loans to be made to corporations, even though the borrower may be borrowing the money in his or her personal capacity for an inexpensive franchise. The bank’s lending policies may require that the loan originate from its commercial loans department, rather than from the personal loans department (the latter handling your mortgage or car loan).
The commercial loans department makes all of its loans to corporations; so they normally require you to be incorporated because that’s what the department is streamlined to do. The bank’s own internal policies may dictate that you have to use a company so that it can loan to your company.
Sometimes, the franchisor will require the franchisee to be a living, breathing person (or persons), not a company. However, the “individual” franchisee will be permitted to assign and transfer the franchise agreement to a company that he or she personally owns. This is one way the franchisor can obtain a personal covenant, like a guarantee, where a living, breathing person (and not an inanimate entity like a corporation) signs on the dotted line and puts themselves personally “on the hook” for any money owing to the franchisor.
7. Your Personal Liability
Some franchise agreements will be drafted such that a corporation that you have created is in fact the “franchisee” under the franchise agreement and that the obligations of your corporation under the agreement are guaranteed by you in your personal capacity. In other words, you, as guarantor, will be called on to pay the obligations of your company under the franchise agreement if your company doesn’t pay.
Other agreements are structured in reverse. That is, you are the individual with whom the franchisor is principally dealing and you are entitled, after execution of the franchise agreement, to assign your interest to a company that you own. In this way, you (being the individual who signed the contract in your personal capacity) will still be personally liable for the obligations of the corporate franchisee if your company fails to pay its obligations to the franchisor, but you are allowed to run the franchise through your company for tax and related reasons. Indeed, through a company you may reduce your exposure and liability to third parties. But as you originally entered the franchise agreement personally, you are still personally responsible even though you “assigned” it to your company.
Still another form of structure gaining some popularity is one in which both you and your company are collectively referred to as the “franchisee.” Remember, your company is a separate legal personality, just like you are. Here, you and your company are on the hook: your company is the franchisee but you are also the franchisee (e.g., Mr. Smith and Smithco Ltd. both signed on as franchisees and are each liable to perform their covenants and obligations under the agreement). It’s done because there are defences available to guarantors at law that might not be available to franchisees who entered the agreement in their personal capacitates. The franchisor could bring an action against you as “franchisee” or your company as “franchisee,” and it would probably bring an action against both of you, on the basis that if your company has no money, you might.
Other agreements have far more ephemeral language. They don’t refer to the guarantor of the agreement being a guarantor. Instead, they refer to the person signing the agreement in his or her personal capacity as “associate.” Whether they are called “associate” or otherwise, generally, if someone signs a franchise agreement in his or her personal capacity (i.e., using his or her personal name), he or she will be personally bound (giving credence to the old legal adage “you sign it, you eat it”).
Obviously, as a prospective franchisee, you should consider speaking to an accountant or tax lawyer about possible tax consequences in respect of each form of organization.
7.1 Spouses as “franchisee”
All too often spouses who jointly own the franchisee corporation and jointly guarantee the obligations of the corporation, or the husband and wife jointly sign as “franchisee” in their personal capacities.
Given that not all such business opportunities succeed, would you, as a prospective franchisee, really wish to have your spouse exposed to this potential liability? This is especially so where only one of you will be actively involved in the franchised business. In other words, if a guarantee or personal covenant is required, must both you and your spouse take on the potential exposure? Or should only one of you be the covenanting party, taking the risk and being prepared to take the loss; the other party being shielded from such loss?
Too often, one spouse, even with independent legal advice, signs a franchise agreement as guarantor, co-franchisee, or associate, but has minimal or non-existent involvement in or knowledge about the management of the business. A failed business means both parties are subject to possible execution against their personal assets, which may include the family home and perhaps retirement savings. So perhaps only one spouse should give the guarantee or personal covenant. In these circumstances, it’s worth clarifying with the franchisor.
Finally, in respect of a personal guarantee or covenant, is it possible to “cap” the exposure at a limited amount of money or a limited number of months worth of royalties? This is also worth discussing with the franchisor.
8. Does the Franchisor Own the Trade-marks?
Does the franchisor own the trade-marks? You can check this relatively easily by performing your own “bare bones” trade-mark search at the Canadian Trade-Marks Database, which is maintained by Strategis: http://strategis.ic.gc.ca/cipo/trademarks/ search/tmSearch.do. Or simply put CIPO into a search engine and it will direct you to the Canadian Intellectual Property Office, where you can find the trade-marks page. This website contains a lot of useful information on matters dealing with the federal government, but the most important matter here is that the site maintains a database for all registered, expunged, current, and pending Canadian trade-marks.
Enter the name of franchisor’s trade-mark in the search engine and assess from the results whether the mark has matured to registration or whether it has been applied for only (meaning the examiner at the trade-marks office is still assessing the trade-mark application and its potential for registration). You can also check if the mark has neither been applied for nor registered.
Note that Strategis Canadian Trade-Mark Database searches are not always foolproof or perfect. Garbage in will yield garbage out, so make sure you enter the trade-mark accurately. Also, the search engine has limitations, chiefly the fact that it finds “dead hits” but rarely does it find phonetic or visual equivalents (e.g., easy vs. EZ or Pharma vs. Farm).
If the mark has not matured to registration, meaning it does not have a registration number with initials (the initials are almost always TMA) immediately preceding the number, it is possible that the mark might not be approved or might be opposed by an interested third party (usually the owner of a similar mark). This might cause the franchisor to have to pick another mark and “re-brand” the franchise at some late (and more inconvenient) time. Re-branding can create confusion in the system and necessitate a change of signage, advertising, and other branding identifiers.
It is important to consider what will happen if the franchisor does not have a registered trade-mark at the time you acquire the franchise rights and if the franchisor might not ever be able to secure the trade-mark. It might be prevented from ever obtaining the trade-mark that you think you’re getting the right to use. The question to ask yourself is, “Is it worth all that money for this franchise if the franchisor can’t legally license me its trade-mark and brand?”
If you are still considering signing the agreement, then ask yourself this: “Who pays for re-branding if the mark, and all that goes along with it, has to change?”
In
