What is a Franchise Disclosure Document in Canada?

How a franchise disclosure document is different than a franchise agreement

The FDD is not an agreement or contract.  It does not create any binding obligations on the prospective franchisee.  The prospective franchisee does not sign the FDD (except for signing a receipt which simply acknowledges that the prospective franchisee has received the FDD).

A legally compliant FDD is often a large and complex package of documents that a franchisor delivers to a prospective franchisee in one piece at one time.  A franchisor is required to deliver an FDD to a prospective franchisee at least 14 days before requiring the prospective franchisee to enter into any binding franchise or related agreement or pay any money.  This applies to new franchised businesses or locations, and often to resales of existing franchised businesses.

An FDD contains an extensive list of information that is either legally prescribed or otherwise constitutes “material fact” information that can impact the prospective franchisee’s decision to become a franchisee.  The FDD provides prospective franchisees with information so that they can make a business investment decision whether or not to purchase the franchised business.  It informs a prospective franchisee’s decision whether to enter into franchise and related agreements and on what terms.

In contrast to the FDD, the franchise and related agreements (which are contained in the FDD package) are the legal contracts between the franchisor and franchisee.  After the end of the 14-day period, the franchisor can request the prospective franchisee to sign the franchise and related agreements that are contained in the FDD and make the required payments.

Through these franchise and related agreements, the franchisor grants to the franchisee the rights to operate a business within the franchise system.  When both parties sign the franchise and related agreements, a franchise relationship is created based on the terms of these agreements.  The franchise and related agreements set out all the terms and conditions to the sale and operation of the franchised business, such as:

• the term of the franchise, royalties and other fees that the franchisee must pay to operate within the franchise system,
• operational requirements,
• termination rights, and
• post-termination rights and obligations.

Key information you can expect to find in a legally compliant FDD

Not all FDDs are legally compliant.  Franchise legislation and court decisions that have interpreted various provisions under the franchise legislation have set strict and onerous standards for what an FDD must contain in order to be considered a legally compliant FDD.

1. Financial statements: Financial statements for the franchisor’s most recent year-end, prepared on a review-engagement basis. The financial statements must contain all critical information about the franchisor’s financials.

2. Franchisor’s certificate: A certificate signed by the franchisor’s officer or director certifying that the FDD contains no untrue information, representations, or statements, and that it includes every material fact, financial statement, and other information required by franchise legislation. If the franchisor has more than one officer or director, at least two officers or directors are required to sign the certificate.

3. Copies of all agreements: Copies of all agreements that the prospective franchisee will be required enter into.

4. Site specific information: Specific Information about the actual franchised business, location and history (if applicable). All “material facts” about the specific business and location must be contained in the FDD – this includes all information that can reasonably impact the prospective franchisee’s decision to enter into the franchise agreement for that location or the financial cost that the prospective franchisee is required to incur.

5. Summary of setup costs and ongoing payments: All costs required for the setup of the franchised business must be contained in the FDD – this includes cost of construction or renovation, equipment, etc. In addition, all ongoing payments to the franchisor or its affiliates have to be set out.

6. Information about the lease: As part of the site-specific information, if there is a lease or offer to lease for the location, the FDD must contain copies of all lease agreements. It should also disclose key information about the terms of the lease.

7. For resales – the sales revenues of the franchised business: Based on recent court decisions in Ontario about resales of existing franchised businesses, the FDD is required to contain the historical sales revenues of the franchised business that is being resold.

8. Licensing, permits and industry-specific Information: The FDD must contain information about all licensing and permits required to set up and operate the franchised businesses. While many industries have a relatively basic licensing and permits requirements, other industries are subject to a highly complex regulatory regime.  In those heavily regulated industries, the FDD must contain all relevant information about the regulatory regime, including extensive information about all the relevant details governing the setup and operation of the franchised business in that industry (such as the daycare industry, for example).

9. List of current and former franchisees in the system: A list of all current franchisees, including their location and contact information, and some information about franchisees who have recently left the system must be contained in the FDD. Prospective franchisees should use this list to contact existing and former franchisees as part of their due diligence investigation.

10. Other information: other information required to be contained in an FDD includes:

• Business background
• Background of the principals
• History of litigation, civil actions, convictions, and bankruptcies of the franchisors and its affiliates

Summary

A Franchise Disclosure Document (FDD) is a legal requirement in Canada’s regulated provinces before selling a franchise to a prospective franchisee. It is an important package of informational that the franchisor is required to give to prospective franchisees, containing essential details about the franchise investment that can impact the prospective franchisee’s decision to make the franchise purchase.  Overall, the FDD plays a vital role in the franchising sale in Canada’s regulated provinces, promoting transparency, protecting the interests of both parties, and facilitating informed decision-making for prospective franchisees.

This article is provided for general information purposes only and is not intended to provide legal advice. Parties in a business dispute should obtain legal advice from a knowledgeable commercial lawyer.

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