Franchising in Canada: identifying material facts

Turning an existing business into a franchise means looking at its model through an outside investor’s eyes. Information that seems obvious to the founder may fundamentally change a prospective franchisee’s decision. Building a franchise network on solid foundations therefore requires you to identify ‘material facts’, not simply complete the sections of a disclosure document.

Understand what goes beyond the regulatory checklist

In Canada, franchising is regulated at provincial level. Where franchise legislation applies, the information expressly required by the regulations is not necessarily everything you must disclose.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, among other things, that the disclosure document contain all material facts. New Brunswick’s Franchises Act imposes the same obligation, alongside the prescribed information and documents. In both provinces, subject to statutory exceptions, prospective franchisees must receive the document at least 14 days before signing an agreement relating to the franchise or paying any consideration to the franchisor or its associate.

The practical test is this: could the information reasonably be expected to have a significant effect on the franchise’s value or the decision to buy it? Whether the prospective franchisee thought to ask about it is not the issue.

Quebec has no specific franchise legislation imposing this same disclosure regime. However, the Civil Code of Québec governs matters including contracts, good faith and consent. The absence of a statutory disclosure form is therefore no justification for withholding information crucial to a decision. Seek legal advice on the obligations that apply in the intended operating location.

Examine the actual business model, not just the sales pitch

Before marketing your first franchise, bring together those responsible for operations, finance, sales and digital systems. Their task is to identify anything that could make a future franchisee’s experience different from the one presented in your offering.

Start with four questions:

• Can demand be replicated? Does a substantial share of the business come from an exceptional customer or a one-off event that the franchisee will not benefit from?
• Does the concept depend on a vulnerable resource? Is essential software due to be discontinued before a replacement has been validated?
• Is significant expenditure already being considered? Are plans under way for a compulsory overhaul of equipment or premises fit-out?
• Does a constraint limit the offering? Is a service central to the sales pitch still experimental or unavailable under certain conditions?

These situations do not automatically constitute material facts in every case. They do, however, warrant a documented legal assessment. The aim is neither to disclose every day-to-day difficulty nor to leave sales teams to decide on their own what matters.

For an existing business, also distinguish the results attributable to the concept from those arising from particular circumstances: how long the business has been established, its longstanding customer base or favourable terms that cannot be transferred.

Create an auditable decision log

A simple internal log can turn discussions into practical action. For each issue identified, record:

• the fact, described without promotional language;
• its source and the date it was verified;
• the outlets or prospective franchisees potentially affected;
• its possible effect on the investment or business operations;
• the person responsible for assessing it;
• the disclosure decision and the reasons for it.

Distinguish between established facts, approved plans and assumptions. For example, a formal decision to replace a point-of-sale system does not have the same status as an idea raised in a meeting. This distinction helps your legal adviser choose accurate wording without turning a possibility into a certainty.

Keep supporting records, such as internal decisions, technical opinions and relevant correspondence. The log is a preparation tool; it does not replace the disclosure document provided to prospective franchisees.

Make disclosure clear and consistent

Material information loses its practical value if it is buried in vague wording. Describe the situation, its implications and the genuine uncertainties. Avoid reassuring phrases that contradict the facts, such as ‘no impact expected’, when nobody has assessed the consequences.

Next, compare the disclosure document, the contract and the sales presentation. A brochure should not describe a service as fully operational if the disclosure document says it is experimental. This consistency must also extend to verbal answers given to prospective franchisees.

In Ontario, inadequate disclosure may give rise to remedies including rescission or damages, depending on the circumstances. Gathering material facts therefore deserves a designated lead and legal review before any offer is made.

Key takeaway: before selling your first franchise, ask each person responsible for an area of the business what information could change a prospective franchisee’s decision. Document their answers, then seek legal advice on what must be disclosed.