In Ontario, as part of the Arthur Wishart Act (Franchise Disclosure), 2020 (the “Act”) , franchisors are required to provide prospective franchisees with a Franchise Disclosure Document (FDD) before entering into a franchise agreement. The FDD is a comprehensive disclosure tool designed to inform the franchisee about the franchisor's business operations, financial stability, and legal standing.
What is a Franchise Disclosure Document (FDD)?
The Franchise Disclosure Document is a document that outlines important details about the franchisor's business, including its financial health, litigation history, fees, and obligations that the franchisee will be expected to adhere to. The FDD is a protective measure that ensures prospective franchisees can make informed decisions about entering into a franchise agreement.
Key Components of the Franchise Disclosure Document:
- Franchisee Obligations
This section outlines the franchisee's responsibilities in terms of fees, operational standards, and reporting. It helps franchisees understand their day-to-day role within the franchise. - Franchisor’s Background
The FDD provides detailed information about the franchisor’s history, including business experience, financial stability, and ownership structure. It also discloses any previous bankruptcy or litigation history that could affect the franchisee’s decision. - Financial Information
Franchisors must provide financial statements that allow prospective franchisees to assess the financial health of the franchise. This section helps franchisees evaluate the potential profitability and risks involved in purchasing the franchise. - Franchise Fees and Royalties
The FDD outlines the franchisee’s financial commitments, including initial fees, royalties, and marketing fees. This transparency helps the franchisee assess the total investment needed to establish and run the franchise. - Litigation History
Franchisees are entitled to know if the franchisor is involved in any ongoing or past legal disputes. This could influence the franchisee's perception of the franchisor’s business practices.
Why the FDD is Crucial for Franchisees:
The Franchise Disclosure Document is designed to provide franchisees with a clear understanding of the business opportunity. It provides insight into the franchisor’s operations, financial stability, and risks involved. By law, the franchisor must disclose this information, allowing prospective franchisees to make well-informed decisions. franchisors must provide a disclosure document to potential franchisees at least 14 days before receiving any payment or signing any agreements related to the franchise. This rule has been interpreted very broadly, even applying to confidentiality and non-disclosure agreements, making it difficult for franchisors to safeguard sensitive information in their disclosure documents.
However, Since September 1st,2020, franchisors have more flexibility. They can ask prospective franchisees to sign agreements without providing a disclosure document, as long as those agreements are limited to:
- Keeping any shared information confidential,
- Prohibiting the use of disclosed information, and
- Specifying a location, site, or territory for the prospective franchisee.
These changes aim to strike a balance between protecting franchisors' interests and ensuring transparency for franchisees.
In Ontario, the Franchise Disclosure Document is an essential tool that ensures franchisees are informed before entering into a franchise agreement. It allows franchisees to make confident, informed choices about their investment, and it helps maintain transparency and fairness in the franchising process.
If you’re a franchisee in Ontario looking to better understand the Franchise Disclosure Document (FDD) and its implications for your business, contact us at LexCounsel. Our team can guide you through the intricacies of the FDD, ensuring you make informed decisions before entering into a franchise agreement.