Canada: The Franchisor - What He Has To Tell You!

Last Updated: April 20 2012
Article by J. Dave McInnes

Choosing franchising as your way of getting into business can be an excellent choice. A well run franchise provides you with the name recognition, sales and expertise of an established business even though you are just starting out.

The choice of a franchisor to share your business life with is however, not without financial, managerial and other risks. How can you minimize the risks before you commit dollars and effort to any particular franchisor? How can you obtain timely and relevant information when the franchisor seems to hold all the cards? - Read on!

Alberta is the only Province to have legislation dedicated to franchise matters. The relatively new Franchise Act ("Act") and its regulations has recognized the potential imbalance of negotiating strength between a larger, more business-wise franchisor and most potential franchisees. The Act has provisions designed to reduce the power imbalance and to assist prospective franchisees in making informed investment decisions by:

  • requiring the timely disclosure of necessary information;
  • providing civil remedies to deal with breaches of the Act; and
  • providing the means by which franchisors and franchisees may govern themselves and promote fair dealing among them.

This article focuses on the information which must be provided by the franchisor at the outset and highlights a number of the prescribed remedies, should the franchisor not meet its informational requirements.

Before signing on or opening serious discussions with a franchisor, be aware that the Act requires, subject to a few exemptions, that a franchisor provide every prospective franchisee with a copy of a disclosure document. This must be done at least 14 days before the signing of any agreement relating to the franchise or the payment of any monies by the franchisee, relating to the franchise. The disclosure document must contain copies of the proposed franchise agreement and must comply with the regulations under the Act.

The information provided in the disclosure document will assist the franchisee in making the investment decision. Also, if the franchisee suffers a loss because of a misrepresentation in the disclosure document, the Act provides that the franchisee has a right of action for the damages. Should a franchisor fail to give the prospective franchisee the disclosure document by the time required, the prospective franchisee may rescind all franchise agreements by giving notice no later than 60 days after receiving the disclosure document or no later than 2 years after the franchisee is granted the franchise, whichever occurs first. There is also an obligation on the franchisor to provide a written description of any material change to the disclosure document.

The Regulations require that the disclosure document contain the following information:

  • operating and legal names and address;
  • the history of the franchise and the names of the directors and officers of the franchisor;
  • any convictions or pending charges relating to the directors or officers of the franchisor;
  • any existing or contemplated civil litigation and liabilities regarding the franchisor;
  • the existence of any administrative proceedings and existing orders;
  • a statement of whether the franchisor has been bankrupt; 2
  • the nature of the business;
  • a review of the initial franchise fee and other fees;
  • a statement of the initial investment required and whether the franchisor provides any financing directly or indirectly;
  • an estimate of the working capital required;
  • a review of any restrictions on the sources of products and services and what the franchisee sells; ]
  • a review of the rebates or other benefits to the franchisor;
  • a review of the obligation to actually participate in the franchise business;
  • a summary of the franchise closures in the system and the reasons therefor;
  • a review of the territory granted by the franchisor to the franchisee; and
  • others.

In addition, the franchisee should be aware that the Act prohibits any waiver or release by a franchisee of a right given by the Act and if given, the waiver or release is deemed to be void.

As you now realize, the disclosure required, along with the remedies provided, go a long way in addressing the imbalance of negotiating power between the franchisor and franchisee. It should permit you, the prospective franchisee, to make sound business decisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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