Dictating (Franchise) Disclosure

Andraya Frith

March 2012

by Alex Vorro for Inside Counsel -  Andraya Frith was recently quoted in this article from Inside Counsel.

Canada has been an attractive option for U.S. investors and businesses for years. Not only is it America’s largest trading partner, but the thousands of miles of mutual border, common cultures and shared languages make Canada a logical choice for international business relations….

Canada also is a logical first step for U.S. franchisors looking to expand into the international marketplace. While the financial crisis put a damper on U.S. franchisors pushing into Canada in recent years, the relatively strong Canadian economy has reinforced the neighbor to the north as an ideal target when looking to court prospective franchisees.

But despite the recently increased activity in U.S. franchisors moving into the Canadian market, there are some still-developing legislative issues about which they should be aware before plunging head-first across the border.

There have been a handful of lawsuits in recent years that perpetuated the perception that Canada’s franchise laws are over strict…. One key difference between Canadian and U.S. franchise disclosure laws is the franchisor’s obligation to disclose all other material facts to a franchisee….

You need to step back and ask yourself what other material facts may exist that the franchisee would need to have in front of them to make an informed investment decision,” says Osler, Hoskin & Harcourt partner Andraya Frith. “And now, in many cases, you have to have a customized disclosure document for each candidate. The days of just providing your standard form franchise disclosure document are over.”

While the Canadian franchise regime is similar to that of the U.S., it’s still important for U.S. franchisors to do their homework before heading for the border….

Frith adds that Canada’s approach to leasing can be quite different from what U.S. franchisors are accustomed to at home. The same goes for labor and real estate costs, which tend to be higher in Canada than in the U.S., and will need to be factored into disclosure documents. Then there is making sure that the franchisor understands the cultural differences, consumer preferences and the local competition as well. Expanding into Québec  also can be a challenge. Québec not only has a different culture and language, but also is a civil law regime while the rest of Canada adheres to common law.

“Many of our more successful U.S. clients who come to Canada first run a corporate pilot store so they can get a better understanding of the Canadian marketplace and what the costs of establishment will be for franchisees,” Frith says. “Then they later use that corporate pilot store so they can get a better understanding of the Canadian marketplace and what the costs of establishment will be for franchisees,” Frith says. “Then they later use that corporate store as a training center for future franchisees, convert it to a franchise or continue to run it corporately.”