Franchises are an attractive business model in Canada, and with good reason: franchisees can start their own business with the added comfort of working within a proven operating system and utilizing the goodwill of a recognized brand. Franchisors are required, by law, to provide potential franchisees with a comprehensive package of disclosure documents prior to entering into a franchise agreement. So, before franchisees sign on the dotted line, they should review these documents, not only to familiarize themselves with their ongoing rights and obligations under the franchise agreement, but to familiarize themselves with the nuances of the specific business model of the franchise system. Often, these important issues include:
Training
Most franchises offer potential franchisees the opportunity to train and prepare for success. The skills and know-how required to operate the franchise often come from hands-on experience and training provided by the franchisor, typically at an off-site location. It is important to review the franchise agreement to understanding the initial and ongoing training provided to franchisees. If the agreement is silent on training, potential franchisees should seek out details, along with an understanding of anticipated costs and travel expenses. Often a franchise agreement requires that potential franchise owners not only attend training, but that they also bring certain key employees along. Generally, franchisors provide initial training, and in many cases mandate ongoing training to allow for upgrading management and operational skills. It is advisable to ensure those rights and responsibilities are detailed in the franchise agreement.
Time Requirements
Franchise agreements often require franchisees to devote their full time and attention to operating the business. Therefore, if a prospective franchisee plans to run the franchise as a passive investment or side venture, they must ensure the franchise agreement accommodates this type of arrangement.
Marketing
Another benefit of franchising is that franchisors may develop and implement large marketing campaigns that reach a large audience. The franchise agreement will often set out the national and local campaigns in which franchisees must participate and contribute. If the agreement provides limited detail, additional information should be requested, including anticipated costs. Franchisees are also generally expected to engage in local self‑promotion, making it important to understand the related obligations and any restrictions on permitted activities or marketing initiatives within the applicable territory.
Location/Territory
Are you considering opening a new franchise in a city where the brand doesn’t yet have a presence? This can be a great opportunity to establish goodwill and build recognition across a large area. However, it also raises an important question: what happens if someone else wants to open a second location in the same city?
A franchise agreement should clearly set out the exclusive territory in which the franchisee is permitted to operate. Even with an exclusive area, a franchisor can still place another franchisee just outside another’s boundary. As a potential franchisee, make sure you are comfortable with your territory and what it might mean if another franchisee operates nearby. You should also review any rights the franchisor retains within your area, including those related to online sales completed directly through the franchisor’s website.
Final Thoughts
The above topics are just a few key elements to review in a franchise agreement. Ultimately, franchising can be a lucrative but complicated business model to pursue. There are many considerations to weigh, which is why surrounding yourself with trusted advisors can be invaluable as you engage in franchise discussions. It is also good practice to visit existing franchise locations and speak with current franchisees to gain insight into their experiences. The more informed you are about entering a franchise system review (and related negotiations), the more prepared you will be to succeed.
This blog post was written by Colton Allen, a member of the Business Law team. Colton can be reached at 613-566-2073 or at [email protected].
