The Disclosure Document – What to Expect
The decision to open a business and become an entrepreneur is not one most people take lightly. There are countless hours that go into planning and preparing for the big transition from employee to owner. If the business you have decided to open is a franchise, there are some additional considerations you are going to have to take into account. First, you are going to enter into a working relationship (hopefully for some length of time) with someone else, namely, the franchisor. You will need to be comfortable with the franchisor and the franchised business that they are promoting. Most franchisors are excited about their business model and helping their franchisees become successful business owners. Most franchisors have put a significant amount of time into creating their franchise model and preparing it for franchisees.
Part of their preparation in Ontario (and other provinces with franchise legislation) involves creating a disclosure document for potential franchisees. This document is a (generally lengthy) package of information about the franchisor and the franchised business. It must include all material facts about the business, background, and financial information about the franchisor, costs to establish the franchise, the franchise agreement, and any other ancillary agreements. If there is a material change in the business between the date the franchisee receives the document and the date the franchisee signs, the franchise must provide information on the change. Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000, (the “Act”) describes all of the required information that must be present in the disclosure document.
The goal behind the disclosure document is to promote informed decision making on the part of the franchisee. The Act also promotes this through the creation of mandatory timelines in relation to disclosure. For example, to allow the franchisee time to review the documents before they are to be signed, the franchisor must provide the documents at least 14 days before the franchisee can sign it or any other related agreement or before the franchisee makes payments to the franchisor.
Most franchisors follow the Act to a tee when completing and providing the disclosure documents. However, there are instances in which disclosure may not be complete or when a disclosure document is not provided at all. The Act contemplates these situations and provides recourse for franchisees who may have signed franchise agreements without being provided proper disclosure. For those who have had disclosure but it was not complete, they have 60 days to rescind their franchise agreement and walk away. For franchisees who received no disclosure at all, they are provided a 2 year period in which to do the same. In these instances, the Act further provides additional recourse that the franchisee can seek for damages incurred from the franchisors who did not provide adequate disclosure.
If you are considering purchasing a franchised business, please don’t hesitate to reach out to us as we would be pleased to help you navigate through the disclosure document.