Buying a Franchise in Canada. Tony Wilson

parties will deal with each other fairly and in good faith.” “If it’s the law anyway,” I argue, with only a touch of embellishment, “why not state it in the agreement?”

      If they aren’t prepared to do this, my polite and measured response is: “Sorry, did I hear you correctly? You’ve made all sorts of representations and provided all sorts of comfort to my client about how fabulous this franchise is, how great the location is, how good the other franchisees in the system are, how successful the system is, and how you see the franchisees as your ‘partners’ and your ‘family,’ but you won’t covenant in the agreement to treat the franchisee fairly and in good faith? Did I hear that correctly? Does that mean you want the right to treat them unfairly and in bad faith?”

      I’m happy that most franchisors who I’ve “discussed” this with will agree to such a request. It needn’t be done in the body of the agreement. It can be done in an addendum to the agreement (an addendum being a modification to the franchise agreement that forms a part of the agreement and is usually attached at the end of the document). It can also be in the form of a “letter agreement” as long as it’s signed by both parties and acknowledged to be a modification of the agreement.

      Although what might be called the standard Canadian form of franchise agreement usually provides for the franchisor acting reasonably in most circumstances in which it can exercise discretion (e.g., “the franchisor, acting reasonably shall … ” or “subject to the reasonable approval of the franchisor”) there may be issues in which you may want to add “reasonableness” language (e.g., “the franchisor, acting reasonably shall … ” or “the parties, each acting reasonably and in good faith, shall … ”). Remember, pick carefully and don’t nitpick!

      2

      “Buying” into the Franchise

      By the time a prospective franchisee appears in his or her lawyer’s office for advice concerning the acquisition of a franchise, one or more of the following things have likely occurred:

      • The prospective franchisee has been to a trade show and has become interested in acquiring a particular franchise.

      • The prospective franchisee has been surfing the Internet and has become interested in acquiring a particular franchise.

      • The prospective franchisee has approached or been approached by a franchisor (or its sales agents) and has become interested in acquiring a franchise.

      • The prospective franchisee has executed a deposit agreement and has paid between $2,000 and $10,000 towards the initial franchise fee (and has been given a copy of the formal franchise agreement to review).

      • The prospective franchisee has signed the deposit agreement, paid a deposit, and executed the franchise agreement.

      • The prospective franchisee has made or is about to make an offer to lease premises for the franchised business, including having paid or being about to pay a deposit to the landlord (or its leasing agents).

      • The prospective franchisee has made or is about to make an arrangement to buy an existing franchise from another franchisee.

      • The prospective franchisee has been given a copy of the franchisor’s disclosure document.

      • In very bad situations, the franchisee has already signed the franchise agreement.

      If you are considering buying into a franchise, you should talk to a franchise lawyer before you sign any documents or pay any deposits or fees. My recommendation is that it should be a lawyer with experience with franchise law. This chapter will help you understand why it is important to consult a franchise lawyer as early as you can in the franchising process.

      1. Who Are You Dealing With?

      You can tell a little about a franchisor by knowing who the “sales force” is and how it “sells” its franchises. Is the seller a director, officer, or key employee of the franchisor? Is the seller employed directly by the franchisor or has the seller otherwise worked exclusively for this franchisor for a reasonable time period? Is the salesperson on “commission,” meaning he or she gets paid when he or she “closes a deal”? Is the salesperson part of a brokerage network such that if you are not keen on acquiring a coffee franchise with headquarters in Seattle, the seller can sell you an extremely successful chicken concept hailing from Toronto, a low-carb wrap franchise catching on in Boston, or a pizza franchise with headquarters in Edmonton?

      It may be that once the sales process has been concluded, and you have “bought in,” the friendly and charming people who “sold” the franchise to you have somehow stopped returning phone calls and emails, and have moved on to the next customer or the next up and coming concept. To your surprise and trepidation, you must now deal with perhaps a less-than-friendly president of a less-than-friendly franchisor who has just quit smoking, suffers from gout, employs field personnel comprised of former wrestlers, and watches The Apprentice to relax. Needless to say, you may discover a change in the corporate culture from the charming and helpful sales force. In other words, you may have to deal with reality, and the reality may be different than you expected. It is important then, for you to know whom you will inevitably be dealing with in the franchising relationship and, to the extent possible, to be comfortable with those persons. If you aren’t comfortable, why would you proceed?

      Some franchisors have instigated what is euphemistically referred to as a “debunking” session (or a “discovery day”), whereby, prior to the execution of the franchise agreement (but after a deposit agreement has been signed, a deposit provided, and the prospective franchisee is ready to “sign on”), the president or senior managers of the franchisor send the sales force “out of the room” and tell the prospective franchisee words to the effect that, “I don’t know and I don’t care what he told you. He’s just a commissioned sales guy. This is the way it is in this franchise. There are no guarantees you are going to make any money and it’s hard work. And by the way, sign here, acknowledging that you understand this.”

      These sort of debunking sessions serve as a “reality check” for overeager franchisees who have been won over by the sales process and the salesperson, or have otherwise sold the deal to themselves. But these sessions also assist the franchisor by allowing a franchisor to claim that there were no representations or warranties made to the franchisee that weren’t contained in the franchise agreement (i.e., “I told him the way it was”).

      2. Deposit Agreements

      Deposit agreements containing confidentiality covenants are, on the whole, an encouraging sign within the franchise relationship. Franchisors have legitimate interests to protect. The franchisor wishes to separate the serious contenders from the “tire kickers,” and the litmus test for that purpose is the execution of a deposit agreement and the placing of a deposit. The tire kickers will move on to other franchises; the serious contenders will take the process further.

      From the perspective of the franchisor, it not only wishes to separate the genuinely interested from the marginally interested, it also wishes to protect its system, concept, and intellectual property rights. The franchisor does not wish to enter into negotiations with you, provide you with a franchise agreement, a disclosure document, perhaps financial statements, and other confidential information, thus educating you on the secrets that led to the franchisor’s success in the marketplace, only to have you back out of the deal and form a competing business across the street.

      In Ontario, there can be no deposit agreements entered and no deposit made until the franchisor has made disclosure according to the Arthur Wishart Act, and waited the requisite 14-day period after disclosure.

      In Alberta, a deposit can be taken before disclosure and a deposit agreement entered (usually with confidentiality provisions included), but the deposit must be no more than 20 percent of the franchisor’s initial franchise fee and it must