When you stop to get a coffee at a local drive-thru, where the brand of the restaurant is highly recognizable, and it has multiple locations set up across the country, chances are that you are dealing with a business that is part of a national franchise network. Franchised businesses are some of the most common businesses that people deal with every day. Franchised businesses include a wide range of business types – such as restaurants, gas stations, grocery stores, convenience stores, service organizations – where the franchisee owner of the business uses the trademarks and system of the franchisor and, in return, pays the franchisor ongoing fees/royalties. The value that these trademarks and systems bring to the franchisee owners, and the dominance of franchised businesses in the marketplace, make franchises highly sought out by people that are looking to own their own businesses.
The relationship between the franchisee and the franchisor will be governed by a franchise agreement, which is a legal contract that sets out the terms of the franchisee/franchisor relationship. As there is typically a substantial power imbalance between the franchisee and franchisor in this relationship (with the franchisor often having disproportionately greater financial resources and negotiating power over the franchisee), the franchisor will most often dictate virtually all of the terms of the franchise agreement.
Across Canada, several provincial governments have recognized this imbalance and have enacted legislation that attempts to promote fair dealing between franchisors and franchisees and make it a requirement that the franchisor discloses to potential franchisees certain details about the franchised business before a franchise agreement can be entered into by the parties. While such legislation can provide some legal protections to prospective franchisees, the substantial terms of the legal relationship between the franchisee and the franchisor as set out in the franchise agreement will still most likely be entirely determined by the franchisor. I also note that in Saskatchewan there is no franchise legislation currently in place to specifically protect franchisees’ interests.
As the franchise agreement is a legally binding contract, a prospective franchisee will need to make themselves aware of the obligations that they will be bound to under the contact – with such obligations having potential long-term implications that may impact the prospective franchisee for years (or even decades). Below are some examples of terms that may be found in a franchise agreement that a potential franchisee should be aware of before signing a franchise agreement:
- Fee for renewal/sale of franchised business
A franchise agreement will often require the franchisee to pay the franchisor in the event the franchisee renews the franchise agreement or sells their franchised business. As well, a franchise agreement will often set out specific terms for the renewal/sale of the franchised business — such as requiring the franchisor's approval for the sale of the business or requiring certain renovations to be done as part of a sale/renewal transaction. These provisions can have a large impact on the value of the business.
- Obligations to renovate/purchase equipment
A franchise agreement can require a franchisee to pay for costly renovations or new equipment purchases for the business. The franchise agreement will often permit the franchisor to dictate to the franchisee whether renovations and equipment costs are required, with the full costs of to be borne entirely by the franchisee.
- Obligations to purchase supplies
A franchise agreement can require that a franchisee purchase its supplies directly from the franchisor or the franchisor’s designated suppliers, at prices determined by the franchisor. This agreement may impact the franchisee’s bottom line, as these supplies may be available from different suppliers at lower-costs and/or higher-qualities.
- Personal guarantees and non-compete provisions
A franchise agreement will often require the individual owners of the business to personally guarantee the obligations of a corporate franchisee under the franchise agreement and require that the individual owners provide non-competition covenants to not compete against the franchisor. These personal obligations may apply to the owners of the franchise even after the franchised business is sold, or the term of the franchise agreement has come to an end.
The above is just a sampling of provisions that can be included in a franchise agreement that can have serious long-term implications on the finances and business affairs of a franchisee and the individual owners of a franchisee. As such, it is important that a potential franchisee has a full understanding of their obligations before entering into a franchise agreement, and to have the franchise agreement reviewed by an experienced lawyer before signing, in order to avoid any potentially unpleasant surprises from the franchise agreement down the road.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.