By: Jonathan Mackenzie
I am thinking of Purchasing a Franchise. What should I look for in the Franchisor’s Franchise Disclosure Document?
Whether you are purchasing a Franchise for the first time, or you are renewing your Franchise Agreement with a Franchisor, it is important that you work with a Franchise Lawyer to fully understand the Franchise Disclosure Document (“FDD”) provided to you by the Franchisor.
While it is very important to review the FDD in its entirety, here are five important items to look for in the FDD:
- Financial Statements
The Franchisor’s Financial Statements in the FDD should be carefully reviewed with a Franchise Lawyer as well as with a Financial Advisor such as a Chartered Public Accountant. A clear understanding of the Franchisor’s financial situation is extremely important before a Franchisee makes the decision to sign a Franchise Agreement. - Lawsuits Against the Franchisor
The Arthur Wishart Act obligates Franchisors to disclose certain pending and ongoing lawsuits against them, including details of the allegations being made. A Franchisor may have been named as a Defendant in one or more lawsuits that may need to be disclosed in the FDD. If a lawsuit(s) is disclosed by a Franchisor in the FDD, it is important for a Franchisee to speak with a Franchise Lawyer to better understand the allegations being made against the Franchisor, to learn whether there are any publicly reported court decisions involving the Franchisor, and to have the opportunity to ask the Franchisor questions about the lawsuit(s). - The Number of Franchisees that left the Franchise System in the last three fiscal years
The Arthur Wishart Act requires that the Franchisor disclose the number of Franchisees that left the Franchise system in the Franchisor’s previous three fiscal years. If a significant number of franchises have left the system over the previous three fiscal years, it is likely a red flag that warrants further questions from the Franchisor. - Franchise Fees
The Arthur Wishart Act requires that a Franchisor disclose the particulars of the Franchise Fees that a Franchisee will be required to pay during the term of the Franchise Agreement. Franchise Fees can include Initial Franchise Fees, Service Fees, Royalties, Technology Fees, and other fees. It is crucial for a Franchisee to clearly understand what their financial obligations to the Franchisor will be prior to signing a Franchise Agreement. - Trademarks
Trademarks are an essential component of any Franchise System’s branding. Canadian Franchisors usually own Trademarks that are registered with the Canadian Intellectual Property Office (CIPO). Registered Trademarks can include Word Marks as well as Logos. Franchise Agreements allow a Franchisee to use the Franchisor’s registered trademarks under license. It is crucial for a Franchisee to clearly understand which Trademarks are owned by the Franchisor in Canada, and it is important for a Franchisee to know if there are any legal disputes involving the Franchisor’s Trademarks. If Trademark litigation results in the Franchisor losing its ability to use a given Trademark, the Franchisees will also lose the ability the use that Trademark and may have to incur significant expenses in rebranding their Franchised Businesses.
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