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Sizing up franchise disclosure documents

By Peter Snell

By reviewing disclosure documents in detail, potential franchisees can develop questions to ask a lawyer, a business advisor, or the franchisor before they buy.
By reviewing disclosure documents in detail, potential franchisees can develop questions to ask a lawyer, a business advisor, or the franchisor before they buy.

It is not unusual for potential franchisees to feel overwhelmed at the sight of a massive, 100-page disclosure document. While franchise legislation in certain provinces indicates this type of documentation must be “concise,” it is the responsibility of the franchisor to provide full disclosure to prospective franchisees. As a result, these documents are often large and intimidating. However, they must include all material facts which are critical to anyone’s decision to purchase a franchise.

The importance of being thorough

A common reaction among prospective franchisees is to glance through the disclosure document, flip pages, and look at some of the charts, but not read the full document in detail. Many will start reading it with the full intention of examining it thoroughly, then begin to gloss over the information and flip forward to try and find something “more interesting.” This is a mistake.

The disclosure document, along with the franchise agreement, is extremely important, and it needs to be reviewed carefully and understood before investing in a franchise. Initially, with so much “legal speak” to wade through, reviewing it in detail may seem like an extremely daunting task.

However, it is ultimately the potential franchisee’s responsibility to be comfortable with the business investment they are looking to get involved with.

All too often, franchisees will say, “I didn’t know I had to do that as part of the franchise system.”

This is largely because they never bothered to read the contents of the disclosure document or the franchise agreement in the first place. To be fully prepared, it is necessary to conduct a thorough review.

It is also important to remember each franchise system has its quirks, and no two franchise agreements or disclosure documents are the same. Assuming otherwise is very dangerous and reading these documents is never a waste of time. By reviewing them in detail, potential franchisees can develop a list of questions to ask the franchisor before they buy. These questions can also be posed to the lawyer and/or business advisor helping them with their decision.

Some potential franchisees may be tempted to skim over portions of the disclosure document, but it is extremely important the entire document is reviewed thoroughly.
Some potential franchisees may be tempted to skim over portions of the disclosure document, but it is extremely important the entire document is reviewed thoroughly.

Why these documents are so long

Another key factor to consider is why certain franchise agreements and disclosure documents are lengthier than others. Is everything in them necessary?

Most mature, established franchisors have a very comprehensive form of franchise agreement. As franchise systems continue to grow and evolve, their agreements tend to become even longer and more standardized, making them less “negotiable” in the eyes of the franchisor. The desire to maintain a high degree of uniformity in the franchise system will lead to more standardization in the franchise agreement and supporting documents.

Both parties are taking risks when opening a new franchise business. The franchisee is risking their time and investment in establishing the franchise, while the franchisor is putting its well-maintained image and reputation on the line, and risking the goodwill associated with its trademark and franchised business. Brand building is intended to be a long-term benefit to all members of the franchise system, and maintaining uniformity and standardization is a critical aspect of brand control. If the franchise agreement, and disclosure document do not provide sufficient certainty over how the brand and operations are to be controlled, this can lead to uncertainty and inconsistency in how the franchise’s service or products are delivered to consumers.

The length of the disclosure document can also be impacted by how many additional documents and agreements franchisees may be required to sign. Each of those agreements must be attached to the disclosure document, along with a description of the material aspects. Additionally, the franchisor has to list its various franchise and corporate locations and provide contact information for its franchisees in the system. In most cases, the franchisor also needs to attach its financial statements, which can be several pages long.

Over time, requirements under provincial franchise legislation have added to the length of disclosure documents and franchise agreements. Court decisions interpreting different aspects of these requirements have also added length, as the franchisor must insert new details to avoid future issues. For example, a requirement has evolved through case law for location-specific site disclosure, which has led to additional information being needed in the disclosure document. Further, the recent COVID-19 pandemic has also led to several disclosure implications for franchisors.

When these various aspects are added together, it is easy to see how franchisors end up with thick and bulky franchise agreements and disclosure documents. However, it is important not to be intimated by the length, as this likely means potential franchisees have access to more detailed descriptions of various terms and conditions.

Why longer is better

As potential franchisees take the time to read through these documents, they will gain a better understanding of the franchisor’s system and the investment requirement. Just because a disclosure document or franchise agreement is longer and more detailed does not always mean it is going to be a tougher contract compared to a short-form version. In some cases, short, broad, and general statements can make it more difficult to determine the true intention of the franchise agreement. This may make the document harder to understand, and more challenging for advisors to offer advice on. Also, in the event of a future dispute with the franchisor, uncertain or incomprehensible clauses will be tougher for an arbitrator or court to interpret.

Having a franchise lawyer assist in reviewing the franchise agreement and the disclosure document is a very valuable step to take, especially if the potential franchisee is not comfortable or experienced in reviewing contracts.

It is not unusual to see many different styles of disclosure documents or franchise agreements. In some cases, franchisors like to take a more casual approach and use informal terms like “you,” “me,” “us,” or “we,” to create a more personal approach to the disclosure document and franchise agreement. However, the most important aspect of these documents is not the tone, but the detailed information they contain regarding the terms and conditions.

Doing a full analysis

Whether franchise agreements or disclosure documents are short, long, or somewhere in between, the most important thing to do is take the time to fully analyze them. Being well-informed before making the franchise investment is vital and will serve franchisees well as they launch their new businesses.

Peter Snell is a partner in the franchise group at Cassels Brock & Blackwell LLP. He assists clients to expand their franchise businesses in Canada and around the world. Snell can be reached at psnell@cassels.com.

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