A franchise disclosure document is a written document, designed to provide franchisees with key insights and information that is needed in order to make an informed decision about investing in a franchise opportunity.
A typical franchise disclosure document includes:
- Background on the key executives, such as its directors and officers, and anyone that one would deal with as a franchisee
- Background on the franchisor – the history of the company, what they offer and how it is operated, how long it has been in business, how many franchises it has
- Any history of litigation, civil actions, convictions, bankruptcies of the franchisor and the directors and officers
- A summary of all trademarks and other intellectual property that are licensed under the franchise agreement
- A summary of the costs and fees required to start and run the franchise business
- An outline of the training and assistance provided by the franchisor (initially and on-going)
- A list of current and former franchisees and their contact details
- Financial statements and other fiscal information
The disclosure document must meet requirements set out by provincial franchise legislation. British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island have specific legislation on franchising.
The prospective franchisee is given a minimum of 14 days to review the document prior to signing on with the franchise.
When will a prospective franchisee receive their franchise disclosure document?
The timing will vary based on the details and progression of the relationship as both sides vet each other. Typically, once the franchisor sees the franchisee is a good potential fit, they will share the disclosure document.
Not every province allows for a Non-disclosure Agreement, so there is risk to the franchisor in revealing all of that sensitive information too soon and without some certainty about the likelihood of things progressing
What financial information is disclosed?
The financial information included in the disclosure documents is likely to include the franchisor’s overall fiscal performance during the most recent year (this will include assets, liabilities, and earnings of the franchisor itself) and/or possibly historical actual gross sales of anonymous individual locations.
Franchisees are advised to review all financial statements with an accountant, who can explain the numbers and use them to project and build a business plan.
A lawyer is also beneficial to the process, to ensure there are no loopholes in how the information is conveyed.
Does a franchise disclosure document specify how much money a franchisee can make?
Franchisors can choose to, but aren’t required to, provide information on projected earnings. A variety of factors can play into the success or failure of a franchise. It is difficult and risky for franchisors to provide earnings claims and promise they are applicable to every franchisee.
What should a prospective franchisee do with a franchise disclosure document?
When a disclosure document is provided, a prospective franchisee has a minimum of two weeks to review the materials.
The potential franchisee should not sign any contracts or agreements until this period has passed. During the two week period, they should focus on gaining a full understanding of the information and what it means. This is where a franchise lawyer can be very beneficial. Franchising is a unique kind of licensing, and an experienced lawyer is the best way to avoid anything unusual or problematic in the agreements.
Essentially a lawyer will translate the information into terms the potential franchisee can understand. If you aren’t well versed in complex legal documents, it is likely something will slip by unnoticed. Understanding their rights, responsibilities and obligations is so important.
A franchise lawyer will also be able to identify any abnormalities and any opportunities to negotiate.
As already mentioned, an accountant is also beneficial to the process. If you have a banker, it would be wise to include them as well.
It is also smart to reach out to existing franchisees to get insight into how things are going. Don’t exclude former franchisees, gaining insight into what went wrong is very important.
The Franchise disclosure document plays an important role in a franchisee’s due diligence. It requires time, attention to detail and support from experienced professionals.
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