Throughout the franchising relationship, the franchisor is obligated to share specific details, documents, and information with prospective franchisees, as well as current franchisees. Provinces with franchising legislation will have specific reporting requirements and if you’re a franchisor or you are thinking about buying a franchise, you should check with your provincial government to see if they have specific laws regarding franchise reporting.
While not law, the Canadian Franchise Association (CFA) has a Disclosure Document Guide that franchisors can follow that will help them stay in compliance with provincial regulations.
The CFA recommends franchisors have the following information in their franchise disclosure documents:
Corporate Name of Franchisor
This can also include information about the trademarks used in the franchise.
Business Experience of the Franchisor
This should include a brief history of the franchisor’s experience in that specific business along with the number of years it has been running. The franchisor may want to include information about the experience of specific employees within the business if that experience is relevant.
Directors, General Partners, and Officers
List all of the directors, partners, and officers who have day-to-day management responsibilities relating to the franchise along with brief rundowns of their history and experience. It should also include a statement that none of the listed individuals has a conviction or indictable offense under the Criminal Code of Canada that involves franchises or other businesses. If there has been a conviction, the details of that conviction should be given. Similar information about major shareholders may also be included.
Franchise Experience of the Franchisor
This disclosure of experience doesn’t necessarily have to relate to the franchise in question. It should be an overview of the franchisor’s experience in general, including previous franchises and any other current franchises it is operating.
Nature of the Franchisor’s Business
Include a description of the nature of the franchise business being offered.
A list of all current franchisees with the names, addresses and telephone numbers should be included. If it isn’t, the CFA recommends a franchisor to explain when and how this information will be made available to a prospective franchisee. The list of current franchisees and their contact information should also be made available in a timely manner so a prospective franchisee has enough time to contact as many current franchisees as they want.
Similar to the above list, the franchisor should also include a list of corporate owned locations with the addresses of those locations.
Required Franchisee Investment
This should outline any and all fees the franchisee will be required to pay, including initial franchising fee, initial capital costs, inventory cost, leasehold improvements and any deposits that may be required.
Also, if the franchisor is able to offer any financing, the details of the financing should be laid out, including the repayment plan to the franchisor.
A summary of the most important provisions of the franchise should be provided here, including the length of the term and any renewals, the amount of the initial franchising fee and when that is payable, the amount of advertising contribution and when those need to be paid, restrictions or investments for inventory, supplies and equipment. It should also outline what exclusivity the franchisee can expect and detail how close another franchisee or corporate owned location can be to their franchise location, as well as details on how a franchisee’s territory may be altered or if their continuation as a franchisee is contingent upon anything like sales quotas.
Any rebates the franchisee is privy to in terms of investments in goods or services and the details of those rebates should be outlined.
An earnings claim is information given to prospective franchisees that tell them approximately how much money they can make from their franchise. The franchisor should outline how it has calculated any earnings claims and all those claims should be based in reality.
Opportunity to Review Documents and Investigate the Franchise
This is just a statement that guarantees the potential franchisee will have at least two weeks to review the documents and perform their due diligence in investigating the franchise for themselves.
Statement of Bankruptcy and Insolvency
A statement should be made that the franchise hasn’t been affected by bankruptcy or had to be restructured due to insolvency within the preceding six years. Or, if the franchise has been affected by bankruptcy and insolvency, the details of that should be provided.
The franchisor should detail any ongoing litigation.
Any closures of corporate-owned locations or franchisee locations within the prior two years should be detailed, along with information about the total number of franchise agreements that have been terminated or cancelled, left un-renewed or have been reacquired by the franchisor.
Other Material Information
This is the “everything else” portion, where the franchisor can add the other information pertinent to the franchise or the franchisor.
Certificate of Disclosure
And finally, the CFA says the franchisor should include the following two paragraphs exactly like this:
“The foregoing information is provided in accordance with the disclosure policy of the Canadian Franchise Association and is current to date. The Canadian Franchise Association has not checked the information and does not know if it is correct. The franchisor is a member in good standing of the Canadian Franchise Association and abides by its Code of Ethics, a copy of which is attached. The franchisee should examine the franchise investment carefully and independent legal, financial and business advice before making a decision to invest in the franchise.
(The information provided in this disclosure document, or in any changes made in respect of this disclosure document, is full and accurate information considered by the franchisor to be material to the matters disclosed.)”
Trust between franchisee and franchisor is essential and that starts with full transparency and disclosure from the franchisor. FranNet works with only trusted franchises in Canada and can help you find the perfect fit. Sign up for a free FranNet franchise search and consultation today.