What you need to know about Disclosure Documents

Author: Norm Friend

Date: OCT 21st, 2014

Topic: Industry Experts

Franchise Laws in Canada

Although there are several federal and provincial laws that apply to franchising, only five provinces have introduced laws that specifically apply to franchising.

These provinces are Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island.

It is anticipated that British Columbia may be the 6th province in Canada to introduce franchise legislation in 2015.

Each of these 5 provinces requires a franchisor to provide a prospective franchisee with a Disclosure Document at least 14 calendar days before the prospect signs a Franchise Agreement or pays any money to the franchisor. In Alberta, prospects are allowed to pay fully refundable deposits prior to disclosure provided that the deposit does not exceed 20% of the franchisor’s initial franchise fee and only in situations where the Deposit Agreement (or Offer to Purchase Agreement) is limited to dealing with the deposit, the territory or location, and confidentiality issues.

Franchise Laws in the US

In the US, the offer and sale of franchises requires franchisors to comply with both federal and state laws. The Federal Trade Commission (FTC) rule on franchising, which applies in every state, requires each franchisor to provide each prospective franchisee with a detailed Disclosure Document at least 14 calendar days before the prospect signs a Franchise Agreement or pays any money, or other consideration, to the franchisor. In addition to the FTC rule, approximately 15 states require a franchisor to file its Disclosure Document with the state securities administrator in order to obtain approval before offering or selling franchises in the respective state.

What’s in a Disclosure Document?

Generally, all Disclosure Documents are similar in content; however, US Disclosure Documents are typically more comprehensive than Canadian Disclosure Documents in specific sections.

A Disclosure Document must contain the proposed franchise agreement, the franchisor’s financial statements and all material facts including: information about the franchisor, fees, initial investment levels, other expenses, territorial considerations, the franchisor’s proximity policy, restrictions on products and supplies, rebates and discounts accruing to the franchisor, and a list of franchisees currently operating or that have been terminated, expired or not renewed.

If the franchisor provides any earnings claims information they must provide material assumptions underlying their preparation, whether they are based on actual results of existing outlets and the percentage of outlets that meet or exceed each range of results. The Disclosure Document must also state the place where substantiating information is available for inspection.

If you reside in a province that does not have franchise law, you can request the franchisor provide you with a copy of the Disclosure Document that they are obliged to provide in provinces that do have franchise laws. If they do so, it will probably contain a disclaimer to the effect that it is given for informational purposes only.

If you are dealing with a US based franchisor that is not required to provide a Disclosure Document in the province where you reside or where the business will be located, you can request a copy of their US Disclosure Document. They may not give it to you if they consider that it has no relevance because you are not dealing directly with the US based franchisor but with a Canadian subsidiary or a Canadian master franchisee. If the franchisor does have a US Disclosure Document but is not willing to provide it, there are sources where you may be able to obtain a copy of their US Disclosure Document if you consider it be a necessary part of your due diligence.