International Law

The Truth About Franchise Attorneys and Due Diligence

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Ben Hanuka, a well respected Ontario franchise attorney, has an article in the Toronto Star about franchising.

"Buying a small franchised business in Ontario is becoming more common than ever. This is not surprising given the benefits of franchising, such as brand recognition, access to an established system, initial training and ongoing support, and many other benefits that a franchisee may receive from a reputable franchisor.

If you are considering, or are in the process of, purchasing a franchised business, you will receive a package of franchise legal documents sometime in the process of your investigation of the franchise.

This package of materials is called a Disclosure Document.

A franchisor is required to provide it to you at least 14 days before you sign any binding agreement in relation to the franchise or before you pay any monies or deposits to the franchisor or its affiliates in relation to the franchise."

The problem with Ben's post is that, while he does a good job of explaining what is in the Disclosure Document, he fails to explain what the traps for a prospective franchisee really are.

Ben writes:

"A franchise agreement will typically contain a clause or a series of clauses that exclude any verbal discussions or verbal representations that you may have had with the franchisor's representatives before signing the franchise agreement.

It is important that you do not rely on any verbal representations if this clause exists in your proposed franchise agreement."

Ben has this as his ninth point, but in fact this is the most important part of pre-purchase investigation.  

Many franchisees will rely upon information that is not consistent with the Disclosure Document, some information which they found out through their own persistence.

But, you cannot legally rely upon anything other than what is in the Disclosure Document unless you have a written addendum to the franchise contract.

This is why pre-purchase investigation is so hard: you only have 14 days to identify the representations in the sales material and compare them with what the franchise Disclosure Document. You need the assistance of a professional, before the 14 day period if possible.

Full post as published by Misleading Advertising Law on October 20, 2008 (boomark / email).