As appeared in Franchise Canada Magazine March/ April 2008 as a tutorial.
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 Canada franchisors are required by law to provide a Disclosure Document to prospective franchisees in Alberta, New Brunswick, Ontario and PEI. At the time of writing this article other provinces.
Although the Disclosure Document is only legally currently required to be provided in these four provinces many franchisors provide a disclosure document across all of Canada in order to assist prospective franchisees to learn about the franchise opportunity. As a member of the Canadian Franchise Association, a franchisor is required to provide a Disclosure Document as part of the Canadian Franchise Associations Code of Ethics.
Franchisors have different application processes for perspective franchisees but will typically provide the disclosure document once you have been qualified as a potential franchisee and have serious interest. It is not a public document and is usually only available to potential franchisees. In Alberta, New Brunswick, Ontario and PEI the Disclosure Document must be provided a minimum of 14 days prior to the prospective franchisee signing any franchise agreements or paying any funds. (In Alberta a Franchisor may collect a refundable deposit of up to 20% of the initial franchise fee.) If the franchisor does not offer the disclosure document, simply ask for it once you have determined you are seriously interested in the opportunity.
There will be occasions where a franchisor does not have a disclosure document. If you are located outside of the four legally required 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 do your homework and explore the opportunity fully. Where a franchisor fails to provide proper disclosure within the provinces 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. In the event that the agreement is rescinded, the law in the disclosure provinces also provides that you will be compensated for all losses you have incurred in acquiring, setting up and operating the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 franchisors history. There are required statements about risk and seeking legal and financial advice. To learn specifically what the legislative requirements are you can visit the Canadian Franchise Association web site at http://www.cfa.ca/Page.aspx?URL=GovernmentRelations.html
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 licenses required
- Volume rebates and discount policies
- Obligations to participate in the actual operations of the franchised business
- Trade-marks, patent and copyright information
- 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
- A 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. 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 so that he or she can ensure that it meets all legal requirements. 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.
Your legal and financial advisors, along with the franchisor, will all assist you in reviewing the documents and your obligations as a franchisee if you choose to move forward with the franchise. The Disclosure Document is a valuable tool in assisting you in making a fully informed business decision.