Buying a franchise means making a large investment. Buyers should be aware that they have the legal right to comprehensive information about the franchise before the deal is finalized.
The Arthur Wishart Act
The government passed the Act in 2000 and instituted it in order to protect prospective franchisees. The Act requires that before any agreement is signed or payment is made, the franchisee must receive certain information. This requirement was put in place because there is an inherent power imbalance between franchisee and franchisor.
What Kind Of information Is A Franchisee Entitled To Receive?
A buyer has the right to receive information about:
- The franchise offer
- The franchisor
Franchise Offer Information
A franchisor must disclose to the buyer a number of items about the offer itself. This information includes:
- Supplier obligations
- Deposits, costs and other fees
- Exclusive territory description
- The franchisor’s mediation process, should one exist
- Volume rebates policies
Franchisor Information
The franchisee is also entitled to receive information about the franchisor’s business, including:
- Financial statements
- Lawsuits involving the franchise
- Whether the franchise ever faced bankruptcy or insolvency
- History of the franchise
Material Change Disclosure Requirement
The franchisor has an additional duty to divulge material changes that have occurred since the time that the prospective buyer received the disclosure documentation. Such changes include anything that may significantly and negatively affect the value of the business.
What Is The Time Line For Receipt Of Disclosure Information?
The franchisor must provide the prospective franchisee with the disclosure document a minimum of 14 days before:
- A payment is made to a franchisor, or
- The franchise contract is signed
Late or incomplete disclosure documents entitle the buyer to cancel the contract within 60 days after receipt of the agreement. The buyer may also cancel the contract within that time, if the disclosure document is incomplete.
A lawyer experienced in franchise matters can provide insightful and comprehensive advice on the drafting and review of franchise agreements and transactions.
