When I was a kid, my parents, who were both teachers, decided to take a risk, leave the relative security of the teaching profession, and become small business owners by opening a Dairy Queen franchised restaurant in rural, small-town Saskatchewan. Now, some thirty plus years later, they are still operating their Dairy Queen franchise (having sold countless thousands of Dilly Bars), which has been a very successful business in their community. I grew up learning from my parents about the hard work and dedication that it takes to make a small business run properly. As a lawyer, I can appreciation the sacrifices that small business owners make when starting new businesses, including the risks associated with starting a franchised business.
The franchise model is far and away the dominant business model for the retail/restaurant sector, as it provides the operator of the individual business with proven concepts and products, which can help reduce the business risks to the operator in starting a new business. The franchise sector is large, with franchises being estimated to account for forty percent of Canadian retail sales, generating approximately $68 billion in Canada annually and employing over 1 million Canadians. For Saskatchewan, the Conference Board of Canada has forecast retail sales growth in 2017 and a further rise in retail sales for 2018, which will translate into further growth in the number of franchises in the province.
A franchise is a business arrangement where the franchisor grants the franchisee a right to market goods or services under the franchisor’s trademark. In exchange, the franchisee usually pays the franchisor fees and royalties from the sales revenues of the business. In a properly functioning franchise, the franchisor and the franchisee both mutually profit from this business relationship.
While franchises can have the potential to be profitable business arrangements for both the franchisee and franchisor, the franchisee can also be taking on substantial risk by entering into a franchise business relationship. The franchisor will typically have considerable control over the franchisee’s business, and this control can have the potential to be exerted unfairly in favour of the franchisor. The franchise agreement that sets out the legal relationship between a franchisee and the franchisor will typically follow the franchisor’s standard terms and will not be negotiated. At the same time, it is typically the franchisor that has control over information about the franchised business that a potential franchisee will need to know in order to analyze their investment risk.
In Canada, six provincial governments have recognized that there is a control and information imbalance between franchisors and franchisees and have enacted specific franchise legislation to level the playing field between the franchisors and franchisees. Currently, Alberta, Ontario, Manitoba, New Brunswick, British Columbia and Prince Edward Island have enacted franchise legislation, creating comparable provincial franchise regimes. The franchise regimes created by the provinces with franchise legislation follow a similar model, so there is a degree of uniformity and harmonization in these provinces.
The characteristic features of these provincial franchise regimes are that franchisors are required to provide potential franchisees with a franchise disclosure document that provides prospective franchisees with information (including financial information) regarding the franchise so that prospective franchisee can make an informed decision before entering into a franchise business relationship, that a franchisee may rescind a franchise agreement if the information provided by the franchisor in the franchise disclosure document is deficient, that a “cooling-off” period be provided between when the franchise disclosure document is given and when the parties are permitted to sign the franchise agreement, and that there is a duty of fair dealing imposed on the franchisor.
In Saskatchewan, the provincial government has not enacted franchise legislation to protect franchisees, which creates a certain degree of inequity for potential franchisees in this province. Currently in Saskatchewan, there is no requirement for a franchisor to provide a franchise disclosure document to a potential franchisee. As most sophisticated franchisors will have prepared this document to comply with other provincial franchise regimes (including the franchise regime in Ontario, Canada’s largest province), there would be very little cost to franchisors to require them to provide this disclosure in Saskatchewan. Until Saskatchewan implements franchise legislation, potential franchisees in Saskatchewan face greater risk in starting a franchised business than in provinces that have legislated protections for franchisees. Accordingly, there is an increased importance for potential franchisees in Saskatchewan to get good legal advice before signing a franchise agreement in order to identify potential legal risks.