Understanding A Restaurant Franchise Disclosure Document

Are you thinking of becoming a restaurant franchisee? Amazing!

You’ll definitely want to know about the FDD. Not sure what that is? That’s why we’re here.

The FDD (or ‘Franchise Disclosure Document’) is one of the most important documents you’ll review as a potential franchisee.

What is a franchise disclosure document?

A franchise disclosure document is a legal document that franchisors are required to present to prospective buyers of franchises during the pre-sale process in some Canadian provinces. It was originally known as the Uniform Franchise Offering Circular.

The purpose of the Franchise Disclosure Document (FDD) is to provide those interested in becoming a franchisee with information about the franchisor and to ensure that the candidate can make an informed decision about whether they should invest in the franchise they have set their eyes on.

Franchise disclosure regime in Canada

In Canada, six provinces (the “disclosure provinces”) have enacted legislation to regulate franchising. The legislation was designed to protect both franchisees and franchisors. Explore Canada’s current Franchise Acts below:

• Alberta Franchises Act
• British Columbia Franchises Act
• Manitoba Franchise Act
• New Brunswick’s Franchises Act
• Ontario’s Arthur Wishart (Franchise Disclosure) Act
• Prince Edward Island’s Franchise Act

Depending on the province, different rules and regulations may apply. In other provinces in Canada, no laws currently oblige franchisors to provide prospects with any particular information or document about their franchise.

What are the contents of an FDD? and why should you (as a potential franchisee) be aware of what’s inside?

In Canada, Franchise Disclosure Documents should contain all material facts regarding the franchise that a candidate is considering investing in. A “material fact” is a fact relating to the franchisor or the franchise that can reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise.

“Among other things, the FDD describes the franchisor and the franchise, the franchisor’s litigation history, costs associated with opening a franchised location, whether and what kind of training franchisees receive, the intellectual property associated with the franchise, like trademarks, any territory exclusivity, the contact information of other franchisees, and other information as prescribed by law. The FDD also gives the prospective franchisee an opportunity to review the form of the franchise agreement and related agreements that the franchisee will be required to sign.” – Yulia Vasilyeva, Legal Counsel, Recipe Unlimited Corporation

In disclosure provinces, laws have also implemented a mandatory wait period following the delivery of the FDD, which must pass before the parties can take the next step and sign the agreements. This period ensures that the prospect has been given a reasonable amount of time to become familiar with what becoming a franchisee would entail.

Why should a prospect be aware of what’s inside?

Franchisee candidates should always carefully read the FDD before proceeding with the deal as part of their due diligence process. This will help you in making the decision whether the opportunity is right for you and be clear on your and the franchisor’s rights and obligations both before and after you open for business.

Yulia Vasilyeva comments: “Franchise agreements routinely address situations that may not happen for years after signing. For example, the franchisee may one day want to involve their children in the business or reward a longtime employee by giving them a stake. Although the franchised business is independently owned and operated, the franchisor will often have the right to approve any change in ownership of the franchise, and such approval may come with conditions.” Reviewing the FDD and refreshing your memory on the terms of your franchise agreement in the course of the relationship is the best way to avoid disappointment or unwelcome surprises down the road.

If you have any additional questions about FDDs, we invite you to read our post The Importance of Understanding Your Franchise Agreement, and please do not hesitate to contact our team at Recipe Franchising.