Buying a Franchise in Canada. Tony Wilson

      

      BUYING A FRANCHISE IN CANADA

      Understanding and Negotiating Your Franchise Agreement

      Tony Wilson, BA, LLB

       Self-Counsel Press

       (a division of)

      International Self-Counsel Press Ltd.

      USA Canada

       Copyright © 2012

       International Self-Counsel Press

       All rights reserved.

      Foreword

      There are books out there about franchising for people seeking to buy a franchise. The problem is, most of them are American and deal with US concepts that are not necessarily relevant to Canada and the way franchising operates in this country. The Canadian legal books that I am aware of are excellent, but deal with franchising from the perspective of the franchisor. These books are instructive if you are the one starting the franchise, but not as helpful if you are the franchisee seeking to buy the franchise. As well, most of them are for lawyers.

      There was nothing that I was aware of (when I started this book) that was written to assist franchisees in making the single biggest investment of their lives. This book was written to help those people understand some of the legal issues prospective franchisees must be aware of before they acquire a franchised business. The first edition of this book sold over 4,000 copies and I continue to receive emails from Canadians thanking me for writing it and helping them to understand the pros and cons of becoming a franchisee in Canada.

      Little has changed since the first edition; there have been some terminology changes in the United States (UFOC to FDD). PEI has adopted legislation pertaining to franchising, as has New Brunswick (although at the time of writing, that province has yet to approve regulations dealing with disclosure obligations).

      Some provinces have legislation that regulates franchising, but the other provinces and territories do not. In these provinces, franchisees must be more careful before they venture into the world of franchising because there is little but the common law to protect them.

      Hopefully, this book will help explain the pros and cons of buying a franchise in Canada.

      Introduction

      Around 1995, I was asked to write a paper for Continuing Legal Education (CLE) in British Columbia on legal issues relating to franchise law. As I recall, the program was called Advising Small Businesses and it was geared to assist general lawyers who might need specialized information on legal areas they might not see very often in general practice. Different lawyers were asked to write papers from their areas of specialty such as trade-marks, corporate tax, estate planning, and, if memory serves me, there may have been one on entertainment law as well.

      The program was designed to give the general lawyer a starting point on areas of law he or she might not have day-to-day experience with, which would enable him or her to get up to speed in that area and competently advise the client (or failing that, call the author for the real answer).

      I was asked to cover franchise law because franchising was perceived to be a boutique legal area that the organizers thought was important for the general practitioner to know something about. After all, a franchise agreement is one of those things that lands on a lawyer’s desk from time to time. It would help if the lawyer knew how to deal with it (or failing that, who to refer the client to).

      The fact that I was asked to write a paper on franchise law was not unusual. Since 1988, franchise law has been the largest part of my legal practice, and by 1995, I had written numerous franchising-related articles for magazines, legal publications, CLE, and newspapers across Canada. I still do. I also regularly speak about franchise law at franchising conventions, trade shows, and at least one law school, and have recently served as the legal advisor to the Canadian Franchise Association in British Columbia.

      Until 1995, most of my writing had been geared to the needs of the franchisor. I would write or lecture about “Starting a franchise,” “Expanding a franchise,” “How to make more money out of your franchisees,” or “How to enforce your franchise agreement against a franchisee.”

      Like most books and articles on franchising in Canada, my writing and speaking were targeted to the needs of what I call the “head office” types — the corporate executives from Toronto or Vancouver or the United States who own or manage the Tim Hortons’, McDonald’s, and Jiffy Lubes of this world. These head-office types or “franchisors” tended to pay their lawyers lots of money to draft the franchise agreements, subleases, security agreements, and other contracts that govern the franchise relationship.

      Around the same time, it occurred to me that nothing I had written had ever been geared to the small-business person who actually bought the franchise rights; the one who took the risk and borrowed money against the family house; the one who invested the severance package into the actual “store” where you get your donuts; the husband and wife who buy the franchised business, pay its debts, pay the employees before they pay themselves, pay the rent, order and count the inventory, cut a cheque for the royalties, and answer to the franchisor when things don’t go well. To my knowledge, there was little or nothing of a legal nature for the people who reap the rewards if the venture succeeds but who lose their shirts (and perhaps their houses) if the venture fails.

      In fact, what written material that was out there in Canada (when compared to the United States) mainly assisted franchisors and their lawyers, enabling them to “draft around” or otherwise deal with particularly unhelpful court decisions. In short, I discovered that there was very little written legal material to guide prospective franchisees in making one of the most important business decisions of their lives.

      As the lawyers who would be reading my original CLE paper were not likely to be representing the franchisors, I decided to write my original CLE paper from the perspective of the franchisee. It was delivered to an audience of lawyers, and I thought, more or less forgotten over the years. However, around 1999, I met a Victoria lawyer who, when he heard my name, immediately said to me, “When a franchise agreement hits my desk, I go to your CLE paper right away. I use it as a checklist. It’s the Bible.”

      As compliments from one’s colleagues at the bar are difficult to come by on the best of days, comparing something I had written to the Bible was among the better forms of kudos I’d ever received from another lawyer.

      Over time, the original paper was modified, edited, added to, subtracted from, melded, moulded, sliced, diced, paraphrased, and amended numerous times and in a dozen ways.

      I always thought that it would be useful to expand the original paper into a full-length book for prospective franchisees to refer to in their hour and a half of need. The idea was to add a sample franchise agreement with commentary on the various sections of the agreement so that readers could see what a section meant, why it was there, and if it was worth arguing about. I decided to do this for Self-Counsel Press, and approached the publisher on, of all things, a cruise ship. That, then, is how this book came to be. Many readers from all across Canada who read the first edition of this book contacted me with their legal concerns. The second edition will, I hope, help future franchisees understand their agreements, and I welcome all comments.

      This book will address some of the legal issues that you should be aware of if you are considering “buying” into a franchise. I will try to address the following type of questions:

      • Is the initial franchise fee too high for the industry?

      • Is the royalty rate within the going rate for the industry?