We sat down with Cynthia Yang, a corporate and commercial lawyer at Caravel Law focused on franchising and commercial transactions, to discuss the legal issues franchisees need to be aware of before starting their own franchise.
Franchising in Canada is big business. Franchise businesses generate $100 billion in sales annually, and it’s estimated a new franchise opens every 2 hours, 365 days a year across the country. In fact, we have the second-largest franchise industry in the world, outranked only by the US.
And while opening a franchise can be incredibly lucrative, there are a number of legal considerations one should be aware of before they sign a contract.
We’ve taken a look at what prospective franchisees need to know from a legal perspective before they open up shop.
- Knowing your rights under franchise legislation
Six provinces across Canada (Ontario, British Columbia, Alberta, Manitoba, New Brunswick, and Prince Edward Island) have enacted franchise-specific legislation intended to protect franchisees (both prospective and those in an existing relationship) by addressing the often inherent imbalance of power between franchisees and franchisors.
A key obligation placed on franchisors by this franchise legislation is the requirement to provide prospective franchisees with a disclosure document at least 14 days before the signing date of the franchise agreement. The disclosure document must contain all information prescribed by the regulations under the provincial legislation, and is intended to provide a prospective franchisee with all of the information necessary to make an informed decision about whether to make a purchase. If a franchisor fails to comply with its disclosure obligations, a franchisee will be entitled to rescind its franchise agreement within a specific time period, and recoup their investment.
Other important rights and obligations afforded under the provincial franchise legislation include the duty of good faith and fair dealing (which applies to both franchisors and franchisees), as well as the right of franchisees to associate with one another.
It’s important to understand that the rights provided to franchisees under the legislation cannot be waived, and any contractual provisions purporting to do so would be void.
- Understanding and negotiating the details of your franchise agreement
Prospective franchisees who are excited to open their doors often skim over important details of the terms of their franchise agreement.
There are several critical areas to review, including:
- Training and personal commitment: Will you receive any training? How extensive is the training? Will the franchisor provide ongoing support? To what extent will you be required to be involved in the day-to-day operation of the franchise?
- Territory: Will you be provided with an exclusive territory? Will you be required to meet any sales targets to maintain the territory? Can the territory be changed or reduced by the franchisor?
- Non-competition obligations: What are the restrictions on your activities once the franchise agreement has expired or is terminated? Will you be able to stay in the same industry?
- Site selection and development: If there is a physical location for the franchise, who will be responsible for finding the location, negotiating and signing the lease? Will the franchisor develop the site and provide you with a turn-key operation?
- Ongoing expenditures and investments: What are the ongoing costs of the franchise? Could there be substantial surprise expenditures (ex. renovations and grades)?
While some franchisors are open to negotiating the terms of the franchise agreement, other franchisors may not be. Regardless, it is important to have a good understanding of the terms of your agreement so that you know exactly what you are committing to, and whether these terms meet your needs and goals.
- Doing your homework on the franchisor
It’s always a good idea to know who you’re getting into business with, so you’ll want to make sure you do your due diligence on the franchisor before you agree to start your own franchise.
What type of industry experience does the franchisor have? Is there a team of people behind the franchisor? Do they have a track record of success?
While the disclosure document should provide much of this information, it’s also worth speaking with other franchisees (both existing and those who have left the franchise system) to understand what their experience has been.
- Working with a franchise lawyer
The franchise relationship is complex and, in many ways, different from a typical business relationship. It often involves the interaction of a range of legal agreements and various interested parties.
A lawyer experienced in franchising will be able to help you navigate through the decision-making process, as well as the ongoing relationship with the franchisor.
Starting a franchise can be exciting, but like any new business venture, it requires due diligence and an understanding of your legal rights and obligations in order to be successful.
Interested in starting a franchise and need legal advice? Caravel Law is an alternative legal firm with over 90 qualified and experienced lawyers to help support your legal needs. Get in touch with our team to find out more.
The information provided in this article is not intended to be legal advice. Many factors unknown to us may affect the applicability of this content to your particular circumstances.