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In addition to the issue of withholdings tax payable on royalties paid to a non-Canadian, there are a few major issues that relate to currency, especially for prospective franchisees currently in negotiations to acquire a U.S., or other foreign-based franchise (Chris Bolin/The Globe and Mail)
In addition to the issue of withholdings tax payable on royalties paid to a non-Canadian, there are a few major issues that relate to currency, especially for prospective franchisees currently in negotiations to acquire a U.S., or other foreign-based franchise (Chris Bolin/The Globe and Mail)

Tony Wilson

What a sinking loonie means for franchising Add to ...

It’s probably true that an 89-cent dollar will make Canadian exports to the U.S. cheaper, and this might result in more manufacturing jobs; particularly in central parts of the country. In addition, those Canadian banks that receive some of their profits in U.S. dollars may also benefit, together with their shareholders.

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The downside, of course, is that imports into Canada from the U.S. – or from anywhere where the currency is expressed in U.S. dollars – will be more expensive. Cross-border shopping and travel, whether for holiday or business, may also have to be rethought.

But what is the effect of the slumping loonie on franchising? Well, in addition to the issue of withholdings tax payable on royalties paid to a non-Canadian (which I addressed in the Globe and Mail in a previous column), there are a few major issues that relate to currency, especially for prospective franchisees currently in negotiations to acquire a U.S., or other foreign-based franchise.

First, if the franchisor is based in the U.S. with franchise and other agreements that require the Initial Franchise Fee, training fees, and other fixed fees to be paid in U.S. dollars, those fees are going to be 10 or 11 per cent higher, making an Initial Franchise Fee of $50,000 (U.S.) roughtly $5,000 (CDN) more expensive than it was a year or two ago. In my experience, U.S. based franchisors aren’t normally inclined to reduce a Canadian’s Initial Franchise Fee simply because our dollar isn’t worth what it used to be.

So you and your franchise lawyer should itemize those fixed fees and costs prescribed in U.S. dollars to get a sense of the real Canadian-dollar cost to you. This information should be available in the form of a table in the Franchisor’s Franchise Disclosure Document; a legal document that must be given to prospective franchisees in Ontario, Alberta, Manitoba, PEI and New Brunswick.

However, if you live in B.C., Saskatchewan, Québec, Nova Scotia, Newfoundland or the Territories, the franchisor is under no obligation to provide such a document to you, so you and your franchise lawyer will have to tally those costs yourself by going through the agreements.

Second, if the franchise agreement, territorial master franchise agreement or area development agreement has a performance or sales quota that must be met in order to keep the franchise rights, and that quota is expressed in U.S. dollars (I’ve seen it!), it may be difficult to meet any quota when a franchisee/master or area developer is being paid in Canadian dollars. Even if you can’t change the currency of the Initial Franchise Fee or other fixed fees, be sure the currency of the performance or sales quota is expressed in Canadian dollars.

Third, if the agreement prescribes that all monthly or weekly royalty payments are to be made in U.S. dollars, (normally paid through electronic funds transfer arrangements between banks), someone will end up having to pay the fees to exchange Canadian dollars in your bank into the U.S. dollar equivalent expected by the U.S. franchisor, and – be warned – it won’t be the franchisor.

Fourth, and probably most importantly, most franchise systems require the franchisee to purchase product from the franchisor or is designated or approved suppliers. Unfortunately, I saw too many franchisees lose their franchise rights, their homes, their savings and their shirts in the 1990s when Canadian franchisees were required to purchase proprietary products and supplies from a U.S. based franchisor (or its supplier) using 69-cent to 79-cent Canadian dollars (depending on the year).

There is nothing untoward about a franchisor requiring the franchisee to purchase from its designated supplier. Franchisors want to ensure their quality standards are met, so they designate a supplier who meets those standards and can actually supply product to an entire franchise system. It may, in fact, be a subsidiary or affiliate of the franchisor.

But franchisors also choose suppliers based upon the volume discounts that the franchisor receives from supplying product to many franchisees, so that – in theory– its cheaper for franchisees to buy through the franchisor than from Walmart or Costco. And of course, franchisors may receive rebates themselves from suppliers that they may (or may not) pass onto the franchisees.

But if the most of the products that a Canadian franchisee is obliged to purchase come from the U.S., a low Canadian dollar means they those products are going to be more expensive to buy and more expensive to sell.

However, if the franchise agreement adequately tackled this currency issue by permitting the Canadian franchisee to purchase the same or similar products from local (Canadian) suppliers in circumstances where the purchase cost (plus freight) charged by the U.S. franchisor/supplier is not commercially reasonable for the Canadian, this will be to franchisee’s benefit. But great care must go in to crafting a “side agreement” that isn’t simply a window dressing and actually allows the franchisee purchase the same or comparable products at competitive prices, thus that protecting the economic viability of the franchisee’s business from the vagaries of fluctuating currencies.

Of course, if the franchisor can’t economically source its products from a local Canadian supplier, or simply won’t do it, Canadian franchisees may well feel the pain of a lower Canadian dollar for the foreseeable future. Some will survive and some won’t.

Mind you, this may give a competitive advantage to franchisors (Canadian or U.S.) that allow for all payments to be made in Canadian dollars, permit all products and supplies to be purchased from local Canadian suppliers, and which generally recognize that to sell franchises in Canada and expand the franchisor’s brand, the currency differential cannot be ignored.

It may well be the most important issue Canadian franchisees must deal with for as long as our dollar is low.

Tony Wilson is a franchising, licensing and intellectual property lawyer at Boughton Law Corp. in Vancouver, he is an adjunct professor at Simon Fraser University (SFU), and he is the author of two books: Manage Your Online Reputation, and Buying a Franchise in Canada. His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.

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