Understanding the Franchise Agreement
A franchise agreement is a contract, which is entered into between the franchisor, and the franchisee and sets out the relationship between the franchisor and franchisee. The franchise agreement will usually appear biased towards the franchisor, which is necessary for the franchisor to maintain control over the franchise system. A franchisor is risking its name and reputation on the franchisee’s performance, so it is only fair and reasonable that bit has the right to place certain obligations on the franchisee. Consistency amongst franchise units is a cornerstone of successful franchising – and consistency requires compliance.
Despite common beliefs, there is no such thing as a standard franchise agreement, and no two franchise agreements are alike. This is understandable because franchises cover many types of business in many different industries and have different characteristics. A franchise agreement will be just one of the documents that a franchisee will be required to sign. These may include a non-disclosure/confidentiality agreement, offer to purchase agreement, lease (or sublease) agreement, and a security agreement.
What is Considered Negotiable?
There are differing opinions regarding just how negotiable a franchisee agreement can be. Franchise agreements can generally be considered non-negotiable, except for items such as location, exclusive territory and opening date. A franchisor may negotiate a point that is specific to a particular franchisee, but will be unwilling to make any changes that will weaken or violate the franchise system. There may be more flexibility, or opportunity for negotiation with a new franchisor whose agreement is still evolving and has not yet stood the test of time.
What’s Included in a Typical Franchise Agreement?
A typical franchise agreement will include:
* the parties to the agreement (the name, address and other details of the franchisor and the franchisee, and any other parties to the agreement)
* the business structure or format being licensed to the franchisee, which is usually referred to as the “System”. The System typically includes: trade names, trade-marks (e.g. logos and slogans), trade secrets, patents, copyright, designs, procedures, techniques, manuals and the products and/or services which are the subject of the franchise
* the term of the and any renewals or options to renew the franchise at the end of the term;
* the fee or fees payable by the franchisee to the franchisor, some of which may be one-time fees (e.g., the initial franchise fee), and some of which may be ongoing fees (e.g., a royalty payment, which is generally a percentage of the franchisee’s gross sales)
* any territorial limitations on the franchise
* any training and/or re-training requirements
* obligations on the franchisee to abide by the franchisor’s System (and the consequences of failing to do so)
* any obligations on the franchisee to modify the System at the request of the franchisor
* any obligations on the franchisee to introduce the franchisor’s new products and services, and any obligations to cease selling particular products and services
* any obligations on the franchisee to purchase products or services from the franchisor or from approved suppliers
* any obligations on the franchisee relating to the hours and days of operation of the franchise
* any obligations on the franchisee to advertise or promote the franchise locally or regionally, or to contribute to the franchisor’s advertising or promotional program
* any obligations on the franchisee to participate in special promotions (e.g., to redeem promotional coupons)
* any obligations on the franchisee regarding the maintenance of financial records, and any obligations to make these records available to the franchisor
* any obligations on the franchisee relating to insurance policies
* any restrictions on the sale of the franchise by the franchisee
* the method or methods by which a franchise may be terminated by the franchisor, and any continuing obligations on a franchisee after termination or expiration of the franchise agreement
Norman P. Friend
President
Franchise 101 Incorporated.
Who links to my website?
admin, articles, September 25, 2008, 4:02 am
The Pros and Cons of Buying a Franchise
Pros of Franchising
Reduced Risk
Franchising does not guarantee success, but a good franchise should help reduce the chances of failure.
A Proven System
With a tried and tested operating system, the franchisee loses the obstacles and gains the opportunities. A franchisee should receive a completely proven system that includes initial training, opening assistance, accounting systems, established suppliers, manuals and use of the trademarks. The all important “learning curve” helps prevent the franchisee from repeating previous mistakes and provides information on inventory levels, store design, competition, pricing structure and operational data drawn from the entire system.
Easier Access to Financing and Reduced Cash Requirements
Financial institutions prefer to lend to established franchised systems because of their higher success rate. The consumer awareness created by national or regional name recognition can reduce the costs of grand-opening promotional activity and advertising start-up. As well, the purchasing power of the franchisor can reduce the franchisee’s initial outlay for equipment and supplies.
Purchasing Power
Collective purchasing power on products, supplies, extended health and insurance benefits, equipment and advertising can easily offset any ongoing royalties paid by the franchisee.
Site Selection Assistance
Franchisors can provide expert site selection assistance based on their operating experience and demographic knowledge. Landlords and developers prefer to deal with someone who has an established track record. This enables franchisees, as part of an established franchise system to obtain locations in major malls and other developments that otherwise would not be available to them as an independent operator.
Advertising Clout
Most independent businesses cannot afford the services of advertising and promotional experts. Consequently, their advertising is often poorly conceived and inconsistent. They also cannot afford to invest in the level of advertising required to maintain a commanding presence in the marketplace. In a franchise system, the advertising cost is spread over many units enabling the franchisor to achieve economies of scale. This also allows the franchisee to create well-conceived promotional campaigns and place the advertising in the most effective medium.
Building Equity
Because of the national or regional name recognition, and territorial exclusivity, a franchised business should sell faster and for a higher value than an independent business. A buyer is often motivated to buy the franchised business for the same reasons as the original franchisee and may perceive a higher value associated with a recognized name and system.
Stress Reduction
The ability to operate more effectively and efficiently can relieve many pressures of business. Systems that control job scheduling, cash flow and inventory levels allow the franchisee to run the business instead of the business running them.
Cons of Franchising
Loss of Independence
The loss of independence can be viewed negatively by some franchisees. Although most franchisees invest in a franchise because they want the guidance of the franchisor, the moment they enter the franchise system they want to make changes. Unless you are capable of working within a system and can accept a certain amount of regimentation, you should think long and hard before entering into a franchise relationship. One of the greatest strengths of franchising is consistency amongst units, and with consistency must come compliance.
Franchisor’s Failure to Perform
Some franchisors don’t deliver what they promise for a couple of reasons. A common reason for failure is the franchisor’s shortage of available capital, which can be caused by:
(a) the franchisor’s unrealistic franchise sales projections;
(b) the franchisor underestimating the expenses associated with the development of the franchise system;
(c) the franchisor’s failure to meet franchise sales projections, or
(d) high franchisee attrition.
Alternatively, it could be that the franchisor is just not capable of providing the support and assistance, or does not possess the ability to operate a franchise organization.
Misunderstanding the Franchise Agreement
Confusion over the interpretation of certain aspects of the franchise agreement can result in a problem with either the franchisor or the franchisee. A potential franchisee has probably never encountered a document anywhere near similar to a franchise agreement. A franchise agreement requires careful explanation and scrutiny, and failure to do so will inevitably result in a conflict that may end up in the courts.
Misrepresentation by the Franchisor
Misrepresentation by the franchisor can be intentional or unintentional. Projections of income and expense can be provided to the franchisee in good faith, but may turn out to be inappropriate for the location because of the franchisor’s inexperience or unfamiliarity with the area’s demographics. Conversely, the figures may be total fabrications simply to get the franchisee to sign on the dotted line and hand over the initial franchise fee.
Caveat Emptor (let the buyer beware), applies to franchising as it does to any consumer purchase or investment; however, consumers are often their own worst enemy, choosing to ignore cautionary advice and warning signals, and basing their investment decision on emotion without balancing it with logic.
Payment of Fees
The franchisee typically pays an initial fee for being granted the franchise, using the system, and receiving initial training. Typically, single-unit franchise fees are in the range of $25,000 to $35,000. The initial fee is paid only once during the term of the agreement; however, franchisors may charge a nominal renewal fee at the commencement of each new term of the agreement. The typical term for a franchise agreement is 5 or 10 years but may vary to coincide with the terms of a lease. Franchisors sometimes charge a site selection fee of $5,000 or more, in addition to the initial fee, which offsets their costs of site selection and lease negotiation.
In addition to the initial fee, some form of ongoing royalty is paid by the franchisee to the franchisor. In most instances, the royalty is based on a percentage of the Franchisee’s gross sales, which vary from 1% to 10%, or even higher, with a median range of 3% to 6%; however, units with high sales volumes often pay 1% or 2% less.
Franchisees are also required to contribute to a national or regional advertising fund, which is in addition to any requirement that the franchisee invests a minimum amount on local advertising.
Norman P. Friend
President
Franchise 101 Incorporated.
admin, articles, September 20, 2008, 3:41 pm
The Importance of Location
The location of your business is as important to your success as having a good product to offer to your customers. For retail businesses in particular, the location can make - or break, the business. It is important that the demographic profiles of people who work or live in the trading area match the target customer profile for income level and age group.
Manufacturing or distribution business may be less dependent on the need to be close to its customers or have drive-by visibility. Instead, it may be more important to have larger premises at a lower rental cost.
Businesses such as motels, doughnut shops, gasoline service stations, and small family restaurants may be better located near a highway.
Walk-By Traffic
Does the business require a high level of walk-by traffic to be successful? If so, is it in a location that provides sufficient pedestrian traffic now and to provide sufficient growth, or will you have to consider relocating the business at some point in the future?
Drive-By Traffic
Does the business rely on drive-by traffic? Is there adequate parking readily accessible to your business operation? Is the parking free, as in a shopping mall, or will your customers have to pay to park in an underground lot or in a coin-metered space? If you have a business that serves trade customers and delivers products to them (for example, automobile parts), then parking for your customers may not be an important factor. Is there traffic congestion throughout the day or just at various peak times during the day, evening, or weekend? Do any of these traffic problems seriously affect a customer’s access to the business?
Shopping Centre
If your acquisition target is located in a shopping mall, you should do your research thoroughly. Evaluate the type of tenants in the mall where the business is located to determine whether they would draw traffic to your or be in competition with you. If the shopping centre has several major or national anchor stores, this should attract a large volume of potential customers. Major tenants might include department stores, large supermarkets, and many national chain or franchise retail or service operations.
Also, take the time to check out other malls within the trading area, to see how they compare with the mall in which the business is located. You should also check out if any other shopping centres are in the planning stages and how they might impact consumer traffic in the future.
Shopping-centre leases tend to be very complex and have stringent clauses in terms of the landlord’s rights and requirements. It is also common for the landlord to request a percentage of the tenant’s gross sales in addition to the base rent and this needs to be weighed against the benefit of exposure to a high volume of potential customers.
History of the Location
At first glance a location might appear to have all the necessary ingredients for the business to be a success, but upon further research it may turn out to be a location where many businesses have failed. Look for such warning signs as too many vacant suites in the building, for-lease signs, or going-out-of-business sales. Another factor could be adjacent buildings to the location. They could be drawing away traffic because of better promotions, nicer facilities, and more attractive leasing rates. Possibly the landlord is difficult to get along with, and that is why many tenants are not renewing their leases. Maybe there has been a turnover of landlords or property management companies, which has caused instability in the operation of the building.
Changing Patterns of Neighbourhood
Take a look at the surrounding area. Is there growth activity occurring in terms of buildings or houses that would show an increase in a potential market? On the other hand, if there is a declining pattern, it could negatively impact the business in the future. Contact the municipal office and make inquiries regarding the development in your geographic market area over the next few years.
Competition
Thoroughly research the competition that is in the market area. Possibly there is very little competition, or the kind of competition that could be threatening to you. For example, a large national chain or franchise operation could spend a lot of money on advertising and promotion. Also look at the proximity of the competition and determine their strengths and weaknesses. Would you have a competitive edge?
Hours of Operation
If hours of operation are important to the success of the business, check to see if the landlord has stipulations in the lease that the building is open for operation only within specified hours. If you the business is located in a shopping mall, you may be required to be open for business at all times that the mall is open and restricted from opening outside of those hours. If opening the business on a Sunday is important to grow the business, check if the municipal bylaws will allow you to do this.
Rent Payment
Obviously, the amount of rent you are going to pay is a critical factor in determining whether the location is attractive. Many small business bankruptcies are due to excessive rental payments. Ask yourself how the proposed rent measures as a percentage of your anticipated sales. Is the rent within industry averages as a percentage of sales? Rent costs in excess of industry averages can be justified only if the location allows for higher mark-ups or other benefits that offset the higher cost.
Norman P. Friend
President
Franchise 101 Incorporated.
admin, articles, September 19, 2008, 7:17 am
The Difference between Licensing and Franchising
The primary difference between simple trademark licensing and package franchising is in the type and degree of control exercised by the franchisor and licensor. The trademark licensor is interested in the quality of the final goods produced by the licensee, not in the licensee’s method of operation. The kind of control he exercises is thus likely to be limited to “passive” control such as inspection of produced goods and testing to insure that quality standards are being met.
Package (or “business format”) franchising, on the other hand, involves active control over the franchisee’s “method of operation”: The location of the business, the hours of operation, the management of the business, and other business matters.
Franchising systems are designed to enhance the goodwill (value) of the franchised product or service. A trademark licensed to numerous franchisees is hopefully enhanced by multiplied sales of the products or services, widespread common advertising and the other beneficial characteristics that result in increased name recognition. In order to insure that the increased name recognition is accomplished in a positive manner, it is necessary to establish controls over the operations of the licensee and the quality of the service or product. In doing so, there are basically two choices:
1. Control only the quality of the product or service; or
2. Control that quality and also establish controls on the operation of the licensee’s business.
If only the quality of the product or service is controlled, the arrangement is a license, and not subject to the franchise rules. If a product is being manufactured and sold, this is usually fine.
Norman P. Friend
President
Franchise 101 Incorporated.
admin, articles, September 18, 2008, 1:02 am
Qualifying as a Business Immigrant
Canada welcomes business immigrants who have the ability and resources to invest in or establish businesses in Canada. During 1998, business immigrants invested more than $437 million in Canada. The Business Immigration Program allows immigrants to enter Canada provided they meet the program’s criteria and strictly follow the ministry or government guidelines. As regulations change from time to time, and vary from Province to Province, anyone interested in this program should check with the appropriate authorities to ensure that they have the most current information.
All business immigrants must apply for immigration from outside of Canada. Business immigrants must apply at one of nine ‘Business Immigration Centres”, which are located in Beijing, Berlin, Buffalo, Damascus, Hong Kong, London, Paris, Seoul and Singapore.
Obtaining entry into Canada can take anywhere from six months to a year or longer, depending upon how complete the application is when it is submitted. The process includes; submitting the application, attending a personal interview at a Canadian embassy, and medical and security checks. As the application requires the preparation of a business plan or proposal, it is advisable that a prospective immigrant consults a lawyer and a professional accountant for assistance. You can visit the Government of Canada site on immigration information for more information at www.canadainternational.gc.ca.
Business immigrants can apply to enter Canada in one of three ways:
1. As an entrepreneur
2. As an investor
3. As a self-employed person
Qualifying as an Entrepreneur
An entrepreneur must establish or buy a business in Canada. There is no set amount to invest, but it should be sufficient to establish the business within two years, while supporting the entrepreneur and his family. The entrepreneur is expected to participate actively in managing the business. The business must contribute to the Canadian economy and create one or more jobs in Canada in addition to the jobs created for the entrepreneur and his family. The entrepreneur is admitted on the condition that these requirements are met within two years of landing, and is expected to meet regularly with an immigration officer to monitor compliance with the terms and conditions. In most cases, a successful applicant will be given conditional landed immigrant status for two years. Permanent landed immigrant status is only granted if the business is established within two years and the applicant meets the Ministry guidelines.
An immigrant is not required to have past business experience or make a substantial investment, but they are required to create employment and to have ongoing management of the business. Regardless, past business experience and a substantial investment will improve an immigrant’s chances of being approved for immigration. Although immigration is the responsibility of the Federal Government, immigration officials are influenced by guidelines of the respective Provincial Government about what type of applicants is preferred.
Prospective immigrants who wish to make an application under the Business Immigration Program should prepare a business plan that will persuade an immigration officer that the proposed investment will be successful. As many applications are declined, an individual should not make an investment or sign any agreement before receiving official permission to immigrate, unless they are willing to make the investment without immigrating to Canada.
Qualifying as an Investor
This category is the easiest and quickest way of becoming a landed immigrant, and is attractive if you do not wish to be actively involved in running a business in Canada.
To qualify as an “investor” you must meet the following criteria:
* You have operated, controlled or directed a financially successful business,
* You have by your own efforts accumulated a net worth of at least $800,000, and
* You are willing to make an irrevocable investment of at least $400,000 in a fund secured and managed by the Government.
Applicants make their $400,000 investment to the Receiver General for Canada at National Headquarters in Ottawa (NHQ). NHQ acts as agent for the approved provincial funds by collecting the investments and distributing them according to the IIP allocation formula (50 percent divided equally among approved funds and 50 percent distributed according to provincial gross domestic product). The provincial funds are responsible for investing their allocations to strengthen their economies and to create or continue employment. They report to NHQ annually, and after the five-year holding period remit the $400,000 investment back to NHQ. Upon receipt, NHQ then returns the investor’s $400,000 (without interest). Participating provinces secure their own funds’ allocations.
Qualifying as Self-Employed
Many immigrants apply under this category, but few applications are accepted. A self-employed business immigrant is considered to be a person who intends to, and has the ability to, establish a business in Canada that will create an employment opportunity for himself or herself alone. This person must also be willing to make a significant contribution to the economic, cultural, or artistic life of Canada. The self-employed category is mainly intended for farmers, sports personalities, artists, writers, and others working in theatrical, cultural or artistic endeavors.
Norman P. Friend
President
Franchise 101 Incorporated.
admin, articles, September 13, 2008, 4:34 am
Qualifying as a Business Immigrant
Canada welcomes business immigrants who have the ability and resources to invest in or establish businesses in Canada. During 1998, business immigrants invested more than $437 million in Canada. The Business Immigration Program allows immigrants to enter Canada provided they meet the program’s criteria and strictly follow the ministry or government guidelines. As regulations change from time to time, and vary from Province to Province, anyone interested in this program should check with the appropriate authorities to ensure that they have the most current information.
All business immigrants must apply for immigration from outside of Canada. Business immigrants must apply at one of nine ‘Business Immigration Centres”, which are located in Beijing, Berlin, Buffalo, Damascus, Hong Kong, London, Paris, Seoul and Singapore.
Obtaining entry into Canada can take anywhere from six months to a year or longer, depending upon how complete the application is when it is submitted. The process includes; submitting the application, attending a personal interview at a Canadian embassy, and medical and security checks. As the application requires the preparation of a business plan or proposal, it is advisable that a prospective immigrant consults a lawyer and a professional accountant for assistance. You can visit the Government of Canada site on immigration information for more information at www.canadainternational.gc.ca.
Business immigrants can apply to enter Canada in one of three ways:
1. As an entrepreneur
2. As an investor
3. As a self-employed person
Qualifying as an Entrepreneur
An entrepreneur must establish or buy a business in Canada. There is no set amount to invest, but it should be sufficient to establish the business within two years, while supporting the entrepreneur and his family. The entrepreneur is expected to participate actively in managing the business. The business must contribute to the Canadian economy and create one or more jobs in Canada in addition to the jobs created for the entrepreneur and his family. The entrepreneur is admitted on the condition that these requirements are met within two years of landing, and is expected to meet regularly with an immigration officer to monitor compliance with the terms and conditions. In most cases, a successful applicant will be given conditional landed immigrant status for two years. Permanent landed immigrant status is only granted if the business is established within two years and the applicant meets the Ministry guidelines.
An immigrant is not required to have past business experience or make a substantial investment, but they are required to create employment and to have ongoing management of the business. Regardless, past business experience and a substantial investment will improve an immigrant’s chances of being approved for immigration. Although immigration is the responsibility of the Federal Government, immigration officials are influenced by guidelines of the respective Provincial Government about what type of applicants is preferred.
Prospective immigrants who wish to make an application under the Business Immigration Program should prepare a business plan that will persuade an immigration officer that the proposed investment will be successful. As many applications are declined, an individual should not make an investment or sign any agreement before receiving official permission to immigrate, unless they are willing to make the investment without immigrating to Canada.
Qualifying as an Investor
This category is the easiest and quickest way of becoming a landed immigrant, and is attractive if you do not wish to be actively involved in running a business in Canada.
To qualify as an “investor” you must meet the following criteria:
* You have operated, controlled or directed a financially successful business,
* You have by your own efforts accumulated a net worth of at least $800,000, and
* You are willing to make an irrevocable investment of at least $400,000 in a fund secured and managed by the Government.
Applicants make their $400,000 investment to the Receiver General for Canada at National Headquarters in Ottawa (NHQ). NHQ acts as agent for the approved provincial funds by collecting the investments and distributing them according to the IIP allocation formula (50 percent divided equally among approved funds and 50 percent distributed according to provincial gross domestic product). The provincial funds are responsible for investing their allocations to strengthen their economies and to create or continue employment. They report to NHQ annually, and after the five-year holding period remit the $400,000 investment back to NHQ. Upon receipt, NHQ then returns the investor’s $400,000 (without interest). Participating provinces secure their own funds’ allocations.
Qualifying as Self-Employed
Many immigrants apply under this category, but few applications are accepted. A self-employed business immigrant is considered to be a person who intends to, and has the ability to, establish a business in Canada that will create an employment opportunity for himself or herself alone. This person must also be willing to make a significant contribution to the economic, cultural, or artistic life of Canada. The self-employed category is mainly intended for farmers, sports personalities, artists, writers, and others working in theatrical, cultural or artistic endeavors.
Norman P. Friend
President
Franchise 101 Incorporated.
admin, articles, September 11, 2008, 2:53 pm
When we launched our franchise system at Nurse Next Door in 2007, we were referred to Norm Friend of Franchise 101 Inc. to help us build the initial platform on which to launch our system. It was important to us to find someone who was compatible with our philosophies, and would provide us with a thorough, measured approach in establishing our growth strategy.
Norm provided us with expert assistance in every phase of the of the franchise development process and used a systemized approach to ensure that all our documents, manuals and procedures were consistent, complete and inter-related.
The whole project was completed on schedule, on budget, and with a high level of professionalism. Since completing the project, Norm has always been accessible to provide quick and candid feedback to any of our questions.
Nurse Next Door now has 19 franchise locations in British Columbia, Alberta and Ontario, with new opportunities available in the Greater Toronto Area and other major markets across Canada.
John DeHart
Co Founder
Nurse Next Door
Scott, Franchises, September 9, 2008, 5:59 pm
Franchising in Quebec
Language
The Charter of the French Language contains a provision which states that contracts pre-determined by one party or contracts that contain printed standard clauses (e.g., franchise agreements), together with related documents, must be drafted in the French language.
Every person whose name is in a language other than French must disclose the French version of the name used in Quebec in carrying on its activities. In other words, anyone carrying on business in Quebec within the meaning of the Act must have a French name.
The Charter of the French Language also deals with issues relating to advertising, computer software, consumer rights, employment matters and commercial signage. With respect to commercial signage, public signs and posters and commercial advertising must be in French (however, English is permitted together with French provided that the French version of same is markedly predominant).
External Clauses
The province’s Civil Code of Quebec sets forth a series of rules, which protect against franchise agreements drafted in an incomprehensible or unreadable manner, agreements that contain abusive clauses and agreements that incorporate by reference documents that are not part of the actual contract signed between the franchisor and the franchisee (External clauses)
External clauses are clauses, which refer to and incorporate provisions not expressly included in the contract itself or in its schedules. The provisions of the typical franchise agreement relating to an operations manual are a good example of external clauses. The purpose of the Quebec legislature is to prevent a franchisee being bound by the provisions of a document, which it has not read or understood prior to signing it. Therefore, it is crucial for the franchisor to comply with this disclosure obligation by providing a copy of the operations manual at the time of execution of the franchise agreement. However, if the operations manual is particularly lengthy, it may be difficult to convince a court that the franchisee had the opportunity to read the entire manual at the time of execution of the franchise agreement. A less attractive alternative would be for the franchisor to provide a copy of the operations manual to the franchisee prior to the execution of the franchise agreement, subject to the franchisee’s execution of a Confidentiality/Non-Disclosure agreement in respect of its contents. The operations manual is the source of other difficulties, in that it is not a static document but is rather intended to evolve throughout the term of the franchise agreement. It could be argued in law that any amendment to the operations manual constitutes an amendment to the original franchise agreement; this would require the franchisor to comply again with the disclosure obligation each time an amendment is made to the operations manual. The difficulty arising from this interpretation is that, by is very nature, both parties must agree to an amendment at the time it is made. It is difficult to predict whether Quebec courts will take the same position as to minor amendments to operational standards, as they will with respect to amendments, which are major in nature, either by reason of the nature of the franchise business or the expenditure required from the franchisee to comply with such amendments. It should be noted that the courts are not given the power to rewrite external clauses; they can only be entirely upheld or declared null. The consequence is severe, as the nullity of external clauses relating to an operations manual would mean that the provisions of the manual no longer bind the franchisee.
Norman P. Friend
President
Franchise 101 Incorporated.
admin, articles, September 9, 2008, 3:28 am
Franchise Legislation
Until 1997, Canada had been relatively free of franchise legislation, with Alberta being the only province in Canada to have legislation directed specifically at franchising. However, the increasing number of law suits between franchisor and franchisee has prompted other provinces to re-assess the need to introduce some form of franchise legislation. On May 17, 2000 the Arthur Wishart Act (Franchise Disclosure), 2000 (the ” Ontario Act”) was passed by the Ontario Legislature and came into force on January 31, 2001. In substance, the Ontario Act is very similar to the Alberta Act. In June 2205, Prince Edward Island enacted franchise legislation (the “PEI Franchises Act”), which is similar in respect of disclosure requirements to both Alberta and Ontario’s disclosure requirements.
The provisions of the Alberta Act applies to the sale of a franchise if the franchised business is to be operated partly or wholly in Alberta and the purchaser of the franchise is an Alberta resident or has a permanent establishment in Alberta. Whereas; in Ontario and PEI the acts apply only if the franchised business is to be operated partly or wholly in those provinces respectively.
The franchisor is required to provide you with a copy of their disclosure document at least 14 days before the signing of any agreement relating to the franchise, or the payment of any consideration relating to the franchise, whichever is earlier. If you are investigating a franchise in a province other than Alberta, Ontario and PEI, and the franchisor is operating in any of those provinces, you can request a copy of the franchisor’s disclosure document that the franchisor is required to provide in those provinces. The disclosure document must contain copies of all proposed franchise agreements, financial statements of the franchisor, reports and other documents in accordance with the regulations. A certificate must be signed by at least 2 officers or directors of the franchisor, which states that the disclosure document contains no untrue statement of a material fact and does not omit to state a material fact. The information contained in the disclosure provides a good basis for assessing the merits of a franchise operation but don’t assume that the franchisor’s compliance with disclosure or registration requirements implies that the regulatory authority has approved or recommends the franchise in any way. It is essential that you verify the information disclosed by the franchisor by speaking with existing franchisees, your lawyer, your accountant, or a franchise consultant.
Earnings Claims
The franchisor is required to provide details of any earnings claims information used by the franchisor, including material assumptions underlying its preparation and presentation, whether it is based on actual results of existing outlets and the percentage of outlets that meet or exceed each range of results. The earnings claim information must have a reasonable basis at the time it is prepared. The disclosure documents must also state the place where substantiating information is available for inspection by franchisees. If the information is given in respect of a franchisor-operated outlet, the franchisor must state that the information may differ in respect of a franchisee outlet. Earnings claims consist of information from which a specific level or range of actual or potential sales, costs, income or profit from franchisee or franchisor outlets can be ascertained.
Franchisee’s Right of Rescission
If a franchisee suffers a loss because of a misrepresentation contained in a disclosure document, the franchisee has a right of action for damages against the franchisor and every person who signed the disclosure document. If the franchisor fails to provide the disclosure document within the time requirements, the prospective franchisee may rescind the agreement by giving notice of cancellation no later than 60 days after receiving the disclosure documents, or no later than 2 years after the granting of the franchise. A franchisor must, within 30 days of receiving a notice of cancellation, compensate the franchisee for any net losses the franchisee has occurred in acquiring, setting up, or operating the franchised business.
Norman P. Friend
President
Franchise 101 Incorporated.
admin, articles, September 7, 2008, 11:20 am
Buying a franchise can be a good option, especially for someone going into business for the first time. There are essentially two ways of acquiring a franchise: you can acquire a new franchise or purchase an established franchise unit from the current franchisee (a resale). In fact, franchisors have existing units for sale from time to time and depending on the circumstances, these units can be a good investment.
If you have the opportunity to purchase a franchised unit that is not operating to its full potential, which is part of a good franchise system, it may be a good investment depending on the price and the reason it is underperforming. For example, if the location is good and what is required to raise the performance is related to such matters as inferior customer service, poor budgeting, lack of cost controls, and inefficient inventory management it may be a good investment, as these things typically do not require major investment.
Everything is relative so you when you evaluate the business opportunity you have to take the price into consideration. If the seller is asking full value and not discounting the price to reflect the situation it may not be such a good investment. You will need the franchisor’s approval to take over the franchise and in most cases you will be required to attend and pass the franchisor’s training program.
Unfortunately, a large number of people view franchising as some sort of magic wand or guarantee of success, and fail to carry out proper due diligence. Franchising is not a guarantee of success or the accumulation of great riches. Certainly, some franchisees enjoy a good return on investment in addition to paying themselves a good management salary, but others work harder than they ever imagined with little or no franchisor support, no profits, and no chance of selling their business. Franchising is usually a safer investment than opening a similar independent business, if the franchise is part of a solid franchise system.
When considering a franchise it is essential that you carry out greater due diligence than if you were buying an independent business. If you are interested in acquiring a resale franchise you need to carry out due diligence on both the franchise and the business itself. Success in franchising is based on mutual dependence, so it naturally follows that the search for a franchise is a mutual investigation process. It is important to evaluate both the franchisor and the franchise. In addition to any legal disclosure requirements, the Canadian Franchise Association (CFA) has mandatory disclosure requirements for its franchisor members.
Reputable franchisors go to great lengths to select a franchisee. If a franchisor fails to investigate you as thoroughly as you investigate them, be cautious. If a franchise is awarded to a franchisee that is unable to operate it successfully, the franchisor will suffer almost as much as the franchisee that fails. Not only does the franchise unit fail to produce an ongoing revenue stream for the franchisor, but it can also take up a tremendous amount of the franchisor’s time and effort to either salvage or resell the franchise.
A franchisor is obviously not gambling its entire reputation on you; however, you are probably betting a good deal of your future on the franchisor, so don’t hesitate to ask a lot of questions. A franchisor that is offering a legitimate opportunity and has nothing to hide should have no hesitation in providing the necessary information to a qualified franchise prospect and should respect the fact that you are investigating them in much the same manner as you are being investigated.
Balance Your Decision-Making
To be a successful franchisee you must:
(a) have a passion for the business,
(b) understand the business, and
(c) be capable of financing it.
Obviously, you should not consider a franchise that is beyond your financial means. Emotion and logic should be equally balanced when making the final decision about purchasing the franchise. You should feel good about the people involved in the franchise, and excited about the opportunity, however, logic has to be applied to the decision-making process in such areas as consumer acceptance, risk analysis, availability of product, demographics etc. Ask yourself, “Does this all make sense?” Your emotional commitment is only one of the essential elements, and if any of these elements is missing, the franchise is probably not right for you.
Norman P. Friend
President
Franchise 101 Incorporated.
Norm, Franchises, September 7, 2008, 11:04 am
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