A franchise disclosure document (FDD) and a franchise agreement are two of the most important documents involved in buying a franchise. However, the differences between the two documents, and when they apply in the franchise buying process, can often create confusion among prospective franchisees, and even franchisors.
It is critical that prospective franchisees understand the difference between these two documents to make a well-informed investment decision.
What is a franchise disclosure document?
The FDD is a comprehensive written resource that is presented to prospective franchisees by the franchisor before the parties enter into a franchise agreement. The FDD contains vital information that serves as a tool for conducting due diligence and is intended to help prospective franchisees make an informed investment decision before entering the franchise agreement.
Broadly speaking, the FDD will disclose detailed information about the franchisor, the franchise system, and the terms and conditions of the franchise opportunity. More specifically, the FDD will include information on:
- the franchisor’s background,
- the franchise system’s history,
- any prior or pending litigation matters and bankruptcy,
- all initial and ongoing fees,
- the territory,
- the intellectual property rights,
- the training programs and other support,
- any advertising requirements,
- any other material facts about the franchise opportunity.
In addition, the FDD will disclose a copy of any agreement relating to the franchise that the prospective franchisee will be required to sign. This means that a copy of the franchisor’s franchise agreement will be disclosed as part of the FDD.
In contrast, what is a franchise agreement?
Unlike the FDD, a franchise agreement is a binding contract that imposes legal obligations on both the franchisor and the franchisee and governs their relationship. Therefore, while a prospective franchisee may be provided with an overview of the franchise relationship in the FDD, as well as valuable information about the franchise system as a whole, the contractual relationship between the parties will only come into force once the franchise agreement is signed. Once the franchise agreement is signed, the prospect will officially become a franchisee. The contractual nature of the franchise agreement as opposed to the FDD is the most important difference to grasp between the two documents.
Therefore, if either party is looking for guidance on the specific terms and conditions of their relationship, or certain rights and/or obligations they have in relation to each other, the franchise agreement will be the governing document.
What else should I take into consideration?
With this understanding in mind, there are a few other key differences worth noting.
- While a franchise agreement is an essential document when buying a franchise, the FDD is not a mandatory document in every Canadian province. To date, only six out of the 10 Canadian provinces have enacted their own provincial legislation to regulate the offer and sale of franchises and the franchise relationship. These provinces include Alberta, British Columbia, Manitoba, New Brunswick, Ontario, and Prince Edward Island. This means that franchisors are only legally required to provide an FDD to prospective franchisees in these six regulated provinces (unless one of the very narrow exemptions apply; consult your franchise lawyer to determine if any of these apply to you). However, in the event that mandatory provincial legislation applies, not only will the FDD itself be a mandatory document but the content and delivery of it must also be compliant with applicable franchise legislation.
- The FDD may contain a receipt page which will be signed by the prospective franchisee to acknowledge that they have received the FDD. However, as mentioned above, the FDD is not an agreement or contract, and therefore signing the FDD receipt does not amount to any legal rights or obligations. It is simply an acknowledgment of receiving the FDD.
- Prospective franchisees should understand that the FDD is not negotiable. Any negotiated changes between the franchisor and the prospective franchisee will not appear in the FDD, but rather in the execution version of the franchise agreement that they are presented with to sign.
As discussed, the FDD and franchise agreement serve distinct purposes. However, they are interconnected and ultimately work in tandem to establish a transparent and legally binding foundation for the franchise relationship.
Sofi Katsovskaia
Associate
Cassels Brock & Blackwell LLP
skatsovskaia@cassels.com