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Advice & Tips Ask an Expert

Q: What does a franchisee need to make a fully informed investment decision?

A: Deciding to partner with a franchisor and embark on a new business is an exciting time for prospective franchisees. However, the decision is a major one, and should be fully informed. The source of much of this information comes in the form of a franchise disclosure document, which is a legislatively required packet of documents and information, regulated by laws enacted in most provinces.[1] Most of the provincial acts are similar, but do have some important differences. Fundamentally, the courts have interpreted these legislated disclosure requirements as aiming to ensure that a franchisee has all of the information necessary to make a “fully informed investment decision”. As such, each element of the required disclosure is designed to ensure all relevant and material information is included and given to franchisees before they sign a franchise agreement.

While the disclosure document is a legal requirement, and may seem daunting or technical, the underlying premise is to ensure franchisees are fully informed. The disclosure document should of course be carefully reviewed with lawyers and advisors. The legislation and regulations, however, are premised on and drafted with potential franchisees in mind.  As such, the legislation and regulations provide a road map that outlines the type of information franchisees should be sure to have, and be sure to understand before deciding to finalize the franchise agreement.

Each province’s franchise acts and regulations are slightly different, but each prescribes lists of facts and information that should be in the disclosure document. These include:

  • the franchisors’ business background;
  • the business background of the franchisor’s directors and officers;
  • details of whether the franchisor, its associates or directors have been convicted of fraud or unfair business practices, have been subject to administrative orders or penalties, or have been found liable in any civil action for misrepresentation or unfair business practices;
  • details of whether the franchisor, its associates, or any corporation that the franchisor’s current directors were former directors or officers with, have been involved in bankruptcy or insolvency proceedings;
  • audited financial statements;
  • disclosure about whether alternative dispute resolution is mandated in the franchise agreement;
  • outlines of all of the franchisee’s costs for establishing and continuing the franchise, including any supply restrictions, mandatory contributions to advertising funds, and training or assistance that is offered or required;
  • descriptions about the scope and limits of the franchisee’s rights in respect to the franchisor’s trademarks and logos;
  • a description about the franchisee’s territory, any terms of exclusivity, and a description of any policies about the proximities between franchisees;
  • contact information for the franchisees and locations of all similar types of franchises in the province;
  • the contact information for each franchisee that has been terminated, cancelled, not renewed or otherwise left the franchise system; and
  • a description of all restrictions or conditions in the franchise agreement relating to termination, renewal, or transfer.

For those who may not have an extensive business background or are new to franchising, knowing the kind of information you need that is material may not be intuitive or obvious. The legislation and regulations are designed to set out these details, and in effect define the scope of what is needed to make a fully informed investment decision.

Though no one wants to think about the end of the relationship in the exciting days before it has begun, it is important to understand the broad rights and protections the legislation affords franchisees who are not given all of the required information. However, these protections do not mean that a prospective franchisee is immune from having to do their due diligence. It is important that as a prospective franchisee, you actually understand all of the information provided. While each case that is litigated is analyzed on its fact-specific circumstances, courts do consider when looking in hindsight what it is that the franchisee actually knew and understood at the outset of the relationship.

It is never for anyone’s benefit to operate in ignorance. Deciding to open a franchise is a big, life-changing decision, and it should therefore be made with as comprehensive an understanding as possible. A truly fully informed investment decision benefits all concerned. Franchisors want to partner with people who know, support, and want to expand the franchise system. Franchisees want to succeed in their business. As the adage goes, there is no such thing as a dumb question. Get answers to the questions you know to ask, and find out what you may not know that you should be asking.  The path to success is paved with knowledge, and the first step in your franchise journey is a fully informed investment decision.

Stephanie Sugar
Associate
McCarthy Tétrault LLP
ssugar@mccarthy.ca

[1] Visit the CFA backgrounder page on legislation for more details: https://www.cfa.ca/our-services/advocacy/franchise-legislation/

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