What is a Franchise Disclosure Document?

The assessment of whether to purchase a franchised business is a significant one, and prospective franchisees should be making informed investment decisions before signing any franchise agreement.

Franchise law in various Canadian provinces recognizes the importance of franchisees receiving as much information as possible before binding themselves to a franchisor who holds considerably more power in the business relationship.  As a result, the provinces of Ontario, Alberta, Prince Edward Island, New Brunswick and (later this year) Manitoba, have franchise legislation in place which protects the need for franchisees to make educated investment choices.

This is the purpose of the franchise disclosure document – a compendium of information about the franchise system which franchisors are required to provide to franchisees operating businesses in those particular provinces.  The legal requirement to deliver a disclosure document is not taken lightly, and a franchisee’s right to receive one prior to signing a franchise agreement cannot be waived by a franchisee. 

Where a disclosure document is delivered incorrectly, fails to comply with the required level of information mandated by law to be disclosed or is not provided at all to a franchisee, that franchisee may have either 60 days or up to 2 years from the date a franchise agreement was signed to “rescind” or undo its franchise agreement and have the bulk of its investment returned and losses compensated.

It is also prescribed by law that a disclosure document must be delivered to a franchisee at least 14 days before that franchisee signs any agreement relating to the franchise or makes any payment to the franchisor. 

Over the course of the next several weeks, this blog will explore the contents of a disclosure document and the delivery and format requirements to assist first-time franchisors in achieving this compliance level and drawing franchisees’ attention to what to look for once they’ve received the disclosure document.