Franchising continues to fuel rapid business growth across Canada. For entrepreneurs exploring franchise ownership, one of the most important documents you’ll encounter is the Franchise Disclosure Document (FDD).
The FDD is designed to help prospective franchisees make informed decisions before they invest. It provides essential information about the franchise system, the franchisor’s background, the fees and costs involved, the terms that will govern the relationship, and more.
Under provincial franchise laws in Ontario, British Columbia, Alberta, Manitoba, New Brunswick, and Prince Edward Island[1], franchisors must provide the FDD at least 14 days before a prospective franchisee signs any agreement or pays any money. If an FDD is non-compliant, not delivered in accordance with required rules, or not delivered at all, franchisees in a province with franchise legislation may have the right to rescind (cancel) the franchise agreement, and may be entitled to claim amounts invested, and compensation for losses incurred from the franchisor.
In short, the FDD is your roadmap to understanding what you’re signing up for and whether the opportunity aligns with your goals.
Key sections to review carefully
While the content requirements for FDDs vary slightly across systems and provinces, here are some of the key areas you should focus on:
1. Litigation and Bankruptcy History
This section discloses whether the franchisor, its associates, its general partners, or its directors/officers have been involved in lawsuits or bankruptcies. It is important to review this section carefully. A pattern of litigation can be a red flag that warrants deeper investigation.
2. Initial and Ongoing Fees
The Franchise Disclosure Document will contain details on all the costs you’re expected to pay, including upfront franchise fees, ongoing royalties, advertising contributions, technology fees, and more. You should understand how these payments work to build accurate financial projections, paying particular attention to fees that could fluctuate or increase over time. Make sure you understand all financial obligations and confirm that you have sufficient working capital to make the investment. It is a wise choice to engage a financial advisor or accountant to review the numbers carefully and build a realistic business model to project capital requirements, cost structures, and potential return on investment.
3. Territory
If you receive an exclusive territory, you should review the FDD to see what the exemptions to such “exclusivity” might be. For example, in a food franchise, some systems reserve the right to sell through other distribution channels, such as online or in grocery stores, even within your territory. Alternatively, you may not receive an exclusive territory at all.
4. Termination, Renewal, and Transfer Rights
These provisions explain under what conditions you can renew or sell your franchise or exit the system. Pay close attention to the grounds of default that allow the franchisor to terminate the agreement, and any notice or cure periods that might apply.
Typically, franchisees do not have a contractual right to terminate the Franchise Agreement, and so your main exit option will be through a transfer (selling your franchise to a new owner). It’s important to understand what conditions and fees will apply to any transfer, as these can significantly affect your ability to exit the system.
Prospective franchisees should also review the renewal rights carefully. If the Franchise Agreement (and therefore the FDD) do not explicitly provide for renewal, you should not assume that renewal will be available when the initial term of the Franchise Agreement comes to an end.
5. List of Current and Former Franchisees
The Franchise Disclosure Document will provide a list of current franchisees, as well as contact information for former franchisees that left the system within the last fiscal year. Speaking with current franchisees can give you candid insights about the business, profitability, and day-to-day support from the franchisor. You should also ask former franchisees why they left the system and what challenges they faced. If many locations have closed recently, ask the franchisor why.
6. Financial Statements
The franchisor must provide financial statements for its most recent fiscal year. You should consult an accountant experienced in franchising to assist in your review of the financial statements, as well as to assist you in assessing the financial viability of the opportunity.
Conclusion
As you can see, the FDD is an effective due diligence tool. By understanding its contents and seeking professional guidance, you can approach your franchise investment with confidence and clarity.
Priya Gill
Cassels Brock & Blackwell LLP
pgill@cassels.com
[1] Saskatchewan’s Franchise Disclosure Act received royal assent in May 2024 and comes into force on June 30, 2026.