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There are two documents that are of vital importance when you join a franchise as they dictate the terms and conditions that you are agreeing to when joining said franchise. These are the Franchise Agreement and the Franchise Disclosure Document. These documents are designed to help you make an informed decision, clarify points of legal interest, and create a legally binding framework with which you must abide.
Each document functions in a slightly different manner, and it is crucial that you understand both of them and what they represent before you sign. If you have any concerns, you should raise these with your proposed franchisor at the earliest opportunity and seek legal advice from a lawyer who specializes in franchise law.
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Franchise Agreement
A franchise agreement is a contract that details the legal obligations of both the franchisor and franchisee. Once this document is signed, both parties will have entered into a legally binding agreement with defined terms and conditions, rights, obligations and liabilities.
The Franchise Agreement is the document that governs the relationship between the franchisor and their new franchisee, and it will be used in the event of any dispute or disagreement. All franchisors are mandated by law to ensure that their franchisees sign a franchise agreement before they begin trading.
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Franchise Disclosure Document
A Franchise Disclosure Document is typically provided to prospective franchisees before they sign a Franchise Agreement. This document is designed to help prospective franchisees make an informed decision about whether or not to proceed with joining the franchise.
These documents are mandated in Alberta, British Columbia, Manitoba, New Brunswick, Ontario, and Prince Edward Island. However, it is best practice for all franchisors to issue a Franchise Disclosure Document, regardless of their location or that of their prospective franchisee.
This document provides the background and history of the franchise and information about the franchisor. It also details any previous or ongoing litigation matters, the fees associated with the franchise, the intellectual property rights that the franchisee would acquire, the support and training available to franchisees, and any other material facts deemed important.
A draft Franchise Agreement is usually provided as an addendum to a Franchise Disclosure Document.
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In conclusion, although the Franchise Agreement and the Franchise Disclosure Document are interconnected, they serve different purposes. To be effective, they must be transparent, coherent and entirely aligned to ensure that no gray areas exist that could lead to misunderstandings and disputes.
