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 franchise legislation, the 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.
It's hard to imagine the Ontario marketplace without franchises. 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. But, as with any other business, there are risks.
Franchisors frequently provide the use of the company name, methods of business operation, accounting and bookkeeping systems, symbols and trademarks 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 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 arrangements, 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 right to associate and duty of fair dealing apply to all franchise agreements, including those signed before the act came into force in 2000. 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.
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:
It will also include information about the franchise offer, such as:
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.
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 the disclosure document does not meet the act´s requirements, the franchisee has a right of action for damages.
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 Government and Consumer Services that they meet the conditions for exemption including:
The criteria that an individual franchisor must meet to be exempt from the requirement to include a financial statement in the disclosure document are set out in a regulation under the Act. 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. Businesses providing such information, for a fee, are listed under "Credit Reporting Agencies" online and in telephone directories. 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. Furthermore, if the franchisor fails to continue to meet the exemption criteria, the exemption is no longer effective and the franchisor must provide financial statements.
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:
If you'd like to join the thousands of franchisees across Ontario, start with some homework.
Visit the Canada-Ontario Business Service Centre website for more information.