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Mr. Claude J. Pellan,
L.L.B., B.Comm., Attorney

(450) 674-5551

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125 St-Charles West J4H 1C7

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1305 Lebourgneuf Blvd., Suite 304 G2K 2E4

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The obligation of a Franchisor to provide a Disclosure Document in Quebec

NUMBER 4 - November 2, 2007


Question from a franchisor (Quebec) and a franchisee (Manitoba) :

Franchisor (Quebec): I have a network of franchises situated mainly in the province of Quebec and have recently expanded to western Canada (including Alberta and Ontario).  I was recently asked by an eventual Quebec franchisee for a copy of the Disclosure Document I provide to franchisees in the province of Ontario.  My attorney advises me not to provide it to eventual franchisees in provinces where I am not required to provide it.

The eventual Quebec franchisee backed down because, I think, he felt that I was hiding information that would affect his decision to purchase or not the franchise. What is your opinion on providing a Disclosure Document to eventual franchisees in provinces where a franchisor is not required to provide one?

Franchisee (Manitoba): I recently asked a franchisor situated in Manitoba for a copy of his Disclosure Document (the franchisor has granted franchises in Alberta).  He categorically refused and told me he wasn’t required to do so under Manitoba law. Why would a franchisor that already provides a Disclosure Document to franchisees in Alberta refuse to provide me one?

Answer: I thought it a propos to regroup these two (2) questions to address the position of franchisors and franchisees on this issue.

The current position of the vast majority of franchisors I know and have negotiated with in Canada is that if they are not required to provide the Disclosure Document, they don’t because they have been advised that it contains reps and warranties that could be used against them in the future.

With franchise legislation coming into force in more and more provinces and with the growing number of sources of information on franchising and franchisors becoming available, eventual franchisees are generally better informed about the existence of franchise legislation in certain provinces that require franchisors to provide eventual franchisees with a Disclosure Document containing information on the franchisor and its activities and consequently, ask franchisors more questions and information, including a copy of their Disclosure Document, if they have one.  As an attorney, I always advise my franchisee clients to request a copy of the Disclosure Document from the franchisor when I know he has one.

When you look at the overall picture, an eventual franchisee has to provide information on his financial situation, academic background and experience. Certain franchisors also ask eventual franchisees to undergo personality tests before granting them a franchise.  By the end of the evaluation process, the franchisor knows almost everything about the franchisee.  On the other hand, the franchisee has limited information on the franchisor (unless it is a public company). I think it is also important for the franchisee to know the franchisor before making the decision to purchase a franchise and investing into the project. It’s normal for a franchisor to have a franchisee selection process and criteria to select franchisees. At the same time, with more information, an eventual franchisee will make a more informed and unbiased decision if he is provided a Disclosure Document. Yes, there is a risk of losing an eventual franchisee, but better now than having the franchisee realize after two (2) years that he wants out of the franchise (and the consequences for the franchisor). In other words, I think that it is both to the advantage of the franchisor (who already provides Disclosure Document) and the franchisee to know each other before entering into a business relationship.

Now, since the franchisor is not required to provide the Disclosure Document in certain provinces, it follows that he can amend and/or exclude certain sections of the Disclosure Document in those provinces. Let’s look briefly at the contents of a Disclosure Document.

The first section deals with the business background of the franchisor and of the directors, the general partners and the officers of the franchisor. This section may need to be amended if the employees of the franchisor do not have responsibilities in the province in question.

Then there are requirements with respect to disclosing fraud, unfair or deceptive business practices, the fact that the franchisor and/or certain principals has been subject to an administrative order or penalty or have been found liable in a civil action pertaining to misrepresentation, unfair or deceptive business practices or violating a law that regulates franchises or businesses. They also have to disclose details with respect to bankruptcy or insolvency proceeding of the franchisor and/or any of its principals. Then there is the disclosure of audited financial statements (which provide the franchisee with an idea of the financial stability of the franchisor), the standard statement (on credit report, independent legal and financial advice, etc) and a statement as to whether the franchisor uses a dispute resolution process.

The disclosure requirement that franchisors worry the most about is the disclosure of certain financial information (ex: costs of inventory, leasehold improvements, annual operating costs, earnings projections, financial arrangements) because there may be different from one province another and even within different regions of the same province.  This is a section that a franchisor may want to adjust by province or exclude from the Disclosure Document for the reason mentioned above.

With respect to the advertising fund, certain amendments may need to be made to this section to reflect what the franchisor does in that province, especially if a franchisor is starting to develop his network in a new province where he may want his franchisees to do local advertising until he reaches a critical mass of franchisees that warrants a provincial marketing program.

The remaining disclosure requirements are mostly information already contained in the franchise and other agreements. The provisions dealing with the disclosure of local information can be adjusted or taken out.

Franchisors must also disclose the name and telephone number of existing franchises ans of those that have recently left the franchise network. Eventual franchisees usually talk to existing franchisees to obtain more information on the franchisor and its activities.

Then there is the certificate signed by the franchisor or an officer of the franchisor at the end of the document that states the information in the document is true. I think the certificate gives more credibility to the information contained in the Disclosure Document and to the franchisor, but it can also be taken out and/or replaced by a limitation of liability provision.

At the end of the day, with a few amendments, the Disclosure Document can make an excellent marketing tool for the franchisor if the information contained therein it accurate (and presented with the company logo) and an important informational document for eventual franchisees that will help assist them in making a decision on whether or not to purchase a franchise. I believe the Disclosure Document will assist franchisors to sell franchises and more often than not, avoid the potential risks of misrepresentations and unsubstantiated warranties that are sometimes make.

Both parties benefit from disclosure and disclosure sells franchises.

N.B. Financial institutions appreciate receiving a copy of Disclosure Documents. Files can be treated faster and new projects have a better chance of being accepted.

For those that are receiving the bulletin for the first time, I will explain how this take this service entitled “The Question Corner” works. There are no subscription or user fees. To use this service, all you have to do is send a question on franchising or business law in general to c.pellan@hotmail.com and, on Friday mornings, I will choose a few questions of general interest and answer them by email. I will not be giving any legal opinions through this service, but rather providing advice, pointing you in the right direction or providing points of reference to assist to resolve a problem or to answer questions that are asked.

The questions and answers will be sent to other franchisors that may have the same question or wish to comment the question or my answer (unless otherwise indicated in the email), without identifying the person that asks the question.

If an answer to a question is urgent, please specify it in the email. I will provide by best efforts to respond to the question as quickly as possible.


 



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