Canadian franchise legislation creates a highly regulated environment in which to operate. For example, franchise teams and franchise development personnel are responsible for promoting and often explaining to prospective franchisees the franchise opportunity. However, these teams and personnel must operate within the existing legal framework that’s designed to protect prospective franchisees and ensure fairness in a relationship that is inherently imbalanced.

The franchise sales process isn’t simply a marketing exercise. It’s a regulated process with significant legal obligations and potential exposure. Currently, franchise specific legislation is in force in Ontario, Alberta, British Columbia, Manitoba, New Brunswick, and Prince Edward Island, with Saskatchewan soon joining the list of regulated provinces. Although each province has its own legislation and accompanying regulations, the statutory frameworks are generally similar in purpose and function.

Given that the franchisor-franchisee relationship is inherently imbalanced, each province’s legislation requires franchisors to provide a franchise disclosure document (the “FDD”) to prospective franchisees.[1] Section 5(3) of the Arthur Wishart Act (Franchise Disclosure), 2000 for Ontario (the “AWA”) provides that a disclosure document shall contain the following:

(a)   all material facts, including material facts as prescribed;

(b)  financial statements as prescribed;

(c)   copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the prospective franchisee;

(d)  statements as prescribed for the purposes of assisting the prospective franchisee in making informed investment decisions; and

(e)   other information and copies of documents as prescribed.[2]

A central feature of the franchise relationship is the statutory duty of fair dealing.[3] This duty is distinct from the statutory disclosure process and applies to both franchisors and franchisees in the performance and enforcement of the franchise agreement.

In Ontario, for example, the “duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards”.[4] Compliance with the duty of fair dealing requires franchisors to think beyond the specific requirements of what must be included in the FDD. In addition, franchisors must consider what information is material to the franchise opportunity and what a prospective franchisee would reasonably want to know when deciding whether to invest in the business.[5] The obligation doesn’t, however, extend to non-material information, nor does it require constant updates on every development.[6]

The FDD serves as the foundation of the franchise sales process. It’s intended to provide prospective franchisees with clear, accurate, and comprehensive information on the franchised business. Failing to comply with the statutory requirements can result in severe consequences for franchisors, including rescission rights, damages claims, and allegations of misrepresentation.

Given the significant risks associated with delivering deficient FDDs, the education and training of franchise salespeople and franchise development personnel (the “Team”) is of critical importance.

The Team is often the first point of contact with a prospective franchisee, as they communicate and advertise the franchise opportunity. If not adequately trained, they may inadvertently create exposure for the franchisor. Statements made during the sales process with respect to potential earning abilities, operating costs, training, and territory rights carry significant legal risk and should be avoided altogether. Thus, any messaging or comments from the Team must remain closely aligned with the contents of the FDD.

Instead, the Team should refer prospective franchisees directly to the FDD or encourage them to speak with existing franchisees. Even where a representation may appear consistent with the contents of the FDD, the risk of the Team going beyond what the FDD supports is too great, and any deviation could later be characterized as a misrepresentation.

In order to mitigate the risks for franchisors and ensure compliance, the Team should strictly adhere to the three fundamental “golden rules” during the franchise sales process.

Golden Rule #1: Compliance with the mandatory 14-day disclosure waiting period

The first golden rule is that the franchisor must provide a prospective franchisee with the FDD at least 14 days before the earlier of: (1) the signing of any franchise-related agreement; or (2) the payment of any consideration relating to the franchise grant.[7]

This 14-day disclosure period is intended to give the prospective franchisee sufficient time to review the FDD’s materials and assess the risks of investing in the franchised business. This disclosure period requires strict compliance. Courts have consistently held that even minor deviations can jeopardize the enforceability of the disclosure process.

The Team must be trained to understand that no pressure should be placed on prospective franchisees to accelerate the process or execute any agreements, and no money should be accepted prior to the end of the 14-day disclosure period.

Golden Rule #2 – The FDD must be delivered as one single document at one time

The Team should ensure that the FDD is delivered as a single, complete document, whether in physical or electronic form. Where disclosure is provided electronically, it should be delivered as one complete PDF file.

In addition, franchisees shouldn’t be directed to websites or portals to access parts of the disclosure package and follow-up emails containing additional material information (such as leases) must be avoided.[8] Finally, as mentioned above, no representations should be made that aren’t included in the FDD.

Golden Rule #3: Disclosure must contain all material facts necessary for an informed decision

The disclosure document must contain all material facts necessary to permit a prospective franchisee to make an informed investment decision. This includes any information about the business, operations, capital, the franchise system, or control of the franchisor or its associate, that would reasonably be expected to have a significant effect on the value of the franchise or the decision to acquire the franchise.[9]

Any “material change”, defined as a change “that would reasonably be expected to have a significant adverse effect on the value or price of the franchise or the decision to acquire it”, must also be disclosed promptly within the 14-day disclosure window or any such time after until the prospective franchisee signs the franchise agreement or pays any consideration relating to the franchise.[10] It’s worth noting that delays in executing the franchise agreement (after the mandatory 14-day disclosure window) can materially increase the franchisor’s disclosure risk. The longer the period between delivery of the FDD and execution of the franchise agreement, the greater the likelihood that circumstances within the franchise system, the franchisor’s business, or the broader market may change in a manner that constitutes a material change requiring disclosure.

Ultimately, if any information is important enough to be communicated outside of the FDD, it likely qualifies as a material fact and must be formally disclosed within the FDD. This principle becomes particularly important during the sales process, where disclosure issues frequently arise in sales conversations.

A successful Team is naturally focused on relationship building and helping prospective franchisees understand the opportunity, however, well-intentioned sales conduct can quickly create serious legal exposure. The pressure to provide concrete examples (revenue figures from existing locations, cost assumptions, financial models, or even informal “back-of-the-napkin” estimates) is real, and it’s where many franchisors often find themselves in difficulty.

Ontario franchise legislation doesn’t require franchisors to provide earnings projections. However, if a franchisor chooses to do so, the statutory requirements are clear. Any earnings projection must include a statement specifying the reasonable basis for the projection, the underlying assumptions upon which it’s based, and a location where substantiating information is available for inspection. This information must be included in the FDD itself – not communicated separately, not provided informally, and not left to be inferred from a spreadsheet shared over email.

The risk isn’t limited to formal forecasts labeled as “projections.” Courts may look beyond labels and assess the practical effect of the information being communicated. For example, a pre-populated financial model shared with a prospective franchisee, a revenue estimate offered during a discovery day, or a comparison to the performance of an existing location can all constitute a financial performance representation for legal purposes – regardless of how it was characterized at the time. Once that threshold is crossed, the statutory requirements attach, and failure to strictly comply with them can render the FDD deficient.

Franchisors generally have two defensible approaches to managing this risk:

1. Adopt a strict “no earnings claims” policy.

Ensure the Team doesn’t, under any circumstances, provide information that could be characterized as an earnings projection or financial performance representation. This is the most common approach. It requires consistent training, clear internal protocols, and ongoing supervision of sales activity. It’s the simpler path from a compliance standpoint, but it requires discipline across the entire Team.

It can be difficult to sell franchises when Teams can’t point to concrete numbers or even provide estimates of what a franchisee could potentially earn. For any prospective franchisee that insists on obtaining this type of information, the Team should advise the prospective franchisee to consult with accounting experts experienced with the franchisor’s industry.

Franchisors should also direct prospective franchisees to the list of existing franchisees included in the FDD, encouraging them to seek firsthand insight into the day-to-day realities of operating the franchise directly from those already in the system.

2. Include earnings projections in the FDD, prepared in full compliance with statutory requirements.

    

   This approach can be an effective sales tool when done properly, but it requires meticulous preparation, legal review, and regular updating. An outdated projection, or one that omits key assumptions or includes unreliable or misleading data, can be more damaging than no projection at all.

As there’s very limited case law on this issue, courts have not yet fully grappled with what constitutes an appropriate level of disclosure in relation to financial performance representations. This makes any form of earnings claim risky.

Whichever approach is adopted, the guiding principle remains the same: all material financial information communicated to a prospective franchisee must be reflected accurately and completely in the FDD. If it’s important enough to say, it’s important enough to disclose.

The Consequences

The consequences of non-compliance with franchise legislation can be severe. Where the FDD doesn’t meet statutory requirements, the FDD may be found to be materially deficient. Depending on the nature and extent of the deficiency, this can trigger the two-year rescission right. This is available where no disclosure was provided or where the document was so flawed it amounted to no disclosure.

Where rescission is established, the financial consequences for the franchisor are significant. The franchisor is required to refund all monies paid by the franchisee, repurchase inventory, supplies, and equipment at the price originally paid, and compensate the franchisee for all losses incurred in acquiring, setting up, and operating the franchise. It falls entirely on the franchisor to make the franchisee whole within 60 days of receiving the notice of rescission.

Beyond rescission, a franchisee who suffers a loss as a result of a misrepresentation in the disclosure document – including a misleading or non-compliant earnings projection – has a statutory right of action for damages. This right of action can extend well beyond the two-year rescission right time window. The statutory framework is deliberately weighted in favour of the franchisee, and courts have applied it accordingly.

Personal liability is also a very real consideration that’s often underappreciated by those on the Team. Directors and officers who sign the certificate of disclosure are personally exposed as well as individuals making representations to franchisees[11]. Where a financial model or earnings claim was shared by a member of the Team and not captured in the FDD, the individuals who certified the completeness and accuracy of that document may find themselves personally named in litigation alongside the corporate franchisor.

Canadian courts have held directors and officers personally liable in franchise disclosure cases, and the exposure can mirror that of the franchisor entity itself. This risk is not limited to the formal directors or officers of the franchisor. Depending on the circumstances, de facto directors or individuals otherwise exercising significant control over the franchisor’s affairs may also face liability. Similar considerations apply to those who qualify as a “franchisor’s associate”[12] under the applicable franchise legislation.

Moving forward, the Team should be educated on the three golden rules. In addition, the Team should be trained to maintain a file for each franchisee candidate, which should include: documenting all interactions, saving and filing all relevant emails, making notes at every meeting, and keeping a copy of all documents given to the candidate. These files can help reduce potential exposure and liability and ultimately assist with a seamless and rescission-free process.

The practical takeaway for franchisors is straightforward: The Team must be trained to understand that their conversations are not legally neutral. Every material fact, financial figure shared, every comparison to an existing location, and every model provided to a prospective franchisee carries potential legal liability.

The Team must be rigorous, not only in how disclosure is provided to prospective franchisees, but also in the content and information included in that disclosure. The discipline required to manage this risk isn’t a constraint on good franchise development. It’s a prerequisite for it.

Compliance with franchise disclosure legislation shouldn’t be viewed as an obstacle to franchise growth. It’s a framework for sustainable and successful franchise development. Franchisors that invest in proper training, establish clear internal protocols, and ensure that their Team understands the boundaries of the franchise sales process are better suited to minimize legal risks while building strong franchise relationships.

[1] Salah v Timothy’s Coffees of the World Inc, 2010 ONCA 673 at para 26.

[2] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3 at s 5(3) [AWA].

[3] Fairview Donut Inc v The TDL Group Corp, 2012 ONSC 1252 at para 495.

[4] AWA, supra note 2 at s 3(3).

[5] 1250264 Ontario Inc v Pet Valu Canada, 2015 ONSC 29 at para 51.

[6] Trillium Motor World Ltd v General Motors of Canada Limited, 2015 ONSC 3824 at para 243; affirmed in Ken Breau Corporation v Dairy Queen, 2025 ONSC 126 at para 48.

[7] AWA, supra note 2 at s 5(1).

[8] 2240802 Ontario Inc v Springdale Pizza Depot Ltd, 2013 ONSC 7288 at paras 46–47.

[9] AWA, supra note 2 at s 1(1).

[10] Ibid.

[11] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 457-459.

[12] AWA, supra note 2 at 1(1).