Investing in a U.S. franchise? Have you received proper disclosure?

March 3rd, 2015 by Elisabeth Colson

There are many reasons why a potential business owner may choose to invest in a franchise as opposed to starting his or her own business. A franchise may appear to be a less risky investment because the business model has already been proven, making it is easier to assess the potential success of the franchise. As a result, disclosure from the franchisor is critical to the potential franchisee’s ability to evaluate the attractiveness of the franchise opportunity.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”) sets out franchisors’ disclosure obligations to prospective franchisees and serves to balance the bargaining relationship between the parties.  A franchisor is required to provide a disclosure document which includes, among other things, all material facts, financial statements,  and statements for the purpose of assisting the prospective franchisee in making an informed decision. In some circumstances, a franchisor could be liable for any misrepresentations made in the disclosure document.

A prospective Ontario franchisee seeking to invest in a U.S. franchise should exercise additional caution when analyzing the disclosure it obtains from the U.S. franchisor.  A considerable degree of divergence exists between a U.S.-based franchise opportunity and an Ontario-based opportunity.  The differences range from the cost of supply and inventory, disposable incomes of customers, currency fluctuations, and the effect of any relevant taxes.

In all likelihood, a U.S. disclosure document will not include all of the information that is required to be disclosed under the Act. In addition, the disclosure document could provide information and statements that have not been modified to reflect how the franchise opportunity offered in Canada differs from that same opportunity in the U.S. The prospective franchisee should keep in mind that information provided by the U.S. franchisor is based on its experience in the U.S. market and that the implementation of the franchise in Canada may be very different.

Make a smart investment! Hire a lawyer who can help you to determine whether you have received all of the information that you need to assess a franchise opportunity.  DSF’s corporate law team offers expert advice for prospective franchisees.  Let DSF structure the legal framework for your potential franchise and provide your new business with the foundation it deserves. Visit our franchise law page or contact Elisabeth Colson at 416-446-5048.

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