By Peter Snell

Franchisors universally agree this is one of the first questions a prospective franchisee will ask. This is understandable, given the individual is looking to invest tens, if not hundreds, of thousands of dollars in the franchised business. It’s only natural to want an understanding of how profitable the venture will be. However, while this seems like a simple and straightforward question, the answer is often very complex.

The franchisor’s sales force is in a difficult position. On the one hand, their job is to generate enthusiasm and sell franchises. On the other, they have to be careful not to ‘oversell’ and create unrealistic expectations for the prospective franchisee, as this can create potential legal liability for the franchisor. If a salesperson exaggerates about how wonderful the system is, the prospective franchisee may, to his or her detriment, rely too heavily on this information. When expectations are not met, franchisees are understandably disappointed, often disenchanted with the system and may even regret their decision to buy a franchise. This is certainly not the way any successful franchisor wants to embark on its relationship with new franchisees.

Taking this even further, franchisees who are given inaccurate information may also look to sue the franchisor for misrepresentation or seek to rescind the agreement if they are in one of the four provinces with franchise disclosure legislation.

Read the full article: Understanding the Disclosure Document

By Peter Snell

Under the Ontario Arthur Wishart Act and the P.E.I. Franchises Act, certain statements need to be set out at the front of a disclosure document, intended to further assist your decision-making. (Alberta does not require any such mandatory statements.) The statements required under Ontario disclosure obligations are as follows:

1. A commercial credit report is a report which may include information on the Franchisor’s business background, banking information, credit history and trade references.  Such reports may be obtained from private credit reporting companies and may provide information useful in making an investment decision.

2. Independent legal and financial advice in relation to the Franchise Agreement should be sought prior to entering into the Franchise Agreement.

3. A prospective franchisee is strongly encouraged to contact any current or previous franchisees prior to entering into the Franchise Agreement.

4. The cost of goods and services acquired under the Franchise Agreement may not correspond to the lowest cost of the goods and services available in the marketplace.

As well, the Ontario disclosure document must contain the following statement:

5. Mediation is a voluntary process to resolve disputes with the assistance of an independent third party.  Any party may propose mediation or other dispute resolution process in regard to a dispute under the Franchise Agreement, and the process may be used to resolve the dispute if agreed to by all parties.

The P.E.I. mandatory statements are similar to those of Ontario, with some slight differences. For example, P.E.I. requires a statement that current and previous franchisees and their contact information can be found in the disclosure document. This is not required under Ontario law.

It is highly recommended that you review this list of statements carefully and use them as a guide when evaluating whether or not a franchise is right for you. The initial excitement of wanting to buy a franchise needs to be tempered by a thorough review and understanding of the business before signing an agreement. In essence, franchise disclosure laws are intended to encourage you to ‘look before you leap.’

Read the full article: Understanding The Disclosure Document