What is a Franchise Disclosure Document?
Franchise legislation in Canada (BC, Alberta, Manitoba, Ontario, New Brunswick and PEI) requires that franchisors offering franchises for sale in those provinces provide prospects with a franchise disclosure document (“FDD”) prior to selling a franchise to that prospect (technically, the FDD must be delivered prior to accepting a non-refundable deposit or signing a franchise agreement). The purpose of the FDD is to ensure that a prospect is in possession of all material information necessary to make an informed decision as to whether or not to buy the franchise. The information contained in a franchisor’s FDD needs to be updated at various times.
Depending upon the materiality of the information, failure to update an FDD may provide a franchisee with a right to either sue for damages (if the information that was not updated caused damage to the franchisee), or to request repayment of all of the money expended by the franchisee to acquire and operate the franchise. That amount can easily enter the 7 figure range. For example, if the franchisor omits to include updated financial statements for the fiscal year just completed within 6 months of the last fiscal year end, the franchisee will almost certainly be allowed to “hand back the keys” to the business, and be compensated in full for his costs in establishing the franchise. If, on the other hand, the franchisor forgot to add contact information for new franchisees who had joined the system in the last fiscal year (i.e. a “positive” bit of information), then rescission would likely not be available as a remedy, and the franchisee would have to prove that this lack of disclosure had somehow caused him harm–which would be difficult or impossible to show.
Requirements For Updating Your FDD
The following items are required to ensure that you have an up-to-date franchise disclosure document:
1. List of Franchisees
A franchisor needs to ensure that its list of franchisees is updated every time it updates its FDD, for any reason (for example, a material change occurs, like the appointment of a new CEO).
2. Year End Information
There are several categories of information that need to be updated as of the fiscal year-end of the franchisor. This includes information regarding: the ad fund; store closures; the business and organization of the franchisor and its affiliates; officers and directors of the franchisor; litigation, pending litigation, charges and convictions affecting the franchisor, its officers and directors; and bankruptcy and insolvency proceedings.
3. Financial Statements
Financial statements are an important part of the FDD that also need to be updated. Newly-incorporated franchisors can only disclose an opening balance sheet. However, within 6 months of their first year end, the financial statements appended to the FDD must be updated to include full financial statements. From that point on, the financial statements must be updated within 6 months of the franchisor’s fiscal year end. It’s important to remember, that the financial statements must be prepared by an external CPA to a review engagement standard. If updated financial statements are not available, the franchisor must cease all sales activity that would otherwise require an FDD to be delivered, and await the updated statements.
4. Material Changes
The FDD must be updated at any time that a material change occurs. The idea here is that a prospect should be made aware of any “late breaking” information prior to signing on the dotted line, or handing over money. There may be circumstances where a Statement of Material Change can be used as a stop-gap to updating the FDD, but best practice is to roll the material change into the current version of the FDD as soon as possible.
Compliance with the technical requirements of provincial franchise legislation has been proven time and again to be of the utmost importance in avoiding rescission claims by franchisees.
Need Help With Your Franchise Disclosure Document?
Before signing a franchise agreement or making payments to a franchisor, remember to consult with legal and financial professionals who are independent from the franchisor, and experienced in this complex area of law. Siskinds has over 30 years of experience in the franchise sector. As authors of Franchise Legislation in Canada (published by Thompson Reuters), we literally “wrote the book” on compliance with franchise legislation in Canada.