Franchising in Canada: disclosing your business history

Turning an existing business into a franchise means presenting its history as rigorously as its concept. Litigation, insolvency and the backgrounds of those in charge may need to be disclosed to prospective franchisees. To build a lasting place in Canada’s franchise sector, organise these checks before making your first sales proposals, rather than discovering sensitive information on the eve of signing.

1. Define the information to check

The aim is not to publish every difficulty the business has faced since it was founded. It is to establish which aspects of its history must be disclosed under the applicable law and which constitute material facts for a prospective franchisee.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 and its implementing regulation require pre-contractual disclosure covering, among other things, business backgrounds and certain information about litigation, bankruptcy and insolvency. The precise scope of the people, events and periods covered must be checked against the applicable legislation.

The disclosure document must generally be received at least 14 days before the signing or payment that triggers this requirement, subject to statutory exceptions. The Ontario government neither vets nor approves franchisors or their disclosure documents, so responsibility for their accuracy remains crucial.

In Manitoba, The Franchises Act and the Franchises Regulation also require disclosure of information about the relevant people and their backgrounds. However, do not assume that checks carried out for one province automatically meet another province’s requirements.

First practical step: ask a lawyer to draw up a list of the information required for each target province, rather than limiting it to details that show the business in a favourable light.

2. Compile a factual record before drafting

Appoint someone to collate responses, supporting documents and questions for the lawyer. In a small business, this may be a management responsibility, but it should not rely solely on the founder’s memory.

Prepare an internal questionnaire covering, within the legal scope established:

• the identity of the relevant entities, their former names and their links to the business being offered as a franchise;
• management roles and relevant experience;
• legal proceedings, rulings or other events that may need to be disclosed;
• potentially relevant bankruptcies or insolvency situations;
• documents confirming the dates, parties and current status of each matter.

For litigation, distinguish between an allegation, a ruling and a settlement. A claim filed against a business does not prove the alleged facts. Conversely, the absence of an adverse judgment does not necessarily remove every disclosure obligation.

Collect information proportionately, restricting access to those who need it. An internal review does not justify the widespread circulation of personal data or sensitive records.

3. Have the facts legally assessed, without embellishment

Give the material to the lawyer before drafting the text for prospective franchisees. Their role includes determining what disclosure is prescribed, what might constitute a material fact and how to present the information without creating a misleading impression.

Avoid vague wording such as ‘no major problems’ or ‘a matter of no consequence’. These replace verifiable facts with a commercial judgement. Where an event must be disclosed, use an accurate description of its nature, current status and known outcome.

A confidential settlement requires particular analysis: do not assume either that it removes the disclosure obligation or that it permits publication of the entire file. Have the contractual and statutory obligations reviewed together.

Also check that the information is consistent with your sales presentation. If a director has extensive professional experience but the business has never supported franchisees, make that distinction clear. A long-established business is not the same as an experienced franchisor.

4. Assign responsibility for updates and approval

A record that is accurate when prepared may become incomplete before signing. Establish an internal procedure for those responsible to report promptly any events that could affect the information disclosed.

The start of legal proceedings or a change in the management team should prompt a legal assessment, without assuming that every event automatically constitutes a material change under the law. In Ontario, a material change requires a written statement in accordance with the applicable statutory requirements.

Keep a dated record of the checks: people consulted, documents reviewed, unresolved issues and final approval. This makes updates easier; it does not replace statutory disclosure requirements.

The consequences are real: in Ontario, incomplete or inaccurate disclosure can give rise to claims for damages and, depending on the breach, rescission of the agreement.

Key takeaway: before offering your first franchise, gather the relevant background information, have its legal significance assessed and assign clear responsibility for keeping it up to date.