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Franchise Disclosure Requirements

SO YOU WANT TO BUY A FRANCHISE

When deciding whether to purchase a franchise there is certain material information that must be considered in order to make an informed decision. Such material information is possessed solely by the franchisor so various provinces have enacted legislation that among other things, helps balance the inequality of information between the franchisor and franchisee. In Ontario, the relationship between franchisee and franchisor is governed by the Arthur Wishart Act (Franchise Disclosure), (the “Act”).

Disclosure Documents are a summary of information on the franchisor, its executive team and its franchise agreements. The document is provided to potential franchisees and must contain material information prescribed by the Act that will assist a franchisee in making an informed decision regarding the franchise. This includes but is not limited to background information on the franchisor and its directors, financial statements and copies of all agreements relating to the franchise. In Canada, franchise systems are required by law to provide a Disclosure Document to prospective franchisees in provinces where franchise legislation is enacted. A franchisee has a right of action for damages where he or she suffers a loss due to a misrepresentation in the Disclosure Document or statement of material change. A misrepresentation includes an untrue statement or omission regarding a material fact.

In Ontario, pursuant to the Act, a franchisor must prepare and deliver to a prospective Franchisee a Disclosure Document or statement of any material change in the franchise at least 14 days before the signing of the franchise agreement or the making of any payment related to the franchise, whichever
is earlier. Only in specific, limited circumstances is a franchisor exempt from this requirement.

Keep in mind that the Disclosure Document is only a summary of important information. Potential franchisees should also study the franchise agreement in detail as this is ultimately the document they will be signing. The franchise agreement sets out the duties and obligations of the franchisor to the franchisee and vice versa, so it is important to make sure to read and understand these documents. It is also important to have the Disclosure Document and the franchise agreement reviewed by professionals who are familiar with the obligations and rights set out by the Act.

In addition to legal advice, potential franchisees should seek advice from an accountant, a financial advisor and their bank to ensure that they can financially afford the investment. The bank may also request a copy of the Disclosure Document so that they can make an informed lending decision.

Keyser Mason Ball, LLP does not provide financial or accounting advice. A prospective franchisee should seek financial and accounting advice in relation to franchising and the franchise agreement prior to entering into the franchise agreement.

Please contact Joanne Gilbert-Wiens at jgilbert@kmblaw.com or (905) 276-0406 for additional information on these and other related franchise issues.

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This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.

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