At the beginning of February, British Columbia will be joining Ontario and a handful of other provinces by putting in place franchise regulation requirements. B.C.’s new regulations mainly look at disclosure laws, which have been shaped around the regulations those of us in Ontario have been dealing with since 2000.
Basically, franchise disclosure laws make it mandatory to share various documents about the franchise two weeks before any agreements are signed or money is exchanged. These documents are required to be written in plain language, but many times they are drawn up by legal advisors, which can cause some confusion.
They usually run a few hundred pages and can be overly complicated, however, anyone looking to make an investment should take full advantage of all of this information.
In some places in Canada, these disclosure documents are not a requirement but I would ask for them anyways. If the franchise is unable to provide them, you may want to think about what you are getting yourself into before handing over any of your hard-earned cash.
So, what do you look for in these lengthy documents?
First things first, they should include a thorough description of the industry and competition, along with the history of the franchise. This should give you with a clear picture of the organization.
Biographies of the top execs in the company are usually included and this is a great chance to get an idea of who you are getting into business with. Are you going to be comfortable working with these people moving forward? Look for a high level of experience and watch out for previous business failures.
The disclosure documents will provide reports on any previous lawsuits. I highly recommend looking for any past run-ins with bankruptcy.
The outline of the cost of investment is huge. There are some fine details that could possibly derail your success here. Look for any possible hidden fees like royalties or advertising fees. Are product and inventory prices included?
Territorial protection should also be outlined. If not, ask. The last thing you want is for another unit to open up in close proximity. A certain territorial radius should be specified.
And of course, the financial statements. These will give you a good idea of the stability of the franchise. Make sure to examine the profit and losses and the balance sheet. Beware of franchisors who earn most of their money from franchise sales. Franchisors should sustain themselves on royalty payments.
Other things that may be helpful to have outlined in these documents is a report on the current locations, what is open, closed, as well as a listing of those who may have left the franchise program. Don’t be afraid to inquire why they left.
Sales earnings claims and a sample contract can also be helpful in determining the true health and mindset of the organization.
When in doubt, seek your own legal advice. It may come with an added expense, but in the end, it will cost less than a lopsided agreement.