Franchise Legal Matters

A potential franchisee’s guide to retaining a franchise lawyer and franchise disclosure documents

A potential franchisee’s guide to retaining a franchise lawyer and franchise disclosure documents

Franchising is often referred to as a mutually rewarding relationship between franchisors and their franchisees. While this is true, the franchise business model is built upon contracts and other documentation, which makes the relationship that much more complex. Luckily, franchise lawyers are there to help prospective franchisees wade through the paperwork, including the franchise agreement and disclosure document, and fully understand the rights and obligations of the franchise relationship that are outlined within.

Franchise Legal Counsel Matters:

Franchise lawyers are well versed in the ins and outs of the franchise business model. It’s vital for prospective franchisees to fully understand all documentation involved in their franchise investment, particularly the disclosure document (a comprehensive summary of pertinent information about the franchise system, its officers, finances, etc.) and the franchise agreement. As a potential franchisee about to invest your time, effort, and money, you’ll want to have a complete understanding of the relationship you’re about to enter into. This is where an experienced franchise lawyer comes in.

Though there are some common features found in franchise agreements, these agreements can vary from franchise system to franchise system, and from franchisee to franchisee. Today, some provinces have franchise legislation that outlines the information that franchisees must receive before signing on the dotted line. CFA members are required by the CFA Code of Ethics to provide this disclosure regardless of whether provincial legislation is in place. This is just one of the reasons why retaining a lawyer who has experience with the franchise business model is a wise choice.

So where can you find a franchise lawyer? You can find a lot of the information that you need online, through sites like the CFA’s online directory of franchise support services members (www.cfa.ca/SupportCategories). Although the internet is a great source for some initial inquiries, you should speak and meet with lawyers before you retain one.

When selecting a lawyer, there are a few things you should consider. First, look at the lawyer’s experience – have they dealt with the franchise you’re interested in before? How often have they acted for franchisors and franchisees?

Fees are another area that should be examined. You should be comfortable with the costs and timelines, but should also look for quality services and a lawyer who understands your goals and financial situation.

A large part of examining the franchise system is reviewing its disclosure documents and agreements. When meeting with your franchise lawyer, you’re advised to bring in everything you’re being asked to sign, from the franchise agreement itself to any leases or other contracts. Usually these are standard documents, but each should still be examined. It’s also important to look at some documents, such as the franchise agreement and real estate lease, together.

The lawyer will be looking for two main things: franchisee obligations and potential risk. If, upon review, everything is in order, you’ll sign on the dotted line and move forward with establishing your franchise location. But it doesn’t necessarily signal the end for the relationship with your franchise lawyer, as, once a positive working relationship is established, many clients will return with more legal work down the road.
Having an experienced franchise lawyer on your team is an asset both during and after your franchise investigations.

Franchise Document Disclosure Matters:

As part of a proper due diligence process, you should be collecting pertinent information about franchising and franchise systems. You should also be evaluating this information against your goals, attributes, capabilities, and assets. During due diligence, some of this information (financial capacity, skills, passions) will come from your end, while other details will come from the franchise system. An important piece of this investigation puzzle is the franchise disclosure document. Here’s how you can put these valuable resources to best use and learn as much as possible.

What is a franchise disclosure document?

A franchise disclosure document is a written resource designed to provide you with the vital information that you need in order to make an informed decision about investing in a franchise opportunity.

A typical franchise disclosure document may include information such as:

  • Background on the franchisor and the key players within the system, including its directors and officers;
  • Any history of litigation, civil actions, convictions, bankruptcies, etc. of the franchisor and/or its directors and officers;
  • A summary of the trademarks and other intellectual property;
  • A summary of the costs and fees required to start and run the franchise business;
  • An outline of the training and ongoing assistance provided by the franchisor;
  • A list of the current and former franchisees and their contact details; and
  • Financial statements and other fiscal information.

The disclosure document must meet requirements set out in any provincial franchise legislation. Currently, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island have specific franchise legislation, and franchise legislation is soon to become law in British Columbia. CFA members pledge to provide disclosure documents to serious franchisee candidates in all provinces and territories, regardless of whether they’re required by law to do so.

As a prospective franchisee, you’ll be given a minimum of 14 days to review the document prior to signing on with the franchise.

Will a disclosure document specify how much money I can make as a franchisee?

Franchisors can, but aren’t required to, provide information on projected earnings. As a variety of factors can play into the success of a franchise location, it can sometimes be difficult – and risky – for franchisors to provide earnings claims that apply widely.

The financial information that franchisors will include in the disclosure documents is likely to include the franchisor’s overall fiscal performance during the most recent year (which will show the assets, liabilities, and earnings of the franchisor itself) and/or possibly historical actual gross sales of anonymous individual locations. You’re advised to review all financial statements with an accountant, who can explain the numbers and use them to extrapolate the financial viability of the franchise system, and to help you put together a solid business plan.

No matter how the financial information is presented, though, the franchisor must be able to substantiate and justify the information.

Another way to find out more about earnings potential is to speak with existing franchisees.

When will I receive a franchise disclosure document?
The timing of providing a disclosure document to a prospective franchisee can vary from system to system.
Just as you’ll be evaluating the franchise opportunity, the franchisor will also be assessing whether you would be a good fit for the system. The franchise disclosure document usually comes into play once you’re considered a serious candidate.

What should I do with a franchise disclosure document?
When a disclosure document is provided, you have a minimum of two weeks in which to review the materials. You should not sign any contracts or agreements until this period has passed. The two weeks should go by quickly, though, as there is much to be done.

The first step is to gain a full understanding of the information it contains, with help from an experienced franchise lawyer.

A franchise lawyer will be able to “translate” all of the essential rights, responsibilities, and obligations that the documents outline pertaining to both sides of the franchise relationship.

The lawyer will also point out anything different or unusual about the information or what the franchisor requires, and can often identify items that may be negotiated with the franchisor (and lead these negotiations when the time comes).

In addition to speaking with a franchise lawyer, there are others you should consult during this time, including an accountant and banker, who may also want to review the disclosure document.

You will also want to put the list of franchisees that the franchisor provides to good use by contacting current and former franchisees for their firsthand knowledge.

Franchise disclosure documents play an important role in your due diligence process. By consulting with franchise professionals, a disclosure document can help you make your investment decision with a better understanding of the franchise opportunity, as well as the rights, responsibilities, and obligations you’ll be undertaking as a franchisee.