By John Yiokaris and Faye Lucas

"Question Marks, one is green"

 

Deciding to purchase a franchise is a complex process. After researching the business side of the investment, prospective franchisees should carefully review the franchise agreement with their legal advisors before signing it. Many franchisors will tell you that their franchise agreement is standard and non-negotiable, and that may very well be the case; however, you should fully consider the following four key issues before you purchase any franchise.

Franchise fee

In addition to the actual amount of the franchise fee, you should determine if the franchise fee is refundable, and if so, how much will be refunded and under what circumstances. Typically, franchisors will return at least some portion of the franchise fee if a location for the franchise is not found within a certain time period (e.g. six months) or if you do not successfully complete training. If you or the franchisor are unable to secure any sites that are suitable to you, then you should be entitled to a full refund of the franchise fee.

Advertising fund

If the franchise agreement entitles you to obtain annual reports on the advertising activities financed by the marketing fund, you should ask the franchisor for copies of past years’ reports in order to determine the type of marketing that is being conducted and whether it would provide any benefit to you. You should also check the portion of the advertising fund that is spent on administration (a good rule of thumb is that administrative expenses should be no more than 20 per cent of the marketing fund).

Protected territory/Rights reserved

Defining a protected territory in which you will operate can be critically important, particularly if you will be operating a franchise in a highly saturated market. Beyond drawing the borders of the territory on a map, you should carefully consider whether and in what circumstances the territory can be changed by the franchisor, and what sort of exclusive rights you have to operate in it vis-à-vis other franchisees and the franchisor itself.

Required purchases

You should be wary of franchise systems that require you to purchase all of your products, supplies, and services directly from the franchisor or from suppliers designated by the franchisor. Although there are legitimate reasons for franchisors to impose this restriction (e.g. to maintain consistent quality throughout the system), it comes at the cost of your ability to outsource your products and supplies for more competitive prices.

Franchising works best when both parties treat each other in a reasonable and fair manner. Having open and honest discussions with the franchisor about the issues identified above, and ensuring that you are getting into business with a franchisor that respects its franchises, will help ensure that you have entered into a good business relationship.

 

The Experts:

John Yiokaris
Partner
Sotos LLP ©

416.977.3998
jyiokaris@sotosllp.com

Faye Lucas
Associate
Sotos LLP ©
416.572.7318
flucas@sotosllp.com


Adapted from the September/October issue of FranchiseCanada. Check out the current issue of FranchiseCanada, on newsstands now, or you can order your subscription by calling 1-800-665-4232 ext. 224.