Up-front legal advice can help you avoid pitfalls down the road.Getty Images/iStockphoto
y the time you're ready to buy a franchise, you have already crossed your "T"s and dotted your "I"s. You have researched your industry, spoken to franchisors, and consulted with family and friends.
Ready to sign? Not so fast. Now's the perfect time to invest in legal advice to help you make sense of disclosure documents and franchising agreements, which can be lengthy and complicated.
"Too many prospective franchisees are penny-wise and pound-foolish. They are not spending money on appropriate advice up front and that's where I see more problems down the road," says Larry Weinberg, a partner at Cassels Brock law firm who specializes in franchise law.
A franchisor must provide disclosure documents to a franchisee at least 14 days before any deal is signed. These documents contain information such as the business background, litigation history, financial statements, required deposits or fees, proposed franchise agreements and restrictions. What the franchisor doesn't have to disclose is how much a franchisee can expect to make.
If the documents contain a mistake or don't follow the rules on timing, franchisees have 60 days to terminate the agreement without penalty. In Ontario, if a franchisor never provides the documents, the franchisee has two years from signing to either walk away from the deal, sell the franchise or demand payment for the loss, Weinberg says.
RED FLAGS
When he receives disclosure documents, Weinberg looks at the quality of the paperwork's presentation. If it doesn't have a professional appearance, that can be a red flag.
"This is a franchisor's primary selling tool and has a lot of mandatory information. Shouldn't it look great as well as have all the content?" he asks.
Weinberg says lawyers tend to focus on the contractual terms, checking that they meet industry standards and that the range of fees is normal, and determining what the renewal rules are.
Chad Finkelstein, a partner at Dale Lessmann LLP, says some franchisors (usually the larger, more established ones) consider their standard terms as set and won't change them. Others, usually newer franchisors, view the contract as a starting point and are open to negotiation. And while he doesn't discourage negotiation, Finkelstein says it's important that franchisors understand there could be long-term consequences, as franchisees talk to each other (and legally are allowed to), and will find out if one got a better deal than another.
Weinberg says a lawyer can offer a lot of practical advice to potential franchisees: "I would ask, 'Have you spoken to other franchisees already in this system and what did they have to say? Are they happy? Are they receiving a level of service and support? Is the franchisor concerned about everybody profiting?'"
According to Weinberg, one thing franchisees often don't understand is that the franchise is a license they have for a long period of time – but not forever. Ten-year renewals are common, and a lawyer can tell if the renewal requirements are industry standard, and if the transfer conditions and fees are reasonable if a franchisee decides to sell rather than renew.
IF THINGS GO WRONG
"I've seen complete disasters, including some franchises that have failed very quickly and everyone points fingers at each other," says Weinberg. A franchisor may claim that the franchisee picked a bad location or negotiated a bad lease, while the franchisee may claim the franchisor wasn't providing enough support.
Litigation should be the last resort, Finkelstein says, and often settlements can be reached. The issue might be resolved by asking the franchisor to provide more training, inspections or advertising. A franchisee might want to band together with other franchisees who are experiencing similar problems to negotiate a solution. In one case, Finkelstein acted on behalf of a group of franchisees to convince a franchisor to put more support in place for them. It turned out that the franchisor hadn't intended to cause problems; he had become overwhelmed dealing with the number of franchisees he had gained.
 ADVICE FOR FUTURE FRANCHISORS |
Business owners who are considering franchising their businesses should give it careful thought, says Larry Weinberg, a franchise lawyer at Cassels Brock (above). “The rules are written for large, sophisticated companies like McDonald’s or Tim Hortons that have an easy time complying with these requirements. These obligations can be onerous on a small start-up… It’s costly to hire the right accountants and lawyers.” To be successful, you need to have a business with an established track record that has been running profitably. And he warns that it’s not a “get rich quick” scheme — there are laws in place to keep out anyone who thinks it might be. “There is a certain liability that arises if you do it wrong. You can’t use a corporation to hide behind,” Weinberg says. Over at law firm Dale Lessman, Chad Finkelstein advises franchisors to conduct background checks, administer questionnaires, hold interviews and determine potential franchisees’ prior business experience. “When a franchisor calls and perhaps has a franchisee that has gone bankrupt in the first few months, I’m always amazed when I ask what his personal net statement worth said, and the franchisor often never asked for one. Or a criminal record comes up. It’s important to vet potential franchisees.” |
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