When candidates are engaged in the investigative process, reviewing concepts and business models, a major milestone occurs with the receipt of the franchise disclosure document—commonly referred to in the industry by its initials, FDD. The following is an explanation of its contents and how to use this information to your advantage. It’s highly recommended that you seek professional legal and/or accounting services to ensure you have a clear understanding of each section’s meaning.
Each of the Canadian provinces, including Alberta, British Columbia, Manitoba, New Brunswick, Ontario, and Prince Edward Island have franchise disclosure legislation on the books. This enacted franchise legislation is remarkably similar, designed to protect franchise candidates through marketplace regulation.
According to Canadian law, franchisors must supply any franchise candidate with a copy of the FDD (with signature receipt required) at least 14 days prior to signing an agreement of sale or payment. Similar to the U.S., FDD’s are broken down into 23 distinct sections, or Items. For an “A-to-Z” summary of each individual item, you may refer to this blog post from SmallBizTrends.com. Below are the key sections requiring a thorough review:
This section includes the complete history of the franchise offering. You may discover that the brand has been in business for years, but only recently entered into franchising their concept. Item 1 also reveals the true and accurate ownership of the franchise brand. Any parent companies, trusts, partners, investors, or the like must be disclosed.
Although individual fees and costs are disclosed in earlier Items, this section collates all of the financial information in one place, providing you—the interested buyer—with exactly what they require of you to invest in the franchise concept. It’s meant to cover all associated costs with opening a business under their brand name. In other words, it’s a comprehensive look at the total investment required.
If you want to know exactly how the roles of franchisor and franchisee go together, this is the section that spells out everyone’s obligations to one another. This can vary quite a bit depending on the brand, so be sure to ask questions if you’re unsure of a certain responsibility in the operational process.
If you want to know what kind of exclusivity you’ll have in operating a franchise in your particular area, pay close attention to Item 12. It’s designed to provide you with exact specifications for territories, areas, and operational coverage.
Time to perk up your senses—this is a section where you’ll really want to focus. Item 19 deals with a franchisor’s financial performance and standing. Any claims made about sales, income or profits must be disclosed in Item 19 and no other spoken or written claims about financial performance are allowed if they don’t also appear in Item 19. It’s best to review this section with professional legal and/or accounting help.
If you’d like to get started on an entrepreneurial journey of your own, FranNet of Canada can help you get started with the franchise investigative process. With consultants serving every Canadian province, there’s a representative near you, who also lives and works in your area. To find your local province consultant, simply follow this link and select “Canada” on the FranNet Franchise Consultant Directory page of our website.