“Material Changes” to a Disclosure Document – What do they mean to Franchisors and Prospective Franchisees?

For franchisors selling franchises in Ontario and Alberta, the law requires that they must provide all prospective franchisees in those provinces with their disclosure document. In preparing its disclosure document, a franchisor must disclose all “material facts” in its disclosure document. As a franchisor or prospective franchisee, you should already be familiar with the definition of “material fact” – but are you as familiar with the franchisor’s obligation to disclose a “material change” once it has given out its disclosure document?

What is a “Material Change”?

The legislation in both Ontario and Alberta define a “material change” as a change in the business, operations, capital or control of the franchisor or its associate, or a change in the franchise system, that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted [Alberta uses the term “sold” instead of “granted”] or the decision to purchase the franchise, and includes a decision to implement the change made by the board of directors of the franchisor or its associate or by senior management of the franchisor or its associate who believe that confirmation of the decision by the board of directors is probable.

So what happens after a franchisor has prepared its disclosure document, ensured that all “material facts” have been disclosed, has delivered it to the prospective franchisee, and then discovers that a “material change” has occurred? What does this mean for a prospective franchisee and for the franchisor?

When does a franchisor disclose a “Material Change” to a prospective franchisee?

A franchisor is required to provide a prospective franchisee with a written statement disclosing any “material change” (known as a statement of material change) to the information in its disclosure document as soon as practicable after the change occurs and in any event before the 14-day “cooling off” period expires. A prospective franchisee should be aware that if a “material change” occurs, a franchisor must provide you with a statement of material change setting out the relevant information.

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