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A franchise is a legal business entity that is required to abide by provincial-level regulations that determine how they must operate in a fair and transparent manner. Franchises have established contractual documentation that governs the manner in which franchisors interact with their franchisees and specifies the rules and responsibilities to which both parties must adhere.
There are two main legal documents that all franchises use: the Franchise Disclosure Document (FDD) and the Franchise Agreement (FA). Both documents are required by law, and it is strongly recommended that prospective franchisees work with an experienced franchise lawyer when reviewing these documents with the aim of joining a franchise.
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Franchise Disclosure Document
The FDD is usually provided to prospective franchisees once they have qualified as a suitable candidate for the opportunity and at least 14 days before signing the Franchise Agreement or any other contractual documentation.
It is designed to help prospective franchisees develop their understanding of the business they plan to join and must disclose all material facts, including the franchisor's history. An FDD usually details the franchise's financial performance, provides an earnings estimate, and discloses the franchisor's obligations to the franchisees and the franchisee's responsibilities to the franchisor. It also explains what financial commitments are required and specifies restrictions such as product sourcing or territory allocation.
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Franchise Agreement
The FA is the contractual document between the franchisor and the franchisee that specifies the nature of their business arrangement, along with their responsibilities, obligations, and any restrictions they must abide by.
Often, if a franchisee is borrowing money to fund their business, the lender will need to see a copy of the Franchise Agreement before they will relinquish the funds. Some franchisors also require the franchisee to sign a personal guarantee that provides them with certainty that their financial requirements will be met from a franchisee's personal funds should their business be unable to make the necessary repayments.
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Why you need an experienced franchise lawyer
Both the Franchise Disclosure Document and the Franchise Agreement favour the franchisor, as their overarching priority is to protect the integrity of their brand. It is vital that prospective franchisees understand this, and it is just one of many reasons it is strongly recommended that they seek the services of a lawyer who is experienced with franchising.
Lawyers who do not understand the nuances of franchising might otherwise try to level the playing field between the franchisor and franchisee, failing to recognize the dangers to the brand and the other franchisees of doing so. This could end up souring the relationship between the franchisor and the potential franchisee before it is established, in addition to introducing additional costs and time delays as this position is explained and documents are rewritten.
If an experienced franchise attorney identifies any genuine points of clarification, they can be addressed via an addendum to the Franchise Agreement. A list of suitable lawyers is available on the Canadian Franchise Association's website.