Tips for buyers and owners

Whether you are just thinking about operating a franchise business or have been an established franchisee for years, you need to know about Ontario's Arthur Wishart Act (Franchise Disclosure). This legislation has been designed to help you make a more informed decision when you invest. Once you own a franchise, this law encourages fair dealing and provides you with the right to associate with, or create an association with, other franchisees so you can share information about your business experiences.

Why is franchising so popular?

It's hard to imagine the Ontario marketplace without franchising. From donut shops to diners, thousands of businesses in the province rely on this popular method of business operation.

Many people say they start into franchising because they dream of being in business but don't have the experience to start out alone. They rely on the experience and know-how of established franchisors.

Responsible franchisors may offer sound opportunities for the careful investor and provide effective support and advice. As with any other business there are risks.

Why do companies offer franchises?

Franchisors frequently provide the use of the company name, methods of business operation, accounting and bookkeeping systems, symbols and trade-marks and marketing plans to franchise operators. They often sell business-related goods and services, such as inventory or operational supports, to the franchisees or require franchisees to buy them from particular suppliers.

In return they enjoy many advantages. It's the franchisee's money that is used to organize and operate the outlet. Normally the franchisor receives payments from the franchisee and, to ensure uniformity, keeps control over how the business is run. Your ability to use your own business judgement may be restricted. By offering franchise agreements, many companies broaden their marketing and economic base at relatively low cost.

Ontario's new franchise legislation

Ontario´s new franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000 was developed to provide more complete business information to potential buyers prior to signing franchising contracts. The law helps potential franchisees make better informed investment decisions. By encouraging informed investment decisions, the legislation supports a strong, competitive franchising sector that will help to create and preserve jobs.

The legislation protects you once you become a franchisee by providing the right to associate and share information with other franchisees. Further, the act imposes a duty of fair dealing on each party to a franchise agreement.

The act sets out certain rights and obligations for franchises. Like many other business arrangement it is up to the parties involved to make informed business decisions. The government is not involved in the review or approval of franchisors or their disclosure documents. The parties to a franchise agreement settle disputes under this act through the courts.

The disclosure document

Under the new legislation the franchisor required to provide a disclosure document at least 14 days before you sign an agreement or make any payment relating to a franchise.

The disclosure document will include information about the franchisor including:

• Business background
• Litigation history
• Bankruptcy or insolvency information, and
• Financial statements.

It will also include information about the franchise offer, such as:

• Costs (e.g., deposits or fees)
• Copies of proposed franchise agreements
• A description of any exclusive territory
• Restrictions (e.g., obligations to purchase from certain suppliers)
• The franchisor's policy on volume rebates
• Conditions of termination, contract renewal and transfer of franchise
• A description of the franchisor´s mediation process, if one is used
• Training and other assistance programs
• Advertising funds (whether the franchisee is required to contribute to an advertising fund), and
• A list of their current and former franchisees.

If you´re thinking of investing in a franchise, one of the first things you should do is to find a lawyer and financial advisor or accountant independent from the franchisor. Ask them to review all materials, contracts and proposals to them before you sign an agreement or make any payment. Ask your lawyer under what circumstances your agreement could be terminated and you could lose your franchise. The franchise agreement is normally for a limited time. Ask your lawyer whether you have the right to renew.

If you are a potential franchisee, the franchisor is obliged to notify you of any material change that has occurred in relation to the information disclosed as soon as it is practical and before you sign an agreement or make any payment relating to the franchise. A "material change" is one that would reasonably be expected to have a significant adverse effect on the price of a franchise or on the decision to invest. If you have questions about this, contact your lawyer.

Financial statements

Financial statements may provide important information about the financial health of the franchisor. Some large, established franchisors are exempt from having to provide financial statements. All of these franchisors have declared to the Ministry of Consumer and Business Services that they meet the conditions for exemption including:

• They have been in the line of business associated with the franchise for at least five years
• They have a net worth of at least five million dollars
• They have at least 25 franchisees in Canada or, fewer than 25 in Canada and at least that number in another jurisdiction for at least five years
• They have not had judgments against it for 10 years relating to fraud, unfair or deceptive practices or a law regulating franchises.

This exemption is made by regulation for individual franchisors. The fact that a franchisor is exempt from the requirement to provide financial statements in the disclosure document does not imply that the government is in any way endorsing the franchisor or its financial status. It simply means that the franchisor has declared that it meets the conditions necessary for exemption.

Commercial credit reports, (also known as business information reports) which may include information on the franchisor's business background, banking information, and credit and payment history may be obtained from private credit reporting companies. They may be very valuable in making your investment decision. Companies providing such information, for a fee, are listed under "Credit Reporting Agencies" in the telephone directory. If you don't know how to find a commercial credit report, ask your accountant to look for one for you.

Franchisors who are exempt from the requirement to provide financial statements in disclosure documents must comply with all other requirements of the Arthur Wishart Act (Franchise Disclosure), 2000.

Make a smart choice

The list of current and former franchisees in the disclosure document will be very valuable when you are considering buying a franchise. You can learn about how a franchisor operates by talking to some existing or former franchisees before you invest. Some questions to ask include:

• Were there unexpected costs or did you have to make additional unexpected investments?
• Must you purchase a minimum amount of merchandise/materials each year?
• If there is a minimum sales quota, how difficult is it to achieve?
• Are products/equipment supplied by the franchisor satisfactory and delivered on time?
• Did you have adequate support when the business first opened?
• Was the training adequate, and were employees included?
• How are disagreements with the franchisor handled?
• If you could change anything in your contract what would it be?
• What do you like/dislike about the franchisor?
• How long did it take you to start making money, and was it more or less than you expected?
• Would you enter into an agreement with this franchisor again?

Late disclosure document?

If a disclosure document or a statement of material change is not provided on time (or if the disclosure document doesn´t meet the act´s requirements) the franchisee may cancel the agreement without penalty or obligation up to 60 days after receiving a disclosure document.

If no disclosure document is provided, the franchisee may cancel the agreement without penalty or obligation up to two years after entering into the franchise agreement.

In a case where the contract is cancelled the franchisor has 60 days to refund the franchisee´s money.

In a case where the franchisee suffers a loss because of:

• a misrepresentation in the disclosure document, or statement of material change, or
• because the disclosure document does not meet the act´s requirements

the franchisee has a right of action for damages.

What does the new act mean to my existing franchise?

The right to associate and duty of fair dealing apply to all franchise agreements, including those signed before the act came into force. The legislation provides every franchisee the right to associate with other franchisees regardless of any provisions to the contrary that may exist in the contract. This enables franchisees to make wiser business decisions.

The duty of fair dealing requires all parties to a franchise agreement to act in good faith and in accordance with reasonable commercial standards.

It provides the right of legal action for damages where these provisions are breached.