By Adrienne Boudreau, John Yiokaris, and Sofia Sugumar, Sotos LLP

Franchisors operating in or expanding into Ontario must comply with the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 (the “Wishart Act”). The Wishart Act requires that disclosure be made to prospective franchisees. In our legal practice, we continue to see some franchisors that fail to provide proper disclosure. This article highlights those types of disclosure issues that we have seen most recently, and offers practical guidance to help franchisors reduce risk and avoid unintentional non-compliance.

1. The “Stale Disclosure” Risk: Disclosure Isn’t One and Done

Franchisors are required to give prospective franchisees a complete franchise disclosure document (“FDD”) at least 14 days before either:

• the franchisee signs the franchise agreement (or any related agreement), or
• the franchisee pays any money to the franchisor.

Most franchisors understand the need to observe the minimum waiting period before finalizing franchise agreements. However, problems often arise when there is a long delay between delivering the FDD and signing the franchise agreement. In some cases, franchisors allow months to pass before the franchisee signs an agreement or makes a payment to the franchisor. During that time, changes to the franchisor’s business or the franchise system may occur, including changes that could affect the prospective franchisee’s decision to move forward. Failing to disclose these developments can expose the franchisor to legal risk if the FDD no longer reflects the current state of the business.

If a material change occurs after the FDD is delivered but before the franchise agreement is signed or money is paid, the franchisor has a legal obligation to provide the prospective franchisee with a written statement describing the change.

A material change is more than just a shift in operations or ownership. It can include changes to the franchisor’s business, capital structure, control, or the franchise system itself. It also covers decisions made by senior management or the board to implement such changes, even if those changes have not yet taken effect, as long as board approval is likely. Franchisors must assess whether the change could significantly impact the value or price of the franchise, or influence a prospective franchisee’s decision to invest. Importantly, case law does not clearly require that the impact be obviously adverse to qualify as material. This obligation is frequently overlooked, especially when the original disclosure was accurate at the time, but no longer reflects current conditions. Failing to issue a timely statement of material change can trigger the franchisee’s right to rescind the agreement.

To mitigate this risk, franchisors should regularly review whether any changes have occurred since delivering the FDD. If new material information or documents become available, and particularly if an adverse material change has occurred, the franchisor is legally required to provide the prospective franchisee with a written statement of that change as soon as practicable, and in any case before the franchisee signs the franchise agreement or pays any non-refundable consideration. Remember that franchise disclosure is evergreen.

2. Disclose Franchisor Loans, Notes, and Security Agreements

An emerging trend driven by current economic conditions involves franchisors offering to finance all or part of a franchisee’s initial investment. This has become more common as prospective franchisees increasingly face challenges in obtaining traditional bank financing.

In some cases, the franchisor may provide direct financing, or require promissory notes or general security agreements from the franchisee. While these financing deals may seem like separate or “side” arrangements, they are in fact part of the franchise relationship.

Under the Wishart Act, any agreement made between a franchisor and a prospective franchisee that relates to acquiring the franchise can be treated as part of the “franchise agreement.” As such, the material terms of any financing arrangement must be disclosed in the FDD. This includes a summary of the financial terms and, in almost all cases, copies of the relevant financing and security documents.

Failure to disclose these agreements as part of the FDD can result in a disclosure deficiency. In turn, this may provide the franchisee with a statutory right to rescind the franchise agreement, even after the business has commenced operations.

Franchisors should be careful not to treat financing documents as separate or informal arrangements. If financing is part of the offer being made to a prospective franchisee, it must be included in the FDD.

3. Getting Financial Performance Representations Right

Many franchisors want to help prospective franchisees understand how the business performs financially. This might include sharing sample income statements, profit-and-loss projections, or other financial estimates. Franchisors often provide this information to help franchisees secure bank financing or to give them a clearer picture of the business model.

Under Ontario law, there is no obligation for a franchisor to provide any financial projections. However, if such information is provided, even informally, it is considered a financial performance representation and must be included in the FDD, along with a clear explanation of how the numbers were calculated.

To comply with the disclosure requirements, the financial performance information must be based on reasonable assumptions that need to be disclosed and must be substantiated by written documentation, together with the location where information is available for inspection by the prospective franchisee that substantiates the representation.

In our experience, franchisors who wish to include financial performance representations in their FDD should involve both legal counsel and accounting professionals in preparing the materials. The data must be detailed, accurate, and supportable, and the underlying assumptions must be clearly explained.

Franchisors should also keep in mind that even if the intention is to provide the information only to lenders or for illustrative purposes, the law does not distinguish between informal and formal financial representations. If the information is provided to persuade someone to invest, it must be disclosed and properly supported.

4. Avoid Informal Oral Statements and “Off-the-Record” Assurances

A persistent challenge for franchisors involves the use of “informal” financial assurances during the franchise sales process. Such assurances may take the form of oral statements, text messages, marketing brochures, webinars, or other informal communications in which franchise representatives make claims regarding expected sales, profitability, or break-even timelines.

For instance, a sales representative might claim that a particular location in the franchise system generates a certain amount of revenue, or that the majority of franchisees achieve profitability within a defined timeframe and/or a certain level of top-line sales. These statements, even when made casually and/or are actually true, can be interpreted as financial performance representations if they relate to the likely financial outcomes of the franchise.

The concern lies in the fact that these communications occur outside the FDD. They are neither reviewed nor documented, and typically lack supporting written assumptions or data. In the event of a dispute, franchisees may produce screenshots, notes, recordings, or other communications to claim that financial promises were made, stating that such assurances influenced their decision to invest.

Under the Wishart Act, such representations can result in a statutory right of rescission. This applies even when the representations were made by sales staff or other agents of the franchisor, and even when the franchisor did not intend to mislead.

To mitigate this risk, franchisors should establish clear policies and training protocols for all individuals involved in the franchise sales process.  All representatives, including all third-party real estate agents or brokers engaged in the sales process, should be expressly instructed not to make any financial representations, however informally. If a franchisor wishes to disclose this type of information to prospective franchisees, it should be included in the FDD.  The prospective franchisee should be directed to the FDD for this and all other information about the franchise opportunity.

5. Complete Disclosure Covers Every Angle, Positive or Negative

Franchisors are sometimes reluctant to disclose information that may be perceived as negative or that reflects poorly on the performance of the system. For instance, some franchisors may be aware that new franchisees often experience losses in their first year, or that there has been a significant increase in store closures or franchisee turnover.

While it is understandable to focus on the positive aspects of the business opportunity, the Wishart Act requires franchisors to disclose all material facts, including those that may dissuade a prospective franchisee from proceeding.

Material facts include any information that would reasonably be expected to have a significant effect on the decision to acquire the franchise. This may include:

• A pattern of early financial losses among new franchisees;
• Threatened litigation with current or former franchisees;
• Departure of key personnel;
• Termination or non-renewal of multiple franchise agreements; and
• Changes to key suppliers or pricing structures.

Failure to disclose such material facts, even if the rest of the disclosure is accurate and complete, may result in the disclosure being found deficient. This creates potential liability not only under the statutory rescission provisions, but also under common law claims for misrepresentation or failure to disclose.

Disclosure as a Compliance and Risk Management Tool

Courts continue to hold franchisors to a high standard under the Wishart Act, which imposes strict disclosure obligations to ensure prospective franchisees receive all material information needed to make informed investment decisions. Common sources of legal exposure such as outdated disclosure documents, undisclosed financial arrangements, informal financial representations, and omissions of material facts often arise from oversight rather than intent to mislead. Franchisors can mitigate these risks by maintaining a disciplined disclosure process, conducting regular compliance reviews, and seeking legal advice when preparing or updating their FDD. Franchisors are strongly encouraged to work together with experienced franchise counsel to ensure that not only its FDD, but that its disclosure process is complaint with the Wishart Act to ensure that it isn’t met with any unwanted surprises. A carefully drafted FDD enables franchisors to focus on growing their business and reduce the risk of uncertainty associated with judicial interpretation. 

About the authors

Adrienne Boudreau is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. She has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm.  He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Sofia Sugumar is a litigation associate at Sotos LLP.  Prior to joining Sotos, Sofia practiced as a corporate transactional lawyer at another prominent Canadian law firm. This experience gives her a unique advantage in understanding both the operational side of franchise disputes and the commercial realities behind contracts, which she applies to effectively resolve complex franchise matters.