Starting a new business is not a decision you make overnight. Weighing the pros and cons of business is an endeavour that you will research exhaustively and have countless conversations and questions about. Franchising is seen by many as a simple way to go into business for the first time. In a franchise business, the franchisor provides a developed way of doing business, ongoing guidance, systems and assistance in return for periodic payment of fees and/or purchases.
Franchising is an interesting opportunity as it offers the chance to be your own boss without taking on the significant risk that comes with starting a business from scratch. Franchising offers several advantages for would-be business owners, but like anything, there are also some disadvantages that you should be aware of before embarking on a franchise purchase.
Advantages of buying a franchise
- Lower Risk: Franchises are a more secure investment than new businesses because they have the support and backing of a larger, established corporation. These corporations have business models that have been tested, often in different markets across the country, and have already proven themselves to be effective.
- You may find it easier to secure finance for a franchise. It may cost less to buy a franchise than start your own business of the same type. Because of their history of proven success, getting a franchise business loan is easier than getting a loan to start an independent business. The banks know that investing in a franchise is a safer bet than investing in a new business that has not yet had the opportunity to build up a history of
- You don’t necessarily need business experience to run a franchise. Franchisors usually provide the training you need to operate their business model. Franchises have a higher rate of success than start-up businesses.
- Franchises often have an established reputation and image, proven management and work practices, access to national advertising and ongoing support.
- Brand Recognition: Buying an established and recognized brand can give you an accelerated path to profitability by bringing in customers and prospective employees from day one.
- Extensive Franchisor Support: Most franchisors prioritize supporting their franchisees — especially when they are just starting out — by offering them pre-opening assistance with operations like site selection, design, construction, financing, training, and grand-opening programs. The help doesn’t stop there: Some franchises even give loans and other forms of financial assistance to their franchisees.
- Be Your Own Boss: Owning a franchise allows you the chance to be your own boss. You’ll be able to craft a more flexible schedule for yourself; revel in having more autonomy over your career; you can even choose to work from home if that’s what You’ll own a business while having a support system to turn to when you’re in need of advice or assistance. In franchising, there’s a saying that you’re in business for yourself, but not by yourself.
Disadvantages of buying a franchise
- Buying a franchise means entering into a formal agreement with your franchisor.
- Franchise agreements dictate how you run the business, so there may be little room for creativity.
- There are usually restrictions on where you operate, the products you sell and the suppliers you use.
- Bad performances by other franchisees may affect your franchise’s reputation.
- Buying a franchise means ongoing sharing of profit with the franchisor.
- Franchisors do not have to renew an agreement at the end of the franchise term.
Centre to Franchise Law
A Franchisor’s Obligation to Disclose
The franchisor’s disclosure obligation is central to franchise law. Among other things, a franchisor must disclose all material facts to a prospective franchisee in order not to contravene franchise legislation.
The Disclosure Document
A disclosure document disclosing all material facts must be provided to the prospective franchisee at least 14 days before whichever of the following is earlier
A disclosure document must set out certain statements regarding fraud, administrative orders and civil actions for the following actors:
Bankruptcy: Franchisors are also required to disclose whether there have been bankruptcy or insolvency proceedings in a prescribed period before disclosure, with the following as debtors:
Financial Statements: The provincial regulations set out specific requirements for financial statements, one of the key disclosures set out in the statutes.
Required Statements: In Ontario, certain opening statements must be found together at the beginning of the disclosure document. These prescribed statements remind prospective franchisees about:
Set Up Costs: Franchisors must disclose set up costs. These include:
Training: Franchisors must describe any training for franchisees, including whether it is mandatory or voluntary, and who pays for it.
Purchase and Sale Restrictions and Volume Rebates Intellectual Property Licences
Exclusive Territory/Proximity: Regulations require franchisors to make certain disclosures about the operation of the franchise. Specifically, they must disclose:
- Whether the franchisee or its principals are required to participate in the operation of the franchise personally and to what extent.
- Whether an exclusive territory is granted to the franchisee and if so, whether it is subject to any conditions, such as a specific level of sales.
- whether there is any reservation of rights for Internet sales (a requirement in Manitoba).
- Whether there is any policy on proximity:
• between franchises.
• between the franchise and a distributor using the same intellectual property.
• between the franchise and a distributor distributing similar products or services under the same intellectual property
- Policies regarding distance sales or internet sales.
Closed Franchises: Franchisors are required to disclose franchises in the system that have been terminated, cancelled or not renewed, including contact information for those who have left the system in the last fiscal year.
Franchised Locations: While precise details vary from province to province, all franchise disclosure jurisdictions require location and contact information for franchise locations in the province (or in Canada) and/or others that are geographically close.
Termination, Renewal and Transfer Provisions: Franchisors must disclose all provisions in the franchise agreement related to termination, renewal or transfer of the franchise. Precise regulations vary by province.
Certificate: Disclosure documents must contain certificates of disclosure. Generally, each province requires undersigned individuals to certify that a given disclosure document.
Termination of Agreement by Franchisee
Franchisees can rescind their agreements in certain situations. This is commonly referred to as the “rescission remedy”. Essentially, franchisees can back away from their franchise agreements if they can demonstrate that disclosure was insufficient.
Termination for Late or Insufficient Disclosure
A franchisee is able to rescind the franchise agreement within 60 days of receiving a disclosure
document in any of the following scenarios:
- The disclosure document was not provided before the required 14-day deadline.
- A statement of material change was not provided within the required time frame.
- The disclosure document is deficient in its content as required by the legislation or its regulations.
Rescission for No Disclosure
A franchisee could rescind the franchise agreement within two years of entering it if the franchisor never provided a disclosure document.
A Franchisee’s Right to Damages for Misrepresentation
Rescission is not the only remedy franchise legislation affords franchisees. The legislation also gives franchisees the right to an action for damages if they suffer a loss because of:
- A misrepresentation contained in the disclosure document.
- A misrepresentation contained in a statement of material change.
- The franchisor’s failure to comply with the legislative disclosure requirements in the applicable act. (See, for example, section 7(1), A WA.)
A Franchisee’s Right to Associate
Franchisees have a right to associate with each other. A franchisor or its associate cannot interfere with, prohibit, or restrict a franchisee’s right to associate. This right means:
- Franchisees are allowed to join franchisee organizations and more generally are allowed to associate with one another.
- A franchisor or its associate cannot in any way penalize a franchisee for exercising its
right to associate.
How we help you at Minhas Lawyers
At Minhas Lawyers we can make the process of purchasing your franchise a simple and hassle-free one. Since 2006, our law firm has been helping business owners purchase franchises successfully. Turn to our law firm when you need to consult with a franchise agreement Lawyer, franchise litigation Lawyer or franchise contract law Lawyer. We will provide you with the expert legal guidance you can depend on.
Our Services Include
- Buying a franchise store
- Employment agreements
- Expert guidance on how to buy a franchise
- Evaluation services to check out a franchise
- Negotiation of the franchise contract
- Shopping center lease review and negotiation
- Due diligence work for starting your own franchise business
- Review of franchise disclosure documents
- Shareholder agreements
- Financing agreements
- Franchise disclosure agreement
- Franchise disputes, arbitrations and litigation
- Complete business counsel
Minhas Lawyers also help you to Franchise your business
If your business is doing well, it may be time to consider franchising it. The prospect of setting up a franchise is best undertaken with the guidance of an experienced franchise lawyer from a trusted law firm. Turn to the franchise law experts at Minhas Lawyers for help with all aspects of getting started with your franchise. We will walk you through the process from start to finish so you can expand your business the right way.
Our Services Include
- Establishing a franchise system for you.
- Preparation of franchise disclosure agreement documents
- Required franchise registrations
- Franchise shareholder agreements
- Franchise contract negotiations
- Franchise compliance systems
- Preparing franchise contracts to complete the franchisee sale
- Processing the franchise transfer when a franchisee wants to sell
- Franchise disputes, arbitrations, and litigation
- Franchise default notices and terminations
- Comprehensive franchise legal counsel
Minhas Lawyers LLP is a multi-practice law firm based in Mississauga. We advise and represent clients across various segments and practice areas.
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