FRANCHISES IN ONTARIO
A franchise is an arrangement between two entities whereby the franchisor grants rights or privileges regarding the sale and distribution of certain products or services as well as the right to use certain trademarks, trade names, and logos to a franchisee in exchange for payment or continuing payments, whether direct or indirect.1 Notable successful franchises include McDonald’s, Subway, and Pizza Pizza. Once both parties have entered into a franchise agreement, the franchisee must conduct its business in accordance with the standard operating procedures developed by the franchisor. In return for managing the franchise in accordance with the franchise agreement, the franchisor provides the necessary training and ongoing support to help the franchisee operate the franchise.
The franchise agreement is generally a lengthy document that sets out, among other things, the franchise fee, loyalties, and term length of the franchise relationship. Prior to the signing of the franchise agreement, the franchisor is bound by the Arthur Wishart Act (AWA) to provide a document known as the franchise disclosure document to the prospective franchisees. The AWA imposes a further obligation on the franchisor a duty of fair dealing, which includes the requirement to act in good faith and with reasonable commercial standards.2 You should always seek independent legal advice from an experienced business lawyer prior to signing a franchise agreement. Further information regarding the AWA can be found below.
WHAT IS A FRANCHISE DISCLOSURE DOCUMENT?
The franchise disclosure document is a very detailed document that discloses all important information about the franchisor to potential franchisees. Typically, the franchise disclosure document will include, among other things, the number of active franchise locations, directors’ backgrounds, start-up costs, financial statements, and any other material facts about the franchise. In accordance with the AWA, the franchisor must submit its franchise disclosure documents to the franchisee at least 14 days before the signing of the franchise agreement and payment of any franchise fees. The franchisor’s duty of disclosure is ongoing, meaning that if any material changes arise after the disclosure documents are provided, but prior to the franchise agreement being signed, the new material change must be disclosed. If a franchisor breaches its duty to disclose material facts to the franchisee in the franchise disclosure documents, the franchisor may be liable for damages arising from the failure to disclose such information. You should always review the franchise disclosure document with an experienced business lawyer to ensure you clearly understand its content prior to signing the franchise agreement.
BENEFITS OF FRANCHISING FOR THE FRANCHISOR
Entering into a franchise agreement has benefits for the franchisor. For example, franchising the business can expedite business expansion significantly, enabling the franchisor to expand into more difficult geographical areas. The franchisor also gains the benefit of mobilizing multiple eager and motivated franchisee owners to advance its business goals and aspirations.
BENEFITS OF FRANCHISING FOR THE FRANCHISOR
Entering into a franchise agreement has benefits for the franchisor. For example, franchising the business can expedite business expansion significantly, enabling the franchisor to expand into more difficult geographical areas. The franchisor also gains the benefit of mobilizing multiple eager and motivated franchisee owners to advance its business goals and aspirations. This addition of multiple franchisee owners may reduce franchisor liability as the franchisor may not have to sign employee agreements, lease agreements, or risk its own capital to expand the business. These are just some of the benefits that franchising may offer.
BENEFITS OF FRANCHISING FOR THE FRANCHISEE
Franchisees also benefit from entering a franchisor-franchisee relationship. For instance, franchising enables individuals who may not have the capital or ambition to develop a business from the ground up to buy into an established franchise that provides the business structure and knowledge to successfully operate a franchise. If issues arise, the franchisee can look to the franchisor for guidance and advice. Furthermore, franchising provides access to a larger network, which may increase the franchisor’s buying power, allowing for the negotiation of bulk discounts on supplies. Depending on the franchise, franchisees may have access to established marketing campaigns, or the franchisor may handle the responsibility of marketing for all franchisees.
If you are considering franchising your business or becoming a franchisee, our business law team can help you navigate the complexities of franchise agreements and franchise disclosure documents. Contact us today to schedule an initial consultation.
1 Arthur Wishart Act, s.1(1).
2 Ibid, s.3(3).
Disclaimer:The information contained in this article is not to be construed as legal advice. The content is drafted and published only for the purpose of providing the public with general information regarding various real estate and business law topics. For legal advice, please contact us.
About the Author:
Shahriar Jahanshahi is the founder and principal lawyer at Jahanshahi Law Firm with a practice focus on representing business star-ups and investors in the province of Ontario. For further information about Shahriar Jahanshahi, click here.