second edition will, I hope, help future franchisees understand their agreements, and I welcome all comments.
This book will address some of the legal issues that you should be aware of if you are considering “buying” into a franchise. I will try to address the following type of questions:
• Is the initial franchise fee too high for the industry?
• Is the royalty rate within the going rate for the industry?
• What parts of the agreement are negotiable and what parts are not?
• How protected is the “protected” territory?
• Is an “exclusive” territory really exclusive?
• What about sales over the Internet or by mail order?
• Should you or your lawyer spend time negotiating a restrictive covenant or does that suggest to the franchisor that you are not a team player and may be a future problem within the system?
• Is the advertising fund going to be spent predominantly on advertisements in media far away from your franchise where it may not assist your franchise in obtaining customers?
• How can you discover the status of the franchisor’s trade-marks?
• Will you or the franchisor control the lease for the franchised location?
• Will you or the franchisor be responsible for arranging the construction and development of the franchised location?
• What is the personal guarantee and can it be avoided or capped in any way?
• Should the deposit monies under a deposit agreement be held in a lawyer’s trust account until the agreement is concluded?
• Is the franchisor receiving any tenant inducement money from the landlord for signing the head lease, and should the franchisor be entitled to retain any of it for its own account?
• When should you agree to the governing law clause even if it’s not the law of your province?
• Does the franchisor need to give a portion of rebates from suppliers to you?
• How easy will it be for you to resell or renew the franchised business?
• What happens when there’s a US form of the franchise agreement that contains provisions totally inapplicable to business in Canada?
• Will the franchisor have a right of approval (and other conditions that must be met?)
• Will the franchisor have a right to buy the franchised business itself?
• What are the franchisor’s conditions for renewing the agreement?
• What is the effect of the Alberta Franchises Act and the Ontario Arthur Wishart Act (Franchise Disclosure), 2000, on franchising both inside and outside those provinces? What about other provinces with laws covering franchising?
These are the types of practical questions that you and your lawyer must deal with on a regular basis. The answers are both legal and business related. I try to answer them in this book to give you a sense of what is normal and accepted in franchising from the perspective of the franchise agreement and franchise law. That said, readers should note my comments come from the legal side and not the business or accounting side. Other materials written by accountants and other business professionals may assist the reader in the same way that I hope to have done from the legal side. In addition, I do not deal with the laws of Quebec, the Quebec Civil Code, or the uniqueness of the Quebec market in any way. My comments pertain to the common-law provinces only, although some of my observations may apply to Quebec in the most general way.
A few words about that mysterious word “negotiation.” First, in my experience, franchisors rarely, if ever, admit to negotiating their agreements, but they will, if pressed, admit to “clarifying” them or “discussing” them as the circumstances warrant. So if you are dealing with a franchisor without a lawyer, characterize your “negotiations” as “discussions” or “clarifications.” Avoid the “n” word. “N” can stand for “no” as much as it can stand for “negotiation.” (“C” stands for both “clever” and “clarification.”) Spin is everywhere these days. You have to live with it, and spin your words to deal with the circumstances.
Secondly, in my experience, attempting to negotiate, quibble, and nitpick the normal, expected, and standard clauses in a franchise agreement (and even the not so normal ones) may lose the prospective franchisee (and his or her lawyer) a great deal of credibility with the franchisor and its lawyer. The prospective franchisee (and again, his or her lawyer) may not be taken as seriously by the franchisor — especially an established one with a successful concept, a well-respected brand, and many locations — and could well be marginalized to some extent by the franchisor, whose attitude may be accurately reflected as follows: “This is standard in all franchise agreements. Who is this idiot?”
Mind you, if you’re dealing with a start-up franchisor needy of making a sale, with few or no franchised units, a questionable concept, an iffy location, a trade-mark that is pending, or other factors that strike you as unusual or above the usual level of risk you’re prepared to take, then by all means, discuss and clarify your heart out, and live by the maxim, “If you don’t ask, you don’t get.” The franchisor can always say, “This is standard in all franchise agreements. Who is this idiot?” But perhaps the franchisor won’t. You just might find you have more of an edge in these circumstances.
In Part 1 of this book, I discuss the issues surrounding what franchising is and who you are dealing with when buying into a franchise, as well as the topic of master franchising.
In Part 2, I provide a sample franchise agreement similar to the type I’ve prepared for franchisor clients. I’ve created a hypothetical franchisor and business model (Internet café and donuts), and I’ve put some deliberate errors and omissions in the agreement to illustrate mistakes or errors franchisors or their lawyers can make.
The sample franchise agreement is broken down into sections, and below each section there is an explanation. The explanations discuss the sorts of legal and business issues that I would raise if I were reviewing the franchise agreement for a prospective franchisee. I also explain when something is normal and when it may be best left alone, no matter how much the prospective franchisee doesn’t like the clause. Again, if there are factors that strike you as unusual or above the usual level of risk, pick five or six of the best points to negotiate and don’t fiddle so much with the boilerplate. Concentrate, if possible, on the money issues; the deal points. (Know how to hold them and when to fold them!)
Also, know what is unenforceable and what is best left alone (lest you turn something that is unenforceable into something that is enforceable … but against you). I raise some of these issues in the book, but a franchise lawyer is probably a better guide to the terms of your specific agreement.
In Part 3, I discuss the disclosure document. Alberta, Prince Edward Island, and Ontario have franchise legislation that requires the preparation and delivery of a disclosure document that represents all material facts about the franchise to franchisees prior to the signing of the franchise agreement. (In the case of Ontario, this document must be presented prior to signing any agreement relating to the franchise and accepting any deposit money from a franchisee.) New Brunswick has passed legislation similar to that of the other provinces that have regulated franchising, but regulations were not yet in place at the time of
