The following article was originally published in Franchise Canada.
Question: As a prospective franchisee, why is it important to hire a lawyer that specializes in franchise law?
The cornerstone of the franchise relationship is at the most basic level is a contract that sets out the parameters of that relationship and manner in which the franchisee must operate the franchised business. Entering into a franchise agreement is a significant legal commitment that requires a careful understanding of both the opportunities and the risks involved. Beyond the franchise agreement itself, there are many other legal elements that a franchisee will be faced with, such as the incorporation of a company, shareholders agreement, lease negotiations, and operational matters, such as employment, permits and licensing, supplier and vendor agreements, etc.
As a prospective franchisee, hiring a lawyer that specializes in franchise law is an important step in becoming a franchisee to ensure that (a) the franchisee has understood the legal commitment that it is entering into by signing the franchise agreement and (b) that it has the adequate legal support to successfully operate the franchised business.
The Legal Landscape of Franchise Law in Canada
In Canada, six (and soon to be seven) provinces have specific franchise legislation in place. This body of legislation is province specific; however, they share a common purpose: to ensure that a prospective franchisee is provided with the information required to make an informed investment decision before purchasing the franchise. In addition, franchise legislation creates a legal framework that governs the relationship between franchisors and franchisees outside of the confines of the franchise agreement.
It is paramount that a prospective franchisee understands its statutory rights and the legal protections afforded to it by the applicable franchise legislation. On the other hand, if the prospective franchisee is located in a province that does not have franchise legislation, then the relationship between the franchisor and franchisee is governed by the law of contract and the prospective franchisee should understand that it cannot avail itself to statutory remedies; therefore, the negotiation of the franchise agreement will become all that more important.
Negotiating Franchise Agreements
The franchise agreement is the foundation of the franchisor-franchisee relationship. This contract outlines the terms and conditions under which the franchisee will operate the business and will affect many aspects of their business, including financial obligations, operational duties, territory rights, and in-term and post-term restrictive covenants.
The franchisor will have a standard form franchise agreement that will be presented to the franchisee. This standard form franchise agreement will have been prepared by the franchisor's lawyer and will contain various protections, rights and remedies in favour of the franchisor.
An experienced franchise lawyer can provide invaluable assistance in reviewing and negotiating the terms of the franchise agreement. While some franchisors may be flexible, others may be more rigid in their terms. A franchise lawyer can help identify (a) contextual factors that ought to be reflected in the franchise agreement and (b) any clauses that are particularly onerous, atypical, or otherwise unfavourable to the franchisee as well as suggested amendments.
Setting Up the Legal Structure for the Franchisee
Prior to the franchise agreement being signed, the first important step for a prospective franchisee is to determine the appropriate business structure for the franchisee. Each business structures has its own advantages and disadvantages, the most common being:
- Sole proprietorship;
- Partnerships; and
- Corporation.
A lawyer with experience in the franchise industry can (a) provide guidance as to the most appropriate business structure, (b) explain the pros and cons to each form of entity, and (c) assist in the creation of the selected entity and ensuring that the jurisdictional requirements for operation are met.
Managing Corporate Governance and Shareholder Agreements
In many cases, franchisees incorporate corporations or enter into joint ventures with others to share the financial burden and operational responsibilities of running a franchise. If multiple individuals are involved in the franchise, it is essential to put in place a comprehensive shareholder agreement. A shareholder agreement outlines the terms of corporate governance, the rights and obligations of the shareholders, and defines the dispute resolution process.
While any corporate lawyer can draft a shareholder agreement, the input of a franchise lawyer is vital, as the shareholder agreement should be tailored to reflect the realities of the franchise agreement, both with respect to the practical operation of the business as well as the limitations and responsibilities of the franchisee under the franchise agreement. For example, the franchise agreement may specify that particular terms are included in the shareholder agreement as it relates to death, disability and transfer, and failure to include such terms would be a violation of the franchise agreement.
Furthermore, any disposition of shares, liquidation of assets, or transfer of the business will be governed by both the shareholder agreement and the franchise agreement. It is important that these two documents work hand in hand to avoid any conflict should such event arise.
Why hire a franchise lawyer?
Franchising offers an exciting opportunity, but it is a serious legal commitment that requires careful planning and expert advice. For prospective franchisees in Canada, hiring a franchise lawyer is essential to navigating the legal complexities of franchise and/or contract law, negotiating fair and beneficial terms in the franchise agreement, and setting up the proper legal and corporate structure for the business. With the guidance of a skilled franchise lawyer, franchisees can protect their interests, minimize risks, and set themselves up for long-term success.
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.
