How a Franchise Agreement and a Franchise Disclosure Document differ
There are two documents that are of vital importance...
The first thing to understand is that good franchisors don’t ‘sell’ franchises, rather they ‘select’ franchisees that in their opinion have the greatest chance of succeeding in their franchise system. The franchisor’s emphasis at all times should be on ‘selecting’ the franchisee and not on ‘selling’ the franchise. If you feel that you are being subjected to high pressure sales tactics during the investigation process consider it a red flag. It could mean that the franchisor doesn’t have sufficient capital, or enough cash flow from recurring revenues (royalties), to cover their monthly expenses and desperately needs the cash from non-recurring revenues (initial franchise fees) to stay afloat. Franchisors should not depend on the revenue from franchise sales to finance their growth as any slowdown in the sales of franchises will inevitably result in the collapse of the whole franchise system
Franchisors have different recruitment philosophies and strategies which are usually a reflection of their respective positions in the marketplace. An established, successful franchise with a strong demand may have more formalized application procedures and place a stronger emphasis on qualifying the applicant than will a new franchise organization. Most franchisors have a formal mutual investigation process which allows both parties to exchange information in a sequential manner and proceed at their own pace. During this process you will be required to provide adequate information for the franchisor to evaluate your potential as a franchisee. At the same time, you will be receiving sufficient information from the franchisor about the franchise opportunity that will allow you to decide if you wish to move forward at each stage of the application process.
The mutual investigation process will vary if you are a resident of, or will be operating the franchise in, one of the five provinces that have laws that specifically apply to franchising. These provinces are Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island. British Columbia may enact legislation to regulate franchising in 2015. In provinces with franchise laws, franchisors are required to provide you with their Disclosure Document at least 14 days before you sign any agreement or pay any consideration relating to the franchise, except for Alberta which allows to you pay the franchisor a deposit provided that the payment is fully refundable.
During the initial enquiry you should not expect to receive a lot of information about the franchise as the franchisor will first need to determine if you meet their pre-qualification criteria. In other words, they want to ensure that you are ready, willing and able to proceed with the franchise if both parties wish to do so after completing the mutual investigation process.
For their own protection, franchisors are very cautious about providing any form of franchise projections as there is no way that a franchisor can accurately project the future performance of a franchised business. All the known elements can be factored into the equation, but the biggest variable, which can skew the whole equation, is the performance of the individual franchisee. Franchisors may provide you with no financial statements or projections, or a financial projection of revenue and expense with a number of different scenarios based on varying performances. In any of the five provinces with franchise laws the franchisor must provide details of any earnings claims information they provide, including material assumptions underlying their preparation and presentation, whether it is based on actual results of existing outlets and the percentage of outlets that meet or exceed each range of results. The earnings claim information must have a reasonable basis at the time it is prepared. The Disclosure Documents must also state the place where substantiating information is available for inspection by franchisees. If the information is given in respect of a franchisor operated outlet, the franchisor must state that the information may differ in respect of a franchisee outlet.
