Purchasing a Franchise – Is it Right for You?

Franchising is a growing trend in Canadian business – a path more and more frequently chosen by new entrepreneurs to launch themselves into business ownership.  And more companies are turning to franchising as a means to expand their existing businesses.  This reflects the incredible growth of franchising worldwide.  Today franchising represents 45% of retail sales and 35% of restaurant sales in Canada - well over $100 billion in sales per year.   Certainly the KW region is part of this trend, with some of the finest Canadian systems originating from this area.

Given the importance of franchising to our business community and the fact that franchise law has undergone recent changes in Ontario, a look at key legal elements of franchising is warranted. 

What exactly is Franchising?
Essentially, franchising occurs when one party (the “franchisor”) develops business methods and related intellectual property and then grants rights to another party (the “franchisee”) to conduct business using those methods/intellectual property.  Typically the franchisor will offer significant assistance such as training, site selection and design, ongoing marketing and product development.  In return, the franchisee will pay an upfront franchise fee, ongoing royalties based on gross sales, and contribute to the pooled advertising fund. 

The classic franchise (called a business format franchise), is also known as a “turnkey” franchise based on the idea that you merely “turn the key” and walk into your new business.  Franchises capitalize on the fact that they are part of a chain. Each outlet looks similar and provides the same goods or services.   Fast food restaurants are a prime example. Customers are drawn to their favourite chain because it is familiar. They recognize the restaurant immediately, know exactly what will be served and feel confident that the quality of product will not vary.

What are the Benefits?
Ideally, franchising is of benefit to both the franchisee and the franchisor.  A franchisee expects to obtain the identity afforded by the chain; pooled advertising and the system’s profile help it to reach more people than it could ever contact alone.  The franchisee obtains a proven business concept with an established network of suppliers.  It gets initial training and the franchisor’s ongoing support.  For many, the key point is that while they enjoy such assistance, they remain independent businesspersons.

Franchising is attractive for franchisors because it is an efficient way to expand rapidly – the franchisees pays all costs of site construction.  Furthermore, since the franchisees are independent operators, they bear responsibility for employees and operating liabilities. After the franchise term has expired, the franchisor may retain the business (if it owns the property or has the head lease). 

Finally, since the franchisees are business owners, they instill entrepreneurial drive. The resulting profitable operations should benefit all. 

What is Ontario’s Law governing Franchises?
Until quite recently, the only province with specialized franchise legislation was Alberta.  Now, however, Ontario has a franchise law called the Arthur Wishart Act.   The fundamental requirements of the Arthur Wishart Act are:

1.  Disclosure
Franchisors must provide a disclosure document to each prospective franchisee at least 14 days before any related agreement is signed or any monies are paid (subject to a narrow exemption).

• All material facts must be disclosed, including a detailed list set out in a Regulation.  
• Material changes must also be disclosed.  
• If disclosure is late, the franchisee may cancel the agreement within 60 days of receiving the document.  If no disclosure is given, the franchisee may cancel up to 2 years after entering the franchise agreement.  
• Upon cancellation the franchisor must refund all money received.  It must also buy back inventory, supplies and equipment, and compensate for other losses.
• The franchisee may also sue for damages (including the right against every person who signed the disclosure document) if there’s been a misrepresentation or failure to comply with the disclosure obligations. 

2.  Fair Dealing
 Both parties have an obligation of fair dealing; they must act in good faith, in accordance with reasonable commercial standards.

3.  Freedom to Associate
 The franchise agreement must not prohibit the franchisee from forming or joining any organization of franchisees, or from associating with other franchisees. 

Practical Matters
While the Arthur Wishart Act is certainly intended to protect the franchisee as weaker party, it is not (and was never expected to be) a cure-all for the downside of this industry. 

If you are a franchisee in one of the minority systems that doesn’t comply with its obligations, the remedies provided by the Act cannot prevent the anxiety, stress and expense of rescission (cancellation) and suing for damages.

That is why anyone entering into a franchise relationship is well advised to take their time, do their research and fully understand what they are getting themselves into.  A thorough evaluation of the franchise opportunity will involve research into the franchisor and its business as well as discussions with broad samples of both existing and former franchisees.  Third parties such as the Canadian Franchise Association and the Better Business Bureau may help to give insight. 

Once disclosure documentation has been provided it is imperative to review this barrage of information thoroughly, with experienced accounting and legal counsel.  Franchising is a specialized industry and the implications of not understanding all of the provisions (and how they interact) can be ruinous. Avoiding these pitfalls with due diligence can help set you on the road to a profitable future as a franchisee.

On-line resources:
For more information, visit

Canadian Franchise Association - Get details on “The Franchise Show”, coming February 6 - 8, 2004 to the Toronto Congress Centre on this site dedicated to ethical franchising practices, www.cfa.ca

Better Business Bureau of Midwestern Ontario - http://www.bbbmwo.ca

World Franchising – Offers a free, brief on-line course to guide you through the steps of deciding on a franchise, http://www.worldfranchising.com/university.htm

Canadian Business Franchising Magazine – web site for a magazine devoted to Franchising in Canada,  http://www.cgb.ca

This article supplied by:
Liisa Kaarid, Lawyer
Borden Ladner Gervais LLP
303 - 508 Riverbend Dr.
Kitchener, Ontario  N2K 3S2
Ph:(519)741-9100, ext. 232
lkaarid@blgcanada.com
www.blgcanada.com

Free Seminar by Liisa Kaarid
Legal Aspects Of Franchising:  Doing It Right
Thursday, January 22, 2004
7:30 am to 9:30 am
The seminar will focus on essential aspects
of Ontario franchise law for both
Franchisors and Franchisees.
Click here for details and registration form