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Franchising. Business Background. (Tashatuvango/Getty Images/iStockphoto)
Franchising. Business Background. (Tashatuvango/Getty Images/iStockphoto)

Tony Wilson

Why franchise consultants shouldn't be drafting your disclosure documents Add to ...

As a lawyer, I'm often asked to do work that isn't, strictly speaking, “legal work.”

Rather than pretend to be an expert in a field I'm not trained in, I often direct my clients to accountants, business valuators, advisers and franchise consultants. This is especially true in cases where clients are starting to franchise their businesses, and may need a significant degree of business advice in addition to legal advice.

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One of the first problems a first-time franchisor generally encounters involves trademarking the business. The client may have discovered – the hard way – that the name they want to trademark isn't available because a search reveals a confusingly similar name that pre-date's their use of the trademark.

In such case, the client runs the risk of facing an uphill and legally expensive battle; one which might well be lost if the other party has used the trademark first for essentially the same goods or services. If the trademark isn't available, or the costs of trying to register the mark far outweigh the benefits, the client may need to re-brand.  Frankly, the exercise of re-branding should not be left to lawyers. Branding specialists, have the best skill set for the job.

Likewise, unless your lawyer has a business or accounting degree, start-up franchisors shouldn’t ask their lawyers to help with business plans.

Nor should they be directly involved in the franchise sales process. There are several Canadian franchise consultants who are more than capable of providing franchisors with business planning, marketing and other franchise-specific consulting services. The Canadian Franchise Association (CFA), for example, has a list of their members who are more than qualified to take on the task of providing franchise specific consulting services to franchisors. If the franchise consultant you’re considering retaining isn’t a member of the CFA, however, I’d ask why and do some further homework on the consultant.

Franchising requires that the franchisor impart expertise, know-how and the fundamentals of its business system to its franchisees. This means that the franchisor must prepare comprehensive policy and operations manuals. Such manuals are best left to consultants and other professionals with expertise, rather than lawyers, whose skill sets lie elsewhere.

However, there are some franchise consultants who will prepare some or all of a franchisor's legal documentation such as franchise agreements, trademark license agreements, subleases, and indeed, franchise disclosure documents (FDD’s) and will charge the franchisor for these services. While I have no problem with non-lawyer consultants giving business advice,  preparing operations manuals, advising on sales or marketing, or offering branding advice,  I do take issue with consultants providing legal advice and charging for it. They shouldn’t be doing this.

First and foremost, these consultants aren't legally trained and what they’re doing is providing legal advice without being lawyers. In other words, they’re pretending to be lawyers. They don't have to know the potential effect of recent case law or legislative changes in the area, so they don’t have to keep up with the law the way the rest of us do.

Moreover, there’s no professional body that regulates franchise consultants the way lawyers are regulated. There’s no one to discipline them for incompetence or professional misconduct. If a lawyer acts improperly (for example, improperly utilizing funds he or she is holding in trust), the lawyer can be disciplined and this can lead to suspension or disbarment. There’s no such remedy available to clients of franchise consultants. If that weren’t enough, there’s no judicial procedure available for a judge to review whether the fee charged by the consultant was fair and reasonable, like there is with reviews of lawyers' accounts.

Second – and this is perhaps the most important takeaway – consultants aren't insured in the way lawyers are. If a lawyer is negligent because he or she has made a serious mistake in one of the agreements or in the FDD, the lawyer is insured for this error. Franchise consultants who “play lawyer” are not.

Indeed, FDDs are very specialized documents and franchisors can be sued for large monetary amounts on the basis of an item of disclosure that is not properly dealt with in the FDD. If there’s a mistake in the documentation that results in  litigation, there’s no insurance policy behind a consultant who prepares the FDD for a client. Because the consultant isn't insured, but is still charging a fee for providing legal services, a franchisor engaging a consultant to prepare these documents for $10,000 is getting the same insurance coverage as if it acquired all its contracts off the Internet for $100; namely, no coverage at all.

And just because a lawyer may have previously reviewed the consultant’s standard ‘templated‘ franchise contracts and FDDs (so the consultant can ‘fill in the blanks’ and change ‘hamburgers’ to ‘tacos’ in the documents  for his clients), doesn’t mean the franchisor benefits from that lawyer’s insurance if the consultant had made an error.Because there’s no legal relationship between the lawyer and the franchisor (because the consultant hired the lawyer not the franchisor), there’s no insurance available to the franchisor if the consultant makes a mistake in this scenario.

I’m certainly aware that some of these consultants have collected franchise agreements and disclosure documents over the years and may simply using an agreement "appropriated" from one of the major chains, substituting the word ‘Subway’ (or another well-known brand name) with the name and food product of the new client. Leaving aside copyright the lawyer has in his or her agreements, if all the franchise consultant is doing is using a well-known brand’s documents and changing a few words around, what value is the client really getting from an uninsured and unregulated consultant who plays lawyer? To put it another way, do you really want to get your root canal performed by someone who isn’t a dentist?

Although there’s a lot of valuable advice to be provided by consultants, having them draft your legal agreements and FDDs isn't one of them, and is fraught with risk.

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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