Are you planning to buy a franchise in 2012?
Here are a few pointers that might help you with your deliberations, from a legal perspective.
1. It sounds self-serving, but bias be damned.
There are between 30 and 35 Canadian lawyers that do franchise work full time. When you go to see a lawyer about franchising, find out whether they are franchise lawyers. Do they write about such legal matters in industry publications?
Are they members of the Canadian Franchise Association (CFA), the American Bar Association Forum on Franchising, or the International Franchise Association? Do they attend and participate in CFA activities, such as conventions and legal days?
Like any unique and distinct area of law, franchise expertise has become specialized and the law changes from time to time. If you’re interested in acquiring a franchise, not only should you do your homework on the franchisor and the franchise you are thinking about acquiring, you should also check up on your lawyers, your accountants and the other professionals who will be advising you through the purchase process and during the course of the franchised term.
I know nothing about motor vehicle law, criminal law or family law, and the moment a file like that lands on my desk, I send it to someone who actually practices in those areas. It’s the same for franchising. Check the websites of your proposed professional advisers and if it looks like they are walking the walk, they are probably part of the “Gang of 35,” and they know who’s buried in Grant’s Tomb.
2. The economy is still sluggish south of the 49th parallel and U.S. franchisors are not seeing a great deal of growth in their industry. It might mean these franchisors – if they haven’t been doing so for the past three years – will expand into Canada and sell their franchises in the larger markets of this country: Toronto, Ottawa, Montreal, Calgary, Edmonton and Vancouver.
But it depends upon the kind of franchised business. For retail or food, Toronto, Vancouver, Calgary and Edmonton are the hot spots. Mind you, every time I open up the paper and see articles on the boom in Saskatchewan, I wonder whether U.S. and Canadian franchisors should start seriously considering a major expansion into that province.
3. A growth industry seems to be mobile franchises, where the franchisee doesn’t invest in a bricks-and-mortar business with leases and expensive build outs, but rather mobile vehicles that visit the customer directly. Whether it’s dog grooming, sprinkler installations, gardening, landscaping or knife sharpening, mobile businesses seem to be enjoying growth in Canada due to the relatively low capital costs involved, and some flexibility in terms of hours of operation.
4. As for legal documentation, in the disclosure jurisdictions of Alberta, Ontario, New Brunswick, PEI, and soon Manitoba, you will probably be presented with a Disclosure Document of 20 to 50 pages in length, a franchise agreement, and audited or reviewed financial statements. And there are a number of other agreements a franchisee would be expected to sign, such as a sublease for commercial premises, a trademark license agreement to protect the franchisor’s interest, a general security agreement that secures the franchisee’s assets, construction and development agreements, confidentiality agreements, and personal guarantees.
Franchising is document intensive. Expect to be required to execute a lot of paper to acquire your rights to a franchised business.
5. Depending on the price you’re paying, incorporate a separate corporation to hold your franchise rights. You have the ability to sell shares in that corporation, and there is some ability to shield personal liability and to do some tax planning as well.
6. Try to limit your personal exposure where possible. If you’re asked to give a personal guarantee of your company’s obligations to the franchisor, try to cap it at a reasonable sum both sides can live with.
7. Always make sure the franchisor has rights to the trademark under which it is branding the product or service. Just because the franchisor or one of its affiliated companies has applied for a trademark in the United States does not mean that trademark will be registered, or even able to be registered, in Canada.
A quick search can be performed on the Canadian Intellectual Property Office database by inserting the franchisor’s trademark within the CIPO search engine and seeing what comes up. If the trademark you think you should be acquiring rights to doesn’t show up on the search, why not? Does the non-Canadian franchisor not consider Canada important enough to register its trademark in? Does the franchisor lack the capitalization to hire trademark lawyers to register the mark in the jurisdictions it will do business in?
Or, to be blunt, is the franchisor simply lazy and can’t be bothered to seek trademark registration? This is more unlikely in the disclosure jurisdictions of Alberta, Ontario, New Brunswick, PEI, and soon Manitoba, as there are particular disclosure matters with respect to intellectual property and trademarks. The higher legal and accounting costs to enter the market for franchisors in these jurisdictions tends to weed out the undercapitalized franchisors, the fly-by-nighters and bottom feeders that give franchising a dubious reputation.
8. Remember, when you’re acquiring rights to a franchised business you don’t own them. You are simply renting the rights. You’re renting the franchisor’s business systems, methods and trademarks for a limited period of time – normally with options to renew in multiples of five or 10 years. Once the term and all renewal terms have been exhausted, that’s it. You have no more rights to be a franchisee of this system in the same way as when a lease ends, you have no more rights to occupy the premises.
One important thing to note with renewals of franchise agreements is that they are not automatic. There are certain conditions the franchisee must satisfy under the franchise agreement to be entitled to them. For example, if the franchisee is not in compliance under its agreement or there is a non-payment of amounts due to the franchisor, or the franchisee is in a default over operational matters, it is within the franchisor’s right to decline a renewal to that franchisee.
Assuming you wish to be entitled to renew your agreement when it ends in five or 10 years, be wary of the requirement that the franchisee execute the franchisor’s “then current standard form of franchise agreement that may contain different terms and conditions then the ones prescribed herein.” This means the franchisor can change the agreement you signed today at the time of renewal in five years.
This isn’t altogether unusual as the franchisor might wish to update its agreement to be in compliance with changes in the law. It also means it can raise royalties, advertising funds, expenditures, and other monetary obligations and this, too, is normal.
Here is what you want to watch out for: If you have acquired a protected territory when you entered the agreement in 2012, do you want the franchisor reducing that protected territory at renewal time in five years simply because of the franchisor’s right to change the agreement? I would hope not, but it’s done all the time.
All matters particular to you, your location and the deal you strike in 2012 should, where possible and practical, extend to cover a renewal franchise agreement in five or 10 years. Otherwise, all those business terms that were negotiated in 2012 when you entered into the agreement may very well disappear in a puff of smoke when it comes time to renew because of the franchisor’s right to provide to you with its “then current standard form of franchise agreement.”
Never believe that franchising is a simple and straightforward area where franchisees don’t need the best advice possible. Most franchisee have mortgaged their house or borrowed from family members to acquire their franchise rights. They risk everything, including the family home, for the venture.
But it is fundamentally important to know the ins and outs of franchising, what’s normal in franchise agreements, what probably should be left alone, and what may be negotiated so you get the best deal when you sign on the dotted line.
Special to The Globe and Mail
Tony Wilson practices franchising, licensing and intellectual property law at Boughton Law Corp. in Vancouver, and he is an adjunct professor at Simon Fraser University. His newest book, Manage Your Online Reputation, was recently published. His column appears every other Tuesday on the Report on Small Business website.
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