The world is undergoing an unprecedented economic crisis for this generation. Like all businesses, franchisors are watching events unfold, with a feeling that there is little they can do to turn the tide.
Franchisors who have previously been through tough economic times know that the franchising industry has proven itself to be surprisingly counter-cyclical, as more and more laid off employees look to the acquisition of franchises as their next career move. Some are disillusioned with the relative risk of being an employee, while others have a severance package that they end up using to buy a franchise. As many of these people have never owned their own businesses, they are interested in being in business for themselves, but not by themselves, which is what the franchise business opportunity model is meant to offer.
But instead of sitting on the sidelines, there are some proactive measures a franchisor should consider as events unfold to reduce the risk of claims from franchisees down the road. For instance, does their current franchise disclosure document disclose "all material facts," as it is supposed to under Canadian franchise laws, at the time it is handed out? Specifically, are there new material facts that need to be incorporated into the franchise disclosure document that comment on and update the economic forecast for their industry? While the entire economy is suffering, there are specific sectors that may face greater pressures. In addition, there may be information that is not easily available about a specific industry that a franchisor should be sure is placed before a prospect.
Franchisors should therefore take a serious look at their current franchise disclosure documents so as to consider the changes now necessary to reflect current economic conditions, and thus reduce the risk of a claim from a franchisee at some later time based on a failure to disclose a material fact.
Franchisors who have already provided disclosure to a prospect, but not yet signed a franchise agreement with that prospect, should recall their continuing disclosure obligation under Canadian franchise law to update a prospect regarding any material adverse change. That should be done right away.
Franchisors who are proactive in dealing with their disclosure obligations are ones who will likely find fewer legal claims down the road.