New franchise rules and laws in British ColumbiaJun 13 2017
As of February 1, 2017, British Columbia has instituted new franchise laws via the Franchises Act, bringing the province into alignment with five other provinces that already have similar acts in place. BC’s Franchises Act was passed in November 2015 by the legislature but did not apply to franchisors and franchisees until this year.
As of February 1, 2017, a BC Franchise Disclosure Document (often referred to as an FDD), must now be given by franchisors to prospective franchisees 14 days prior to the execution of a franchise agreement or any agreement relating to the franchise or payment of consideration in relation to the franchise. The FDD discloses all of the material facts that are related to the franchised business, including but not limited to all fees and costs associated with obtaining the business and the financials of the franchise.
Items of Disclosure in the FDD
The FDD protects the franchisees by requiring the franchisor to provide various items and information so that the franchisee is able to make an informed decision prior to putting any money into the business. All information must be set out accurately, clearly and concisely. It also allows the franchisee to back out of the deal under certain circumstances, such as if the disclosure document was not provided within the time requirements. Disclosure required by the FDD includes:
- Copies of all of the contracts that the franchisee is expected to sign;
- A description of the franchise/business opportunity;
- List of all fees the franchisee pays to the franchisor;
- Details of any litigation the franchisor and/or its affiliates is involved in;
- A list of former and existing franchisees so that the prospective franchisee may obtain more information about the franchise;
- A list of any territory that has been granted;
- Financial statements that have been audited or reviewed;
- Any other material facts.
Under the Act, the franchisee may rescind a franchise agreement without facing penalty or obligation up to two (2) years after entering into a franchise agreement if the franchisor never provided the disclosure document. Additionally, a franchisor is required to provide a prospective franchisee with a written statement of material change as soon as possible should there be any major change in the control, operation, capital or other change in the business, franchise, or franchise system that could be seen to have an adverse effect on the value of the franchise or the franchisee’s decision to acquire it.
In most cases, it will not be a hardship nor an onerous task for existing franchisors to implement the new rules. A franchisor who already sells franchises in Manitoba, Alberta, Prince Edward Island, Ontario or New Brunswick will have already been required to provide disclosure so they will simply need to modify their existing FDDs and add the information required for British Columbia. Franchisors who sell franchises only in BC would not have previously been required to provide disclosure so they will have to retain lawyers in order to create FDDs that are in compliance with the new Act.
In addition to allowing prospective franchisees to be more informed prior to investing, the new Act provides additional benefits, including but not limited to:
- The ability to accept refundable deposits from franchisees should the franchisee find an issue in the disclosure;
- Legal remedies for franchisees if a misrepresentation was made in the disclosure, a statement or material change or as a result of a franchisor’s failure to comply with various aspects of the Act;
- Litigation in British Columbia for franchisees instead of traveling to another province.
The new laws also require franchisors to create financial statements which are review engagement-based at a minimum, rather than ‘notice to reader’ statements.
- A review engagement-based statement is issued by an accountant and provides a moderate level of assurance that the statement conforms to generally accepted accounting principles and requires a moderately detailed analysis and inquiry of the compiled information.
- Conversely, a ‘notice to reader’ statement is also prepared by an accountant, but uses only information available to the accountant and indicates no audit or review engagement has been carried out and the accountant will provide no assurance or opinion.
The ‘notice to reader’ is the least reliable form of disclosure, as it has not been audited or reviewed. A full audit is the most reliable form of disclosure, with review engagement-based statements falling between the two.
The new Act also provides for exceptions and defenses to liability. For example, in the event the franchisor misrepresented a fact and if the franchisee knew about it, the franchisee cannot hold the franchisor liable. A franchisee also has a right of action for damages against the franchisor, the franchisor’s broker and/or associate, and every party to a disclosure document or statement of material change if the franchisee suffered a loss because of a misrepresentation in a disclosure document, statement or material change or by way of the franchisor’s failure to comply with the Act. The Act is a large step toward protecting small business operators that decide to own a franchise instead of starting a new business from scratch.
Sources: Legislative Assembly of British Columbia | Globe and Mail | Ormsby & Mackan Chartered Accountants