franchisees with contact information
Financial Statements of the franchisor
Franchise Agreement
Table of Contents of the Operations Manual
Certificate of Franchisor signed by an officer of the company stating that all material facts have been provided and that the information provided is true
Receipt to be signed and dated by the franchisee acknowledging receipt of the Disclosure Document

The disclosure document is only a summary of important information. Potential franchisees should study the franchise agreement in detail as this is ultimately the document they will be signing. Legal and financial advisors, along with the franchisor, will all assist potential franchisees in reviewing the documents and in clarifying the obligations as a franchisee of the franchise system. Lawyers with franchising experience can review the disclosure document so that he or she can ensure that it meets all legal requirements. Potential franchisees should also seek advice from an accountant and the bank to ensure that they can financially afford the investment. The bank may also request a copy of the Disclosure Document so that they can make an informed lending decision.

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Disclaimer: The opinions or viewpoints expressed herein do not necessarily reflect those of the Canadian Franchise Association (CFA). Where materials and content were prepared by persons and/or entities other than the CFA, the said other persons and/or entities are solely responsible for their content. The information provided herein is intended only as general information that may or may not reflect the most current developments. The mention of particular companies or individuals does not represent an endorsement by the CFA. Information on legal matters should not be construed as legal advice. Although professionals may prepare these materials or be quoted in them, this information should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.

Posted Date: January 2011