Canadian Franchise

Disclosure Document & Agreement

Disclosure Document

Disclosure documents are a summary of information on the franchisor, its executive and the franchise agreements. The document is provided to the prospective franchisee in order that they may make a more fully informed business decision. In certain provinces in Canada and throughout the states, franchisors are required by law to provide a disclosure document

to prospective franchisees. Other countries requiring disclosure documents include, but are not limited to Belgium, France, Italy, Romania, Spain, Sweden, Brazil, China, Mexico, Malaysia and Korea. Even if the disclosure document may not be legally required, many franchisors provide some form of a disclosure document in order to assist prospective franchisees with learning about the franchise opportunity.

In the United States there are certain states, such as California, Wisconsin and Minnesota, where the disclosure documents are filed and made available to the public through a government website. Check in your prospective country to see if there is such a government site for filing disclosure documents. A lawyer specializing in franchising will be able to assist.

Franchisors have different application processes for perspective franchisees but will typically provide the disclosure document to you once you have been qualified as a potential franchisee and have serious interest. It is typically not a public document and is usually only available to potential franchisees. In Canada and the United States, it is required that the franchisor provide the disclosure document a minimum of 14 days prior to the prospective franchisee signing any franchise agreements or paying any funds. Disclosure can be required to be as much as 30 days prior to signing the franchise agreement, as required in Mexico.

There will be occasions where a franchisor does not have a disclosure document. If they are located outside of the required Canadian provinces, they may refuse to give it or simply not have one because they are new. In these instances, you will want to ensure you fully do your homework regarding the opportunity. Where a franchisor fails to provide proper disclosure within the jurisdictions where disclosure is legally required, you may have the ability to rescind the franchise agreement for up to two years from when the franchise was granted to you. You may be compensated for all losses you have incurred in acquiring, setting up and operating the franchise business.

The disclosure document must meet legislative requirements and disclose all material facts regarding the franchise opportunity and the franchisor’s history. There are required statements about risk and seeking legal and financial advice.

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 provided, with outline of initial training program
  • Financing arrangements
  • Assistance provided by the franchisor
  • Franchisees’ obligations
  • Marketing fund, use of marketing fund, past spending, projected spending
  • Restrictions on what and to whom franchisees may sell
  • Special licenses required
  • Volume rebates and discount policies
  • Obligations to participate in the actual operations of the franchised business
  • Trademarks, patent and copyright information
  • Territory
  • Term, renewal, termination and transfer of the franchise
  • Policies regarding dispute resolution 

In addition, the disclosure will have the following attachments:

  • List of existing franchisees with contact information
  • List of terminated, not renewed or cancelled franchisees with last known 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
  • A receipt to be signed and dated by the franchisee acknowledging receipt of the disclosure document.

 

Franchise Agreement

The disclosure document is only a summary of important information. You should study the franchise agreement in detail as this is ultimately the document you will be signing. Have a lawyer with franchising experience review the disclosure document and franchise agreement so that he or she can ensure that it meets all legal requirements and that you understand what you are signing. Also seek advice from your accountant and the bank to ensure that you 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.

If the franchisor is willing to negotiate significantly the terms of the franchise agreement, be concerned. Flexibility may be a sign of a franchisor needing to sell a franchise for cash flow. Changing agreements significantly can affect the integrity of the entire franchise system. Franchising is based on uniformity.

Occasionally I see a business lawyer with no franchising experience review a franchise agreement and come back trying to change the entire agreement as well as the licensing relationship. The franchise agreement is a one-sided document in favor of the franchisor. It is intentionally written this way in order that the franchisor can protect the integrity of the brand and operating system. If there is a franchisee that is damaging the brand’s reputation, the franchise agreement gives the franchisor the ability to take corrective action. This is in the interest of all the other franchisees. A one sided agreement in favor of the franchisor allows this to effectively happen.

Do not be surprised by the fact that the franchise agreement will require you to sign a personal guarantee. This is a standard requirement in a franchise agreement. Franchisors are looking for a commitment from their franchisees. Provided you pay your bills, this should not be an issue for you. If you simply refuse to sign a personal guarantee, this sends a message to the franchisor that you may not be intending to pay your bills, which will justifiably raise concerns for the franchisor. Your legal and financial advisors, along with the franchisor, will all assist you in reviewing the documents and your obligations as a franchisee. The disclosure document is a valuable tool in assisting you in making a fully informed business decision.

 

Franchise Experience Counts

I was recently working with a candidate who was looking to acquire a franchise from one of my franchise clients. I advised the prospect to have the franchise agreement reviewed by a lawyer who had franchising experience. The candidate came back three weeks later with a review summary of the franchise agreement along with ten pages of proposed changes to the agreement that would make the agreement a two-sided agreement rather than a one-sided one. In discussions with the candidate, he confirmed that he had checked with the lawyer and the lawyer had claimed to have franchising experience. As I reviewed the pages of almost 40 proposed changes, it was clear that this lawyer did not understand the franchisee/franchisor relationship and that the changes could not be permitted.

This candidate was a great prospective franchisee who, regretfully, had been given some bad legal advice. Although lawyers may claim to have franchising experience, they may not understand the franchise licensing relationship. I directed the candidate to consult another lawyer and gave him the name of three other lawyers to consult with who were specialists in franchising. With the help of another lawyer we were able to narrow down the ten pages to three or four points of clarification that we were able to address through an addendum to the franchise agreement.

You can find lawyers that specialize in franchising in Canada through the Canadian Franchise Association website, www.cfa.ca. In the United States, attorneys specializing in franchising can be found through the International Franchise Association (http://www.franchise.org) under suppliers. By using a lawyer who specializes in franchising you will avoid having to pay for legal advice twice.

 

 

Wayne Maillet is a franchise management consultant and founder of the consulting company Franchise Specialists. Respected within franchise circles, he brings a realistic, practical understanding of business and franchising. This article is based on excerpts from his book, Franchising Demystified. The book can assist you in learning about franchising and getting into a great business with both eyes open. 

The book can be ordered through most book retailers or directly from the publisher at www.franchisingdemystified.com .