issue, and within a decade I expect legislation to be the norm across Canada.
Part 3 is by no means a legal treatise on disclosure documents. The point is to show you what one might look like so you can look at the one you receive and say, “Oh, that’s why they put that in here!” The Canadian Franchise Association also requires its members to provide similar disclosure documents. Part 3 includes a sample Alberta/Ontario joint disclosure document with explanations similar to what I have done with the franchise agreement in Part 2. I have also strategically placed errors in this document to illustrate mistakes franchisors might make, frighten away copiers, and to otherwise make a point.
As a final note, you wouldn’t give yourself a root canal, would you? You would go to the dentist. That being said, this book is not a substitute for using a lawyer. So even though you might not see the need to use one, I encourage you to hire a lawyer with some experience in franchise law to assist you in all stages of the franchise transaction. Franchise law is a specialty area, and few lawyers have experience in this area.
The Canadian Franchise Association (CFA) is the only national association of franchise systems and service providers in the franchise industry in Canada. They will be able to refer you to a number of experienced franchise lawyers who can provide you with competent advice on acquiring your franchised business or the remedies which may be available to you if things go wrong. The CFA’s headquarters are in Toronto, Ontario, and the office can be reached by telephone at 1-800-665-4232 (or you can find out information from their website at www.cfa.ca.)
I also encourage you to hire an accountant to assist you with structuring the business and tax planning.
Reading this book and using a lawyer (even a franchise lawyer) is no guarantee that you will get the deal you want from a franchisor, and it’s certainly no guarantee that your franchised business will be successful. Success is often a function of many things, including the skills at operating the franchised system and inclination to work hard building the business. (Just because the investment goes sideways does not mean the franchisor is at fault. It may be that you are not the “right franchisee” for this particular franchise or perhaps any franchise at all.)
This book will help you be better informed to make the decision to acquire a franchise. At the very least, it will give you a better understanding of the legal issues surrounding perhaps the single largest business venture in which you might ever be involved. At the very most, it may assist you in spotting problem areas and allow for negotiation of these agreements with the franchisor. Purchasers of this book are invited to contact me for assistance, should the need arise. You can email me at [email protected] or [email protected], or telephone me at 604-684-1800. As I do this for a living, I encourage enquiries from prospective franchisees from across Canada (as long as you appreciate that I do this for a living).
As this book is a general guide, I try to provide general comments and general solutions. I provide anecdotal observations based solely on my own personal experience from years of representing franchisees and just as many years drafting long and complicated franchise agreements for franchisors. When I have to speak about the law or make reference to a statute or legal concept, I will usually do this in my own irreverent and glib style. In doing so, I’ll try to provide straightforward and simple answers, rather than more complicated and consequently more precise explanations that might make the Law Review somewhere or impress a judge. That’s because as a reader of this book, you don’t need the Law Review and you don’t need the latest case law because you aren’t negotiating with a judge. Instead, you will need practical common sense and general advice that will assist you in the process and lead you to ask more informed questions of your franchise lawyer and the franchisor itself. Readers of this book, (some of whom may be lawyers), will appreciate the sacrifices to detail and thoroughness that must come with common sense, brevity, and generality.
Part 1
THE BASICS OF FRANCHISING
1
Understanding Franchising
1. What Is Franchising?
Franchising, or as we sometimes call it, “business format franchising,” can be defined as an ongoing contractual relationship between the franchisor on the one hand and the franchisee on the other. Under the franchise agreement, the franchisor grants the franchisee the licensed right for a period of time to —
• market a product or service;
• use the franchisor’s trade-mark and business system; and
• use the franchisor’s “know-how” in the operation of the business.
In exchange, the franchisee is required to —
• conform to the franchisor’s business system, methods, and procedures;
• maintain the franchisor’s quality standards; and
• pay a fee to the franchisor (which is usually an initial franchise fee and a continuing monthly or weekly royalty).
The franchisor is the entity that grants franchise rights to the franchisee. Although a franchise agreement is different than a lease, you might think of it in lease-like terms in which a “landlord” leases space in a building to the “tenant” for a period of time under a “lease.” In exchange for this right to use the space, the tenant pays the landlord “rent.” When the lease expires or is terminated, the tenant no longer has the right to use the space. During the term of the lease, the tenant must comply with the provisions of the lease and the rules and regulations under it.
Franchising is not entirely similar, but it’s similar enough for our purposes. Instead of the franchisor granting you the right to rent space, the franchisor is granting you the right to use its business system and its trade-mark. In exchange, you agree to pay the franchisor a fee — normally an initial franchise fee and an ongoing royalty based upon a percentage of the gross sales generated by your franchised business. In addition to the initial franchise fee and royalties for the use of the franchisor’s business system, you must also comply with the franchise agreement and with the franchisor’s operating procedures, which is normally set out in its operations manual. Strictly speaking, you don’t “buy” the franchise. You acquire the licensed rights to use the franchisor’s business system and trade-mark for a period of time. When those licensed rights have expired or are terminated, they revert back to the franchisor. The franchisor can, if it so chooses, license the franchise rights to somebody else.
You can see business format franchising in action virtually everywhere (e.g., restaurants, hotels, real estate companies, travel agencies, convenience stores, printing stores, camera stores, tax preparation outlets, cash advance outlets, muffler shops, fast food outlets, and, believe it or not, law firms). All you have to do is visit your local shopping centre or strip mall to see how prevalent franchising has become. In one form or another, you’re surrounded by franchises. In 2004, franchised businesses accounted for the employment of at least 1,000,000 Canadians, so even if you don’t particularly like fast food outlets in your local mall, or relish the thought of yet another muffler shop down the road, you must realize that it’s a phenomenally important segment of our economy. Our standard of living is in part based on the vibrancy of this industry and its ability to create opportunities, livelihoods, and jobs for others.
It must also be remembered
