By Peter Snell
Over the past several issues of Canadian Business Franchise, this column has been exploring the content of franchise disclosure documents in Canada. In this issue, it is time to discuss why these documents tend to be 100 pages or longer.
As always, it is extremely important to take the time to fully analyze the disclosure document and be ready to ask the franchisor any questions that arise from such reading. While the following information can serve as a general overview, prospective franchisees must also seek their own legal and accounting advice when reviewing the document and the associated franchise agreement. Only then can they obtain the specific information and advice relevant to their particular circumstances.
The importance of being thorough
It is not unusual for someone who is looking to buy a franchise to initially feel overwhelmed when presented with a huge disclosure document. This may seem odd, given the document must be ‘concise’ under such franchise legislation as Ontario’s, but the overarching responsibility of the franchisor—under all applicable franchise legislation in Canada—is to provide full disclosure to its prospective franchisees. As a result, disclosure documents are large and can be somewhat intimidating.
A common reaction from prospective franchisees is to flip through the pages, glance at the highlights and look over some of the charts, but not actually read the full document in detail. Many will start off reviewing it carefully, but then gloss over the information or flip ahead to try to find only the most interesting points.
This is a mistake. The disclosure document, much like the franchise agreement, is extremely important and needs to be fully read and understood before you invest in a franchise.
Initially, with all of the ‘legalese’ to wade through, reviewing it in detail may seem like an extremely daunting task. Indeed, I have heard franchisees joke about pulling out their disclosure document to read if they are having trouble falling asleep at night!
It is ultimately your responsibility, however, to make sure you are comfortable with the business investment you are looking to get involved with. All too often, unhappy franchisees will say, “I didn’t know I had to do that as part of the franchise system,” 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, you must undertake a thorough review of both documents. For one thing, each franchise system will have its own particular quirks. No two franchise agreements or disclosure documents are the same. Assuming otherwise can be very dangerous.
Further, reading these documents is never a waste of time. By reviewing the disclosure document in detail, you will be able to develop a list of important followup questions to ask the franchisor. These questions can also be asked of your franchise lawyer and business advisor, who are helping you decide whether or not to purchase the franchise.