What is a franchise disclosure document?
A franchise disclosure document is a written resource designed to provide prospective franchisees with the vital information they need to make the most informed decision possible when investing in a franchise.
What should I expect to find in a franchise disclosure document?
The disclosure document will typically include the following information:
- Background information about the franchisor – the history of the company, what products/services it offers and how it operates, how long it has been in operation, the number of units/franchises, and other brands it operates.
- Background information about the key players within the system, including the directors and officers, and anyone with whom the franchisee would be in contact.
- Any history of litigation, civil actions, convictions, and/or bankruptcies of the franchisor and/or its directors and officers.
- Estimates and projections for working capital, annual operating costs, and earnings.
- Financial statements and other fiscal information.
- Outline of the obligations required of both the franchisor and franchisee.
- A summary of the trademark, patent, and copyright information that is licensed under the franchise agreement.
- Policies regarding dispute resolution.
- A list of current and former franchisees, and their contact information.
Is the franchisor required to provide a disclosure document?
The disclosure document must be provided in provinces that have enacted provincial franchise legislation, including British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island.
When will I receive the disclosure document?
The approval process can vary depending on the franchisor, but a prospective franchisee will typically receive the disclosure document once they have been qualified by the franchisor as a potential franchisee, showing significant interest in the franchise opportunity. As the disclosure document contains so much valuable company information, a franchise system will generally wait until it has carried out its own research and deemed the prospective franchisee to be a viable and serious candidate before providing the disclosure document.
How long do I have to review the disclosure document?
Prospective franchisees have a minimum of 14 days to review the document before signing the franchise agreement with the franchisor. It’s important to wait until at least the end of this two-week period before signing a contract, so you can put in the time and effort it takes to evaluate the available information and conduct the proper due diligence.
Why did I receive a list of current and former franchisees?
Prospective franchisees should put the franchisee contact information to good use and arrange to speak with eight to 10 franchisees to learn more about what it’s like to be a franchisee with the system. You should also include former franchisees, to find out why they’re no longer with the system, and to get a full picture of the system’s viability.
For a complete list of questions you should ask current and former franchisees, consult the Checklist for Franchisees.
Why should I review the disclosure document with franchise experts?
A franchise lawyer is an asset because they can help you in understanding all of the information contained in the disclosure document. As they specialize in franchise law, they will have reviewed many disclosure documents, and will be able to spot any irregularities or inconsistencies that will need to be examined in further detail. They can also point out any areas that are open to negotiation with the franchisor, and can assist in this negotiation process.
Franchisees should also review the financial information outlined in the disclosure document with franchise finance specialists, including a franchise accountant and a franchise banker. These professionals will be able to determine what the investment process will involve, and can help you to identify whether you have the resources required.
To learn more about the roles that franchise professionals can play in helping you make your franchise purchase, read the “How to Work with Your Franchise Support Team” article!