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Franchise Disclosure Documents Must be Site-specific

August 11, 2013

Much has been written in this space about franchisors being required to provide prospective franchisees with a disclosure document. For the uninitiated, a disclosure document is essentially a prospectus for the franchise system which must be provided by a franchisor so that people can make informed investment decisions about whether or not to become franchisees.

So it would make sense, then, that a disclosure document be prepared to be site-specific to the particular business opportunity being purchased by the franchisee. Unfortunately, that’s not always what happens in practice. It is no small expense for a franchisor to have a disclosure document drafted for them, so some franchisors make the mistake of not getting continuous legal assistance in properly disclosing franchisees once that template document is complete. But in order for a disclosure document to be legally compliant, and fulfil its intended objective of fully informing franchisees of what they are about to get into, it needs to include certain elements of the deal that are specific to that franchisee.

For many disclosure documents, that may mean including a copy of a lease. For others, that may mean disclosing the full terms of any initial fee or royalty terms that differ from the standard offering. And for others yet, that may mean including specific estimates about particular construction costs. And, of course, a disclosure document for a new franchise will look different in a few key ways from a disclosure document provided to a franchisee buying an existing location from another franchisee, or for a franchisee who is renewing its franchise agreement.

As a result, when reviewing a disclosure document on behalf of a franchisee, franchise lawyers will know exactly what details to look for to ensure that it was prepared to be site-specific, and can advise franchisees when they may have a right to rescind the franchise agreement in the future. 

A site-specific disclosure document is a win-win proposition, then, since the franchisor will be complying with its legal obligations, and a franchisee will have a clearer picture of the actual investment they are about to make.

Tags: Franchising