Buying a Franchise in Canada. Tony Wilson

but has minimal or non-existent involvement in or knowledge about the management of the business. A failed business means both parties are subject to possible execution against their personal assets, which may include the family home and perhaps retirement savings. So perhaps only one spouse should give the guarantee or personal covenant. In these circumstances, it’s worth clarifying with the franchisor.

      Finally, in respect of a personal guarantee or covenant, is it possible to “cap” the exposure at a limited amount of money or a limited number of months worth of royalties? This is also worth discussing with the franchisor.

      8. Does the Franchisor Own the Trade-marks?

      Does the franchisor own the trade-marks? You can check this relatively easily by performing your own “bare bones” trade-mark search at the Canadian Trade-Marks Database, which is maintained by Strategis: http://strategis.ic.gc.ca/cipo/trademarks/ search/tmSearch.do. Or simply put CIPO into a search engine and it will direct you to the Canadian Intellectual Property Office, where you can find the trade-marks page. This website contains a lot of useful information on matters dealing with the federal government, but the most important matter here is that the site maintains a database for all registered, expunged, current, and pending Canadian trade-marks.

      Enter the name of franchisor’s trade-mark in the search engine and assess from the results whether the mark has matured to registration or whether it has been applied for only (meaning the examiner at the trade-marks office is still assessing the trade-mark application and its potential for registration). You can also check if the mark has neither been applied for nor registered.

      Note that Strategis Canadian Trade-Mark Database searches are not always foolproof or perfect. Garbage in will yield garbage out, so make sure you enter the trade-mark accurately. Also, the search engine has limitations, chiefly the fact that it finds “dead hits” but rarely does it find phonetic or visual equivalents (e.g., easy vs. EZ or Pharma vs. Farm).

      If the mark has not matured to registration, meaning it does not have a registration number with initials (the initials are almost always TMA) immediately preceding the number, it is possible that the mark might not be approved or might be opposed by an interested third party (usually the owner of a similar mark). This might cause the franchisor to have to pick another mark and “re-brand” the franchise at some late (and more inconvenient) time. Re-branding can create confusion in the system and necessitate a change of signage, advertising, and other branding identifiers.

      It is important to consider what will happen if the franchisor does not have a registered trade-mark at the time you acquire the franchise rights and if the franchisor might not ever be able to secure the trade-mark. It might be prevented from ever obtaining the trade-mark that you think you’re getting the right to use. The question to ask yourself is, “Is it worth all that money for this franchise if the franchisor can’t legally license me its trade-mark and brand?”

      If you are still considering signing the agreement, then ask yourself this: “Who pays for re-branding if the mark, and all that goes along with it, has to change?”

      In such cases, I like to have an agreement from the franchisor that if its trade-mark isn’t registered at the time the agreement is entered, then the franchisor is responsible for the costs of new signage and other display items arising from the need for this new mark. This could be done by way of an indemnity from the franchisor.

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      Master Franchising

      1. What is Master Franchising?

      In any negotiation with a “franchisor,” it is important to determine the relationship between all the players. Who are you contracting with? If it’s not a well-known franchisor with a recognizable world-wide brand, then who are you dealing with, and what rights does this person have?

      Some franchisees will not acquire their franchise rights from the franchisor (or who they expect the “franchisor” to be). In some cases, their franchise contract will be with the franchisor’s Canadian branch or subsidiary, or one of its affiliated Canadian corporations. This is because many franchisors will not franchise directly out of the worldwide head office in the United States or the UK, but instead will create a Canadian subsidiary or affiliate that will run the franchisor’s franchised and corporate operations in Canada. This structure is adopted in other countries as well.

      In Canada, this is done for a variety of reasons (including tax planning) and helps deal with Canadians withholding taxes. Where the US-based franchisor has created a Canadian subsidiary, that subsidiary may have a Canadian office and hire Canadian management personnel, although this is not, strictly speaking, necessary. Certainly in larger and more established franchise systems, it is normal to have a “Canadian” office that Canadian franchisees can deal with, as opposed to dealing with someone in Fort Lauderdale, Edinburgh, or Melbourne, who might lack knowledge of the Canadian marketplace, not appreciate the size of the Canadian market (let alone the weather), and be many time zones and long plane flights away.

      In other instances, franchisees will be contracting with a “master franchisee” for its franchise rights. (Sometimes the term “master franchisor” is used to denote the area franchisor granting franchise rights in a territory. More often the term “master franchisee” is used.) A “master franchisee” is similar to a franchisee, only the master franchisee will have additional rights and responsibilities and a much larger territory. Instead of the franchisor granting the master franchisee the right to establish one franchised outlet in one mall in a city with 12 other franchised outlets from the same system, the franchisor is normally granting the locally based master franchisee the right to —

      • establish numerous outlets on its own account throughout a large territory (say for example, all of Ontario or all of Canada); and

      • sub-franchise the franchisor’s system and enter into individual franchise agreements with other entities (called sub-franchises or unit franchises).

      The concept works well. Many US- or Canadian-based franchisors may lack the financial resources to expand to other territories and into other countries. Contracting with a locally based territorial master franchisee allows the “head franchisor” to expand the brand in the new territory using the “local knowledge” of the master franchisee, as well as the master franchisee’s risk capital and the master franchisee’s infrastructure (i.e., employees, offices, etc.). Risk is spread to the master franchisee. The locally based master franchisee will usually have some experience of the local market that the franchisor might not possess (i.e., they’re Canadian), and the master franchisee will often be situated in the territory, as opposed to being in Fort Lauderdale, Melbourne, or Los Angeles.

      In Canada, some franchisors will divide up the country on a provincial or regional basis and grant master franchise rights to a master franchisee in respect of “Western Canada” or the “Maritimes” and that master franchisee will be charged with franchising the “XYZ concept” in those provinces while the franchisor retains the right to develop its own stores and to franchise in Ontario, Quebec, and indeed, the rest of the world.

      There may be overriding reasons why a franchisor (even a Canadian one) may wish to master franchise the province of Quebec; certainly language, culture, and other distinct nuances of Quebec’s society might lead a franchisor to contract with a Quebec company, with principals and employees fluent in French, to enter unit franchise agreements in that province (in French) and service the franchise network (again, in French).

      Not only does it make sense for franchisor to master franchise a territory where it may well need specialized local knowledge with respect to the territory (again, the example of Quebec comes to mind with its civil law system and language), but master franchising is also an appropriate means of expanding the brand when the franchisor does not have the financial or human resources to adequately do so. For example, a Vancouver-based franchisor may want to expand into the Ontario marketplace but understands