When you stop in the morning to get a coffee at a local fast food drive-thru, chances are you are dealing with a business that is part of a national franchise network. Franchised businesses are some of the most common businesses that people deal with every day. Franchised businesses include a wide range of business types such as restaurants, gas stations, grocery stores, convenience stores, and service organizations. These businesses are where the franchisee owner of the business uses the trademarks, designs and system of the franchisor and in return pays the franchisor ongoing fees and royalties. The value that these trademarks and systems bring to the franchisee owners, and the dominance that franchised businesses have in the marketplace, make franchises highly sought out by entrepreneurs that are looking to own their own businesses.
The relationship between the franchisee owner and the franchisor will be governed by a document called a franchise agreement, which is a legal contract that sets out the terms of the franchisee/franchisor relationship. As there is typically a substantial power imbalance between the franchisee and franchisor in this relationship, the franchisor will most often dictate virtually all of the terms found in the franchise agreement. Simply put, the franchisee will typically not have a say in the drafting of a franchise agreement.
Across Canada, several provincial governments have recognized this imbalance and have enacted legislation that attempts to promote fair dealing between franchisors and franchisees and make it a requirement that the franchisor discloses to potential franchisees certain details about the franchised business before a franchise agreement can be entered into by the parties. While such legislation can provide some legal protections to prospective franchisees, the substantial terms of the legal relationship between the franchisee and the franchisor will still be dictated by the franchisor.
As well, it should be noted that in the province of Saskatchewan there is no franchise legislation currently in place to specifically protect the interests of franchisees.
As the franchise agreement is a legally binding contract, a prospective franchisee will need to make themselves aware of the obligations that they will be bound to under the contract, as such obligations will have potential long-term implications that may impact the prospective franchisee for years (or even decades) to come.
Below are some examples of terms that may be found in a franchise agreement that a potential franchisee should be aware of before signing a franchise agreement:
- Fee for renewal/sale of franchised business – A franchise agreement will often require the franchisee to pay the franchisor a fee in the event the franchisee renews the franchise agreement or sells their franchised business to another operator. As well, a franchise agreement will often set out specific terms for the renewal/sale of the franchised business, such as requiring the franchisor’s approval for the sale of the business or requiring certain renovations or upgrades be done to the business before the sale/renewal transaction is completed. These provisions can impose large future costs on a franchisee.
- Obligations to renovate/purchase equipment – A franchise agreement can require that a franchisee pay for costly renovations or new equipment purchases for the business at the discretion of the franchisor. Such provisions can permit the franchisor to dictate to the franchisee whether renovations and new equipment are required, with these full costs often to be borne entirely by the franchisee.
- Obligations to purchase supplies – A franchise agreement can require that a franchisee purchase its supplies directly from the franchisor, or the franchisor’s designated suppliers, at prices determined by the franchisor. This may impact the franchisee’s bottom line, as these supplies may be available from different suppliers at lower-costs and/or higher-qualities.
- Personal guarantees and non-compete provisions – A franchise agreement will often require the individual owners of the business to personally guarantee the obligations of a corporate franchisee under the franchise agreement and require that the individual owners provide non-competition covenants to not compete against the franchisor during the term of the franchise agreement and for a period after the franchisee has expired.
The above is just a sampling of provisions that can be included in a franchise agreement that can have serious long-term implications on the individual owners of a franchised business. As such, it is important that a potential franchisee has a full understanding of their obligations before entering into a franchise agreement and to have the franchise agreement reviewed by an experienced lawyer before signing.