Franchising in Canada

It’s hard to visit any major street or shopping centre in Canada these days without seeing many franchised businesses operating from every corner.  Whether it’s bagels or burgers, fast food or fast lubes, franchising as a means of doing business is firmly entrenched in Canada as a means for entrepreneurially minded business people to embark on their own business while being a part of a larger organization.

A franchise is essentially a licence to operate the franchisor’s business system and trademark according to the franchisor’s standards for between five and twenty years, depending on the franchise.  In exchange for the right to carry on business under a trademark such as “Cookies By George”, or "White Spot", the franchisee usually pays the franchisor an initial franchise fee for these rights, plus an ongoing royalty linked to the gross sales of the franchised outlet.  There is often a requirement for the franchisee to make regular contributions to a national advertising fund as well, so that the franchisor can advertise the brand in high cost media like radio, TV and national newspapers/ magazines. 

Additionally, the franchisee either constructs and develops the premises itself (and at its cost), or buys the constructed premises on a “turnkey” basis from the franchisor.  Either way, there are dollars at stake, and "buying" a franchise could be the single largest business investment a person might ever make in their lives.

Franchisors are essentially selling three things:

1. the value of its recognizable trademark and brand;
2. the know-how associated with the franchisor’s business system (and being able to teach that know-how to the franchisee); and
3. the lower unit costs that come with the purchasing power of a large buying group.

Legally, franchising is very document intensive and it is important for the prospective franchisee to understand what he or she is signing. 

At Boughton, we have over 20 years experience in franchising. We act for some of Western Canada's most successful franchisors and regional master franchisees. But we also act for prospective franchisees as well.

If you are a prospective franchisee, hoping to acquire a franchised business, here are a few legal matters you  should keep in mind, and which we at Boughton can help you with:

• No matter what is advertised about the merits of franchising and how franchised businesses are normally more successful than non-franchised ones, just because the business is "franchised" is no guarantee that you will be successful.
• Has the Franchisor complied with Disclosure Legislation required under the laws of Alberta and Ontario? Because we draft these documents for our franchisor clients, we are ideally suited to reviewing them for franchisees.
• Some U.S. based franchisors don’t “Canadianize” their agreements.  These U.S. agreements can contain U.S. legal concepts not directly applicable in Canada.  Canadian concepts, such as GST and PST are also omitted. Is the price to be paid for the franchise rights in Canadian or U.S. dollars? It will be a problem to pay the initial Fee and the royalties in U.S. dollars if you are collecting money in Canadian dollars. We can help alert you to some of these problems and deal with the franchisor on them.
• If the franchisor is developing the premises itself, it sometimes receives cash inducements from the landlord.  Does the franchisee share in these inducements to any extent?
• Does the franchisor own or control the trademark?  (Certainly a Certificate of Trademark Registration issued from the Canadian Trademarks Office will normally deal with this issue.) As registered trademark agents, we'll check on the franchisor's trademark status as part of our review.
• Are other franchisees in the system content and “making a good living”, or is there litigation between the franchisees and the franchisor? 
• Prospective franchisees should get a list of all franchisees in the system and talk to as many as possible. Ask them these questions:

1. Are you happy in this franchise?
2. Are you making any money?
3. Would you buy into the franchise again knowing what you know? 

• Should both the husband and the wife of a “ma and pa” franchise personally guarantee the franchise and the lease, or should only one party take on that risk? Can you minimize your exposure under a guarantee by limiting it to a fixed amount?
• What assurances are there that the products for sale by the franchisor can be bought by the franchisee at competitive prices?
• Will the franchisee lease the premises directly from a landlord, or sublease from the franchisor?

Other issues which we can advise you on include matters such as:

1. Is the initial franchise fee too high for the industry?
2. Is the royalty rate within the going rate for the industry?
3. How protected is the “protected” territory?
4. Is an “exclusive” territory really exclusive?
5. Is the advertising fund going to be predominantly spent on advertisements in media far away from the Franchisee (where it may not assist the Franchisee at all in obtaining customers)?
6. Who will control the lease for the franchised location, the Franchisor or the Franchisee?  Who will arrange for the construction and development of the franchised location?
7. What if the Franchisor is building out the location but the location isn’t open in a timely manner?
8. Is the Franchisor receiving any tenant inducement money from the landlord for signing the head lease, and should the Franchisor be entitled to retain it for its own account?
9. When should you agree to the governing law clause, even if its not the law of your province?
10. What portion of rebates from suppliers should the Franchisor direct back to the Franchisees?
11. What is the extent of the Franchisor's discretion or right of approval? 
12. How easy will it be for the Franchisee to resell or renew the franchised business?
13. Does the U.S. form of Franchise Agreement contain provisions totally inapplicable to business in Canada, and if so, what can be done about it?
14. Will the Franchisor have a right to buy the franchised business itself?
15. What is the term of the franchise agreement, and what rights of renewal will the Franchisee have?
16. What is the effect of the Alberta Franchise Act and the Arthur Wishart (Franchise) Act of Ontario on franchising both inside and outside those provinces?

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