Franchise Legal Counsel Matters

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Franchising is often referred to as a mutually rewarding relationship between franchisors and their franchisees. While this is true, the franchise business model is also built upon contracts and other documentation, which makes the relationship that much more complex. Luckily, there is help for prospective franchisees in wading through the paperwork and fully understanding the rights and obligations of the franchise relationship that are outlined within.

Franchise lawyers are well versed in the ins and outs of the franchise business model. It is vital for prospective franchisees to fully understand all documentation involved in their franchise investment, particularly the disclosure document (a comprehensive summary of pertinent information about the franchise system, its officers, finances, etc.) and the franchise agreement. As a potential franchisee about to invest your time, effort and money, you’ll want a complete understanding of the relationship you’re about to enter into. This is where an experienced franchise lawyer comes in.

“Fundamentally, it’s a legal relationship. Franchisees are signing a contract that lasts for years and are investing significant amounts of money. It’s absolutely fundamental for them to know what they’re getting into so they can make an informed decision,” says Ned Levitt, a franchise lawyer and partner at Dickinson Wright LLP.

“Franchise agreements are complicated documents. Prospective franchisees may be able to understand the basics, but it’s harder to pick up on the nuances,” says Michael Melvin, a franchise lawyer and associate at McInnes Cooper. “It’s very much in their interest to sit down with a lawyer and go through it together.”

Though there are some common features found in franchise agreements, these can vary from franchise system to franchise system, and from franchisee to franchisee. Today, some provinces have franchise legislation that prescribes the information that franchisees must receive prior to signing on the dotted line. This is just one of the reasons why retaining a lawyer who has experience with the franchise business model is a wise choice.

“The whole area of franchising has grown to a highly specialized area of law, with its own complexity, history of case law and new decisions and interpretations coming every day,” Levitt says. “You can’t play with it lightly.”

So, where can you find a franchise lawyer? “The CFA website is an ideal starting point, as it has information on a lot of law firms from different parts of the country that all specialize in franchising,” Melvin points out. Prospective franchisees can find a lot of the information they need online, through sites like the CFA’s online directory of franchise support services members (https://www.cfa.ca/SupportCategories). Although the internet is a great source for some initial inquiries, prospective franchisees should speak and meet with lawyers first before retaining one.

“Shopping around is quite appropriate in this instance,” says Levitt. He’s also a firm believer in meeting with prospective clients face to face. “Over the phone just doesn’t work as well as in person.”

When selecting a lawyer, there are a few things potential franchisees should consider. Look at the lawyer’s experience – have they dealt with the franchise you’re interested in before? How often have they acted for franchisors and franchisees? “Someone with experience is going to have a mental list in their head to tick off as they review the documentation,” says Melvin, “and then they can highlight anything out of the ordinary or potentially dangerous.”

Fees are another area that should be examined, though Levitt offers a word of caution on this point. “People sometimes get too focused on the fees instead of looking for quality,” he explains. “The more being invested, the more quality they should look for. Franchisees should be comfortable with the budget and the timelines involved.”

As the lawyer and client are going to be working closely together, “Personality fit is important but even more so is going to a lawyer who understands you, your goals and your financial situation,” Melvin says. A balanced working relationship is the goal.  “Don’t get ‘the best lawyer;’ get the best lawyer for you,” advises Levitt.

Once everyone is comfortable, the next step is taking a close look at the franchise. “One thing I look at is its growth. How many franchises have they sold over the last few years and how are they supporting them?” says Levitt. “I also want to know if clients have spoken with other franchisees in the system and what was said. It’s these ‘tracks’ that you have to follow to find out if it’s a good opportunity.”

A large part of examining the franchise system is reviewing its disclosure documents and agreements. Clients are advised when meeting with their franchise lawyer to bring in everything that they are being asked to sign, from the franchise agreement itself to any leases or other contracts. Usually these are standard documents, but each should still be looked at. It’s also important for some documents, such as the franchise agreement and real estate lease, to be examined together. “These documents often interrelate so I need to see both to get the whole picture,” says Melvin. For instance, if the length of term for one does not match the other, he notes, that might be something that needs to be amended.

Melvin explains that the lawyer is looking for two main things. “The root questions are: what are the franchisee’s obligations, and what is the potential risk?” he says. “Franchisors want franchise agreements to have flexibility and that makes it murkier for franchisees. Lawyers can nail things down to more objective standards.”

If, upon review, everything is in order, the franchisee signs on the dotted line and moves forward with establishing their franchise location. Does this mean it’s the end for their relationship with their franchise lawyer? Yes and no, say the experts. “By and large, once the agreement’s signed, it’s the end in that respect,” Levitt explains. “But once we’ve established a good relationship, clients often later come back if they have more legal work, like if they want to incorporate their business.”

Melvin agrees that when incorporating your business in a franchise environment, it’s again a good idea to work with a franchise lawyer. “You need to comply with the franchise agreement when you incorporate or you could inadvertently breach it.”

Having an experienced franchise lawyer on your team is an asset both during and after your franchise investigations.