Franchise Disclosure Obligations in the Highly Regulated Daycare Industry

The interaction between the CWELCC program and franchise disclosure obligations

Prospective franchisees are entitled to receive disclosure of all material facts about the risks and complexity associated with participating in the CWELCC program.

The legal test of an FDD is, among other things, whether it discloses all material facts about the setup and operation of a franchised business. In the child care franchise context, failure to disclose all material facts about what is required to set up and operate a franchised child care centre can void the legal validity of an FDD.

Participation in the CWELCC program has been embraced by some daycare franchise systems as it has increased the number of daycare spots, making daycare affordable for families who otherwise would not have been able to purchase the services. Some franchise systems make it mandatory for franchisees to participate in the program.

But the program can also create potential business risks for operators. Not all child care operators have embraced this program. Some have opted out of the subsidy program, alleging that they cannot be profitable under the program.

Given the complexity of the CWELCC system, franchisors would be wise to carefully assess the breath and depth of the information that likely constitutes material facts and that should be disclosed in the FDD. The requirements of the CWELCC program as they apply to the setup and operation of a child care centre, may entitle franchisees to rescission claims against their franchisors if they are not disclosed prior to their investment in the franchise system.

A rescission decision in favour of the franchisee can be financially and reputationally devastating for the franchisor and is something that franchisors should avoid by ensuring that their FDDs are fully compliant.

Potential material facts associated with the CWELCC program

In addition to the usual zoning challenges involved in locating a suitable location for a child care centre, the CWELCC program imposes additional layers.

Most municipal and related regions that administer the CWELCC program at the local level, define their own capacity and high priority areas for child care spaces. They use this to determine how to allocate subsidy and related funding. The proposed location of the child care centre must be in a high priority area as that region defines it on its own map. Each municipal region is also subject to unique price caps for different age groups of children.

Assuming that the location is in a high priority area for the region, the process of setting up and operating a daycare centre is complex and subject to Ministry of Education licencing requirements, municipal approval for participation in subsidy programs, and many other regulatory requirements.

The licensing process itself can take up to a year, but the franchisee will need to make a significant upfront investment in the location before it can even pursue the licence it needs to open its doors.

Applying for this program can be very resource intensive. There is also uncertainty about the wait time to receive the subsidies, if the centre is approved, and about whether the centre will continue to be eligible for the subsidy in future years. Prospective franchisees should know:

• They will need to have financing in places to cover operating costs while they wait for their application to be approved and to receive the funding. There are also no guarantees the application will be approved.
• Franchisees are required to employ a qualified supervisor who is a Registered Early Childhood Educator (RECE) in good standing with the College of Early Childhood Educators or Ministry of Education, and who meets minimum required number of years of experience. With respect to hiring other employees, franchisees are required to obtain a vulnerable sector check for every employee and every volunteer or student who is on an educational placement.
• The documentation that franchisees are required to submit is It includes numerous handbooks, from parent to staff training handbooks.
• Franchisees are also required to meet a long list of many other operational requirements, from building and equipment to health and medical supervision, nutrition and programs.
• Franchisees must adhere to the government mandated ratios for staff and children for each age group (infants, toddlers, preschoolers, kindergarten children, school-aged children).

As to the use of the subsidy funding, franchisees must use the funding for approved expenses and will be held financially accountable if funds are used for unapproved expenses.

Once the daycare centre is open for business, there are numerous factors that could impact its future profitability – risks that prospective franchisee must know about in advance when they are deciding if they want to invest in a franchised daycare centre. Daycare centres are required to keep audited financial statements and the municipality can audit these from time-to-time. If the municipality determines that the daycare centre is too profitable, it can withdraw subsidies.

Conclusion

Daycare franchisors must disclose all material facts about the participation by franchisees in the CWELCC program, and about what this entails for the prospective franchisee from site-selection to the setup and operation of the franchised daycare centre.

Other areas for disclosure that franchisors should consider include potential changes to the legislation and the area. Neighbourhoods change over time. Demographic changes can impact demand for different age groups.

Navigating the franchise landscape in the highly regulated daycare industry requires a thorough understanding of the unique challenges and complexities involved. Prospective franchisees are entitled to be well-informed about material facts relating to the regulatory hurdles and potential risks that can impact the profitability of their investment. The franchisor’s obligation to disclose material facts in this context is critical.

Ultimately, a well-crafted FDD that addresses the industry-specific challenges and risks can be critical to protect the franchisor and the franchise system. A proactive approach to disclosure not only safeguards the financial interests of a franchisor by providing fulsome disclosure to prospective franchisees, it also contributes to the overall stability and resilience of a daycare franchise system amid a highly regulated and ever-evolving landscape.

Franchisors in the daycare industry are encouraged to have candid and detailed discussions with their legal advisors to discuss what may be considered material fact within their franchise system and operating environment and how they can best reflect this information in their FDDs to mitigate rescission risk.

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The information contained in this article is provided for informational purposes only and does not constitute legal advice. Readers should not act on this information without seeking professional legal advice from a lawyer experienced in this area. The content in this article may not reflect the most current legal developments, and the application of law can vary in different provinces and territories. As such, the information in this article is not guaranteed to be complete, correct, or up to date. The author and the publisher of this article disclaim all liability for any actions taken or not taken based on any or all of the contents of this site.

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