Franchise Disclosure in Alberta: What the franchisee can expect and what is expected from the franchisor
As with any investment decision, it is important for the prospective investor to do their research prior to committing to an investment. Luckily for those looking to invest in a franchised business operating in Alberta, the Franchises Act requires franchisors to disclose detailed information regarding the franchise to better assist potential franchisees in making informed investment decisions. In turn, these disclosure requirements offer helpful guidance to franchisors in determining what information must be disclosed to prospective franchisees.
Timeline to provide the disclosure document
Before the franchisee signs any binding agreements, or pays any non-refundable deposits to the franchisor, the franchisor must provide the franchisee with a disclosure document outlining the ins and outs of the franchise. This disclosure document must be received by the franchisee at least 14 days before the franchisee signs any agreement relating to the franchise, or before the franchisee makes any non-refundable payment relating to the franchise. In the event the disclosure document is not provided to the franchisee within the given timeframe, the franchisee may choose to cancel all franchise agreements or withdraw from any offers to purchase. The franchisor must then compensate the franchisee for any net losses the franchisee may have incurred in setting up the franchised business. Depending on the circumstances, the franchisee may have from 60 days to 2 years to cancel the franchise agreements resulting in significant losses, both financial and otherwise, to the franchisor.
Contents of the disclosure document
In most instances, a disclosure document must:
- Comply with the requirements of the Regulations;
- Contain copies of all proposed franchise agreements; and
- Contain financial statements, reports and other documents in accordance with the Regulations.
The Regulations state the disclosure document must contain all “material facts” about the franchise which is defined as, “any information about the business, operations, capital or control of the franchisor or its associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be sold or the decision to purchase the franchise”. At minimum, this includes all material facts related to the matters set out in Schedule 1 of the Regulations. In addition, if after the disclosure document is provided to the franchisee there is a material change to the franchise, the franchisor must provide a description of that material change in writing to the franchisee. The description of the material change must be provided as soon as practicable after the change has occurred and before the franchisee signs any agreement relating to the franchise, or before the franchisee makes any non-refundable payment relating to the franchise. If the description of the material change is not provided within the allotted timeframe, this may result in the disclosure document being incomplete, giving the franchisee the potential to rescind any franchise agreements on the basis that a substantially complete disclosure document has not been provided.
With respect to financial statements, if a franchisor is required to provide financial statements in the disclosure document, these statements must be prepared in accordance with accepted accounting principles for the jurisdiction in which the franchisor is based. These financial statements must be either audited in accordance Canadian auditing standards, or reviewed in accordance with Canadian standards for review engagements (or must be audited or reviewed to standards that are at least equivalent to Canadian standards). With certain exceptions, the financial statements must be for the most recently completed fiscal year.
In addition to the disclosure of information, the disclosure document must also include a certificate as set out in Schedule 2 of the Regulationsthat must be dated and signed by:
- At least two officers or directors of the franchisor;
- If the franchisor only has one director or officer, by that person; or
- If the franchisor is not a corporation, by the franchisor.
The certificate acts as an acknowledgement that the disclosure document contains no untrue information of a material fact and that the disclosure document does not omit to state a material fact that is required to be stated or needs to be stated in order for the information to not be misleading. Signing the certificate should not be taken lightly. In the event there is a misrepresentation in the disclosure document, and the franchisee suffers a loss because of this misrepresentation, the franchisee may claim for damages against the franchisor, as well as every person who signed the disclosure document, which includes those who signed the certificate.
C. Substantially Complete
The Regulations state that so long as the disclosure document is “substantially complete”, it can be provided to the franchisee in order to satisfy the disclosure requirements and timeline. However, the franchisor may want to err on the side of caution and provide as much detailed information as is required and to adhere to the forms of both Schedule 1 and Schedule 2 of the Regulations. Something that may seem minor, such as a missed signature on the certificate, or failing to provide full contact information for other established franchisees, can be considered a fatal error resulting in a disclosure document that is substantially incomplete and giving the franchisee the option to cancel the transaction.
The disclosure requirements discussed above cannot be avoided and any attempts to bypass them will be deemed void. For instance, even if the franchisee informs the franchisor that certain required information in the disclosure is not necessary, the franchisee remains entitled to this information which later on could be used by the franchisee as a reason to back out of the franchise agreements.
With that said, there are instances where a franchisor is not required to provide a disclosure document, or is not required to include financial statements in the disclosure document, said exemptions which are laid out in the Franchises Act and Exemption Regulations. The burden is on the party claiming the exemption, typically the franchisor, to show that such an exemption exists and disclosure compliance is not warranted. However, as mentioned, failure to provide satisfactory and timely disclosure can result in severe consequences. If you are unsure whether you fall under an exemption or not, it is recommended that you consult a lawyer.