November 20, 2011
Some franchisors make the mistake of assuming that once their first franchise disclosure document is drafted and delivered to prospective franchisees, the work ends there. However, a disclosure document (which is required to be provided to franchisees in Ontario, Alberta, New Brunswick, PEI and, soon, Manitoba) is a living, breathing document which must be updated constantly to evolve with changes to the franchise system.
Franchisors need to be sure that they are well-advised with respect to what types of changes may trigger updates or revisions to their standard form of disclosure document. Certainly, information such as litigation, lists of franchisees, lists of franchisee closures and financial statements will require frequent supervision and revisions on a per-disclosure basis. Beyond those, there exists a statutory duty to disclose any “material fact” to a prospect, meaning any information about the franchisor or the franchise system that might impact on someone’s decision to acquire the franchise.
Certain system changes may seem insignificant or minor to a franchisor, but, if not updated properly, they could result in a deficient disclosure document. If you have recently initiated vehicle wrapping for your business or have new staffing requirements, for example, these matters must be disclosed as a cost which the franchisee will be required to incur.
As a result, it is generally good practice for franchisors to review their disclosure documents with their legal counsel once per year to ensure that all relevant changes which have occurred over the past year are properly disclosed and described. In various U.S. states, it is a legal requirement to file updated disclosure documents with government regulators. However, without such mandated monitoring of a disclosure document in Canada, franchisors must not overlook the importance of an annual update.