Before a person buys a franchise, there is certain information they will want to have. A franchisor must provide a potential franchisee with a Franchise Disclosure Document that contains particular information and meets a specified form, as per the BC Franchises Act, SBC 2015, c 35. This article outlines basic information necessary to understand what must be included in a Franchise Disclosure Document.

Background

Under the Franchises Act, franchisors must provide potential franchisees with a disclosure document at least 14 days before either the signing by the prospective franchisee of the franchise agreement, or the payment by the prospective franchisee of any consideration relating to the franchise (whichever is earlier). This disclosure document must be delivered as one complete document, at one time. A disclosure document must contain all material facts, and the following:

• prescribed financial statements;
• copies of all proposed franchise agreements, and other agreements relating to the franchise, to be signed by a prospective franchisee;
• prescribed statements that have the purpose of assisting a prospective franchisee to make informed investment decisions;
• other prescribed information;
• copies of other prescribed documents.

A franchisor must also keep the potential franchisee up to date by providing them with a written statement of any material change. The potential franchisee must receive this statement as soon as practicable after the change has occurred and before the signing of the franchise agreement, or the payment of any consideration relating to the franchise (whichever is earlier).

Prescribed Information

Under the Franchises Regulation, BC Reg 238/2016, a Franchise Disclosure Document must specifically contain the information below.

Risk warning statements

Presented together at the beginning of the document, the following statements:

A prospective franchisee should seek information on the franchisor and on the franchisor’s business background, banking affairs, credit history and trade references.

A prospective franchisee should seek expert independent legal and financial advice in relation to franchising and the franchise agreement before entering into the franchise agreement.

A prospective franchisee should contact current and previous franchisees before entering into the franchise agreement.

Lists of current and previous franchisees and their contact information can be found in this disclosure document.

Dispute resolution description

Requirements under the franchise agreement with respect to arbitration, mediation or other alternative dispute resolution processes, including requirements relating to location.

Financial statements

Financial statements of the franchisor that are prepared in accordance with the generally accepted accounting principles of the jurisdiction in which the franchisor is based. The financial statements of the franchisor must be either audited in accordance with the generally accepted auditing standards or reviewed in accordance with the generally accepted standards that are applicable to review engagements. The financial statements must be for the most recently completed year, unless an exception applies.

Required information about the franchisor

• the business background of the franchisor;
• the business background of the directors, the officers and the general partners;
• previous convictions and pending charges of the franchisor, the franchisor’s associate or a director, an officer or a general partner;
• whether, during the 10-year period immediately preceding the date of the disclosure document, the franchisor, the franchisor’s associate or a director, an officer or a general partner of the franchisor was subject to an administrative order or penalty;
• whether, during the 10-year period immediately preceding the date of the disclosure document, the franchisor, the franchisor’s associate or a director, an officer or a general partner of the franchisor was found liable in a civil action for misrepresentation or engaging in unfair or deceptive business practices;
• details of any bankruptcy or insolvency proceedings, any part of which took place during the 6-year period immediately preceding the date of the disclosure document.

Required information about the franchise

• costs of establishing the franchise and other fees;
• the franchisor’s policies and practices, if any, regarding guarantees and security interests required of franchisees;
• estimate of operating costs;
• earnings projection;
• the terms and conditions of any financing arrangements that the franchisor offers;
• a description of any training offered to the franchisee by or on behalf of the franchisor;
• if the franchisee will be required to operate in accordance with manuals provided by the franchisor, the table of contents of each manual or information about where the manuals can be found;
• information about advertising, if the franchisee will be required to contribute to an advertising fund;
• purchase and sale restrictions;
• rebates, commissions, payments or other benefits;
• the franchisee’s rights to the territory, if there are any;
• trademarks and other proprietary rights;
• licences, registrations, authorizations and other permissions;
• a description of the extent to which the franchisee will be required to participate personally and directly in the operation of the franchise;
• a list of all the provisions in the franchise agreement that deal with the termination of the franchise agreement, the renewal of the franchise agreement and the transfer of the franchise.

Lists of franchisees, businesses and closures

• a list of all franchisees of the franchisor or of the franchisor’s affiliates that currently operate franchises in Canada of the same type as the franchise being offered, including the name, business address and telephone number of each franchisee;
• a list of all businesses of the same type as the franchise being offered that the franchisor or the franchisor’s affiliates currently operate in Canada, including the name and business address of each business;
• a list of all former franchisees of the franchisor or of the franchisor’s affiliates that previously operated, in Canada and, if applicable, in any foreign jurisdiction;
• the total number of franchises in Canada of the franchisor or of the franchisor’s affiliates of the same type as the franchise being offered within the previous 3 fiscal years that have
  • been terminated or cancelled by the franchisor or the franchisor’s affiliates,
  • not been renewed by the franchisor or the franchisor’s affiliates,
  • been reacquired by the franchisor or the franchisor’s affiliates, or
  • not been renewed by the franchisee or otherwise left the franchise system.