Building a network of franchises can allow an entrepreneur to quickly grow its business, but careful consideration should be given to readying your business for franchising. The following steps are not meant to be an exhaustive list, and will focus primarily on the legal considerations for franchising a business.
Understand your business
The first step is to determine whether your business is “franchiseable.” Although there are no legal requirements that must be met to franchise your business, such as a minimum number of corporate locations, you should consider your business concept to be franchiseable if it can be easily replicated by potential franchisees.
To answer this question, identify the key variables that are necessary to successfully run your business, and that a potential franchisee would need to master to replicate your operation. Franchisees will need specific details and advice on how to get their business up and running. This is commonly referred to as developing a “system.”
This step is crucial from both a business and a legal standpoint. From a business perspective, it will help you develop core competencies and operating standards required for your business. Legally, it will help inform the key provisions of your future franchise agreement and related operating documents.
Develop the appropriate corporate structure
Once you’ve concluded that your business concept is franchiseable, you should seek legal and professional advice in establishing the appropriate corporate structure. At minimum, to help isolate yourself from personal liability, you will want to incorporate a legal entity to act as the “franchisor.” You can incorporate either at the provincial or federal level, depending on your business objectives. You may also decide to incorporate a separate company to hold your intellectual property. Seek professional advice to help you establish the most favourable corporate structure for business, legal liability, and tax planning purposes.
Understand the legal requirements
In Canada, franchising is provincially regulated – it is important that you consider the franchise laws in your province of operation. The provinces of British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island have each enacted franchise laws. In addition to specific franchise sale disclosure obligations, these laws impose a general duty of good faith and fair dealing on the franchisor and franchisee.
The Franchise Agreement
The franchise agreement describes the relationship between you and the franchisees. In the franchise agreement, you are granting potential franchisees the right to use your brand, operational model, and access to your support in order to set up a similar business in exchange for a fee and royalties. Franchise agreements are very detailed and cover a multitude of issues such as IP/trademark licensing, product requirements, fee structures, insurance requirements, minimum standards required by the franchisee to operate the business, etc. Your franchise agreement must be in conformity with the law.
The Franchise Disclosure Document
If you wish to grant a franchise in one of the provinces mentioned above, you will have to provide prospective franchisees with a franchise disclosure document (FDD) disclosing all prescribed and “material facts” related to your franchise. The definition of “material facts” varies across provincial legislation, but generally includes any information about the business, the investment or the franchise that would have an impact on the franchisee’s decision to acquire the franchise. An FDD must be provided to a prospective franchisee at least 14 days before either the signing of the franchise agreement or any payments related to the franchise, including a deposit. The franchisor must certify that the FDD includes all material facts and complies with the applicable provincial law.
Failure to provide an FDD or to meet the provincial legal requirements for FDDs and franchise agreements can have serious legal implications for you as a franchisor. The franchisee will have access to several legal remedies, including rescinding the franchise agreement, requiring a refund for all monies paid by the franchisee, and seeking compensation for all losses incurred to establish its business.
Hire a franchise lawyer
Lawyers that specialize in franchise law will be able to advise you of any legal requirements required by the applicable provincial legislation. A lawyer can assist you in drafting comprehensive, compliant, and enforceable franchise agreements and FDDs.
Some aspects that lawyers will advise on regarding your franchise agreement include:
- Pre-contract disclosure (FDD)
- Franchise fees
- Good faith and fair dealing obligations
- Non-compete, confidentiality, and other restrictive covenant provisions
- Terms of agreement and renewal
- Default and termination provisions
- Post-termination covenants
Lawyers can also assist the franchisor with other legal aspects related to franchising, such as: protecting trade secrets, registering domain names, filing trademarks to protect your brand, copyrights, patents, meeting tax requirements, etc.
Once your franchise agreement is drafted and your FDD is prepared, you can now market and sell franchises. Your decision to sell to a franchise should not be entirely based on the fact that the potential franchisee has capital. Franchisees must be committed to not only selling your products or services, but also committed to your brand. To uphold your brand image, as a franchisor, you will need to ensure that prospective franchisees are properly trained on your system and that the terms of the franchise agreement are consistently enforced across your network of franchises.
Your lawyer can also assist you with this step by ensuring that your franchise system complies with all applicable laws and regulations. This includes ensuring that the FDDs are correctly completed and provided to the franchisee at least 14 days before the signing of the franchise agreement or before any type of consideration is given by the franchisee to the franchisor. This will minimize the risk of legal recourse by the franchisee in the future.
Support and communicate with your franchisees
To be a successful franchisor, your franchisees must be your strongest supporters, meaning that they will speak to prospective franchisees about their experience in a positive way. In fact, it is recommended that prospective franchisees talk to other franchisees in the system. They will ask them standard questions such as: Are you happy? Are you making a return on your investment? Are you supported by the franchisor? If you could, would you buy this franchise again?
To maintain a regular and productive dialogue and relationship with your franchisees, consider forming a franchisee advisory council. A franchisee advisory council can be instrumental in facilitating consensus and communicating policies to the broader network. Regular communication and support of your franchise network will help manage both your expectations as a franchisor and the expectations of the franchisee.
Register as a franchisor
While there are no requirements to register as a franchisor in Canada, it is recommended for a franchisor to register with the Canadian Franchise Association (CFA), the only national trade association for franchises in Canada. Membership in the CFA is voluntary, and the CFA provides a list on its website of all members that are in good standing and that adhere to the CFA code of ethics. The CFA provides extensive programming, tools, and resources to new and seasoned franchisors, and serves as a great platform to network and meet other franchisors and service providers in your industry.
McCarthy Tetrault LLP
(Article prepared with assistance from Brianne Pauline, Articling Student, McCarthy Tetrault LLP)