FRANCHISE: EXPANDING YOUR BUSINESS
Over the past few decades, franchising has been the dominant small-business strategy in Ontario for the expansion of businesses and distribution of products and services. One reason for this strategy’s popularity is that it usually allows for a much quicker growth rate than expansion through retained earnings. There are many other advantages to the franchise model and reasons for its success, however, there are also disadvantages that need to be considered, for example: loss of control, splitting of profits and quality of franchisees. A prospective franchisor should consult with its professional advisors before engaging in any initiative to start a franchised business.
Generally franchises are granted for a single location or for the development of a certain territory. The franchise relationship is a contractual relationship between franchisor and franchisee. The franchisor is licensing the right to use the bundle of rights associated with its successfully established business. In Ontario the Arthur Wishart Act, 2000 (the “Act”) sets out the legal requirements of the franchise agreement and additional disclosure requirements. This legislation imposes a duty of fair dealing and a mandatory presale disclosure regime. Typical terms of the franchise agreement include: license grant; term and renewal rights; exclusive territory; location and development of site; premises lease; training and assistance; ongoing obligations; fees and royalties; reporting and audits; advertising and packaging materials; non-disclosure and confidentiality; restrictive covenants; intellectual property; transfer; defaults and rights on termination; post termination provisions; security; and guarantees.
As mentioned, the Act also sets out the disclosure requirements of the franchisor. These requirements can be onerous and are very specific (similar to prospectus-type disclosure). Examples of information that must be disclosed include: a business background summary of the franchisor and its principals; material facts; previous criminal and civil liability; cost information; financing terms (if offered by the franchisor); terms of purchase and sale of services or goods; any territorial policies; rebates; warranties and use of advertising funds; and prescribed financial statements (although there are some exemptions to this requirement).
Establishing a franchise can be an expensive undertaking both in costs and time. A start-up budget should be prepared that includes the following costs: legal; intellectual property protection; design work; real estate consultant; market analysts; marketing expenses; training; operating manual; and infrastructure. Simply put, there is a lot to think about when considering whether or not to franchise your business, however you aren’t the first to have to consider these issues and obtaining the right guidance/counseling may be the difference between success and failure.
This article is prepared for general information purposes only. It is not intended to be used as legal advice or opinion. Specific legal advice on the particular matters described in this article should be obtained from competent legal advisors. We would be pleased to provide additional details on request and to discuss the possible effect of these matters in greater detail.
This article was originally published in the April 22, 2008 edition of the Ottawa Business Journal.