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Buying into a Franchise

If you’ve ever thought about how a chain business can be so successful, you’ve likely turned your mind towards franchises. Whether you’ve thought about buying a franchise, or possibly franchising your own business, you’ve given thought to the finances and logistics of having a second, third, or perhaps even multiple location(s). 

Franchising can be a lucrative way for both the franchisor (the company granting the license) and the franchisee (the owner of the franchised business) to make money. A franchisee likely isn’t buying a business that is untested. Instead, they’re buying into the history, marketing, and goodwill that already comes with an established brand.

Yet there are legal issues that come with owning and operating a franchise that are different than starting your own business, and there are obligations as a franchisor that may be different from a wholly owned business. So how does it all work? Franchise law can be intricate and complicated, but we wanted to provide an introductory primer.

What happens before buying a franchise?

While there is no federal law that governs buying a franchise specifically, Ontario is one of several provinces that has a dedicated franchise law, known as the Arthur Wishart Act (the “Act”). Wishart was an Ontario politician, and a former Minister of Financial and Consumer Affairs, who was very involved in franchise issues during his time in politics. 

It is important to note how the Act defines a franchise.’ Traditionally we think of franchises as brick and mortar locations, like a pizza or a hamburger chain, but the definition is much broader. The Act confers the right to “sell, offer for sale, or distribute goods or services that are substantially associated with a trade-mark, trade name, logo, or advertising…” This creates a much broader definition than just a typical franchise restaurant. This expansive definition could result in you entering into a franchise agreement and becoming subject to the Act, potentially without your awareness.

The Act provides numerous protections for franchisees, including requiring the franchisors to act in good faith throughout the parties’ dealings. Furthermore, the Act allows franchisees the right to form an association or to associate with other franchisees. Perhaps most importantly, it requires franchisors to provide the appropriate financial and general information disclosure to any prospective franchisees, prior to the signing of an agreement to purchase a franchise. 

What is a Franchise Disclosure Document?

Anyone preparing to sign a franchisee agreement is entitled to a comprehensive Franchise Disclosure Document (“FDD”) 14 days in advance of the earlier of the signing of a franchise agreement or any binding exchange of funds. It should be noted that the Act permits the franchisor to receive deposits if said deposit is fully refundable. Franchisors must also supply this FDD with information relevant to Canada. An FDD that is strictly prepared for the US market will not be considered deficient. 

This part is important. If the franchisee never receives a FDD, or does not receive a proper FDD, they may have the right within a certain period of time to pull back from the agreement completely. This also means a return of any money paid for the franchise, to the franchisor or any of their associates. If the franchisor never provided a FDD, the franchisee has up to 2 years to get out of the agreement without penalty. 

To be considered complete, the FDD needs to contain extensive information including:

  • The business background of the franchisor as well as its officers and directors (including their names, relevant prior experience, etc.)
  • Any prior (within the previous 10 years) charges or convictions against the franchisor or its controlling minds related to fraud, or unfair or deceptive business practices
  • Details of any bankruptcy or insolvency proceedings against the franchisor or any associated businesses within the past 6 years
  • Audited financial statements (in an approved form)
  • A description of a franchisee’s exclusive territory
  • A description of the franchisor’s rights to use the trade-mark, trade name, logo, advertising, or other symbols associated with the franchise
  • A list of locations of all franchisees within Ontario (or at least the 20 closest to Ontario)
  • Contact information for any franchisees whose agreement was not renewed within the last calendar year

This is only a partial summary. It is particularly important for perspective franchisors to ensure that they provide full and accurate disclosure in the FDD. The Act is one of the few legislations that will allow a franchisee to pierce the corporate veil and recover damages from directors and shareholders personally. A franchise lawyer can walk you through your FDD to ensure that it complies with the regulations under the Act, and how to evaluate the information that you have received. 

Things to consider when reviewing an FDD

Buying into a franchise as a franchisee can mean that you’re giving your business an incredible head start. However, franchisees need to give serious consideration to all of the items in the FDD before making the leap.  Some of the many considerations include:

  • The rules about exclusivity in a territory.
    • Are there rules in place to prevent a competing franchisee from opening up an identical location down the road? The brand may benefit, but as a business owner that competition can be incredibly challenging.
  • The rules about marketing the business.
    • Is the franchisee exclusively at the whim of the franchisor’s direction, or do they have any creative freedom about how to grow and promote the business?

Whether you’re looking to franchise or looking to purchase a franchise, speaking with the right lawyer is a crucial first step. We’ve helped countless franchises throughout the Cambridge, Kitchener, and Waterloo Regions and would be happy to assist you. Contact us today to set up a consultation.