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
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
requiring the timely disclosure of necessary information;
providing civil remedies to deal with breaches of the Act;
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
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
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
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
a review of the obligation to actually participate in the
a summary of the franchise closures in the system and the
a review of the territory granted by the franchisor to the
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
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
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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