Have you ever considered buying a franchise? Franchising is a complicated area of law and, like any other investment, involves a high degree of risk. Some franchises work out very well for the franchisees. And some do not. So do your homework before investing.
A franchise is essentially a licence to operate the franchisor’s business system and use its trademark according to the franchisor’s standards for a finite period of time, whether its five or ten years. In exchange for the right to carry on business under the franchisor’s trademark and system, the franchisee usually pays the franchisor an initial fee for these rights, an ongoing royalty linked to the gross sales of the franchised outlet and other fees, such as an advertising fund payment.
Many franchisors go into full swing in autumn, marketing their concepts across Canada. So now is a good time to thoroughly investigate the franchise you are thinking about buying. Here are five major points to consider before buying a franchise.
1. You are not buying the business system, you are renting it. You are simply acquiring the rights to use a franchisor’s business system, trademark and ‘know-how’ for five or ten years. Think of it like a lease. You are ‘renting’ the franchisor’s business system and brand for a time, and when that time is up, it is over. Those rights revert back to the franchisor who can sell those rights to someone else.
2. Renewal and assignment rights are not automatic. Virtually all franchise agreements allow for the right to renew for at least one term, and permit the franchisee to assign the contract. But there are always conditions (and fees) that go along with the exercise of renewal and assignment rights. If you do not meet those conditions, you won’t be able to renew or assign.
3. Be careful of franchise agreements that have not been adapted to Canadian law. Sometimes foreign based franchisors have not adapted their agreements or their disclosure documents to suit Canadian laws. In particular, a U.S. franchisor may not have contemplated the effect of Canadian withholdings tax, a low Canadian dollar, or cross-border supply issues; all which could cost you additional money if not dealt with at the outset of the arrangement.
4. Franchise disclosure document. In Alberta, Ontario, Prince Edward Island, Manitoba and New Brunswick franchisors are required to provide a comprehensive disclosure document to all prospective franchisees prior to the franchisee entering the agreement or paying any money. These are very important documents, because franchisors are required to disclose all material facts. This includes things like litigation against the franchisor or its associates and how much it will cost the franchisee to build out and operate the franchised business. Failure to disclose a material fact that is required to be disclosed in the above provinces might well give you a remedy that allows you to get out of the franchise.
5. Personal liability. If you are going into the franchise contract through a corporation, the franchisor will likely ask for the personal guarantee of all owners of that corporation. Perhaps the guarantee can be capped so that is not open ended or only be given by one spouse and not both spouses who own the corporation.
There are many more important things to consider before buying a franchise, so remember to do your research and always be prepared to walk away.
To read the full article as originally posted on the Globe and Mail “13 Things to Consider Before Buying a Franchise in Canada”, click here. For information about his book, “Buying A Franchise In Canada: Understanding And Negotiating Your Franchise Agreement”, click here.