For many people, it’s a dream to own and operate their own business. However, it can be a daunting affair: where do you even begin? Will it be tricky to break into an existing market? How do you go about building name and brand recognition? If you have some of these concerns, perhaps you should consider purchasing and operating a franchise.
A franchise is basically a type of business arrangement where one party (the franchisor) grants another party (the franchisee) the right to use its name, trademarks, systems, and processes to operate their business. The relationship between the franchisee and the franchisor is set out in a contract called the franchise agreement. A franchise agreement usually states that the franchisor will license the business (along with a name and a marketing plan) to the franchisee. In exchange, the franchisee will pay a fee and ongoing royalty payments to the franchisor. When you choose to operate a franchise, you aren’t actually purchasing the business: instead, you will be granted a license to operate the franchise for a defined term of years. Once the term has expired, the franchisor and franchisee will have to renegotiate their agreement. Basically, when you are granted a franchise, you are not buying a business: you’re renting or leasing a business.
In many respects, operating a franchise can be easier than starting your own original business. You will be gaining instant brand recognition. A new business can take advantage of existing goodwill that is associated with a well-known business name. Often, a franchisor will provide initial training as to how they want the franchise to operate; the franchisee will have the opportunity to attend training seminars. This type of training and knowledge would not be available to the franchisee without this type of arrangement. Franchise agreements can require that services and supplies be purchased from an authorized supplier, ensuring that all customers of the franchise get the same quality of goods and services at all of the franchise locations. In addition, the franchisor is able to purchase supplies in large quantities, and will probably get better prices from suppliers than a small businessperson could. There is great value in consistency – customers know that what they get at your franchise is the same as what they will receive at another franchise location. Franchisors will take care of marketing and advertising.
However, there are some downfalls to operating a business as a franchise. A franchise agreement usually lasts for a specific time: once that time expires, the franchisor must agree to renew the agreement. Therefore, your business and investment is somewhat at the whim of the franchisor. There are significant costs that go along with operating a franchise. Most franchisees have to pay an initial fee that can be very high. On top of that, the franchisee must make ongoing royalty payments to the franchisor, based on a percentage of sales, throughout the term of the franchise agreement. Franchisees are usually expected to contribute to the costs associated with marketing and advertising. If the franchisor encounters issues – financial difficulty, or perhaps problems from a public relations standpoint – the franchisee will likely feel the impact on their business. Finally, the franchisor will maintain a great deal of control over the franchisee’s business: a franchisee will lose some independence in how they run their operation.
Here in Alberta, we have a Franchises Act. The purpose of the Franchises Act is to help prospective franchisees in making informed investment decisions by requiring the franchisor to make timely disclosure of necessary information. The Act sets out civil remedies to deal with any breaches of the Act, and it provides a means for franchisors and franchisees to govern themselves and treat each other fairly.
One of the requirements of the Franchises Act is that franchisors must provide a disclosure statement to any person interested in becoming a franchisee. This disclosure statement must set out full, plain, and true information about the franchise in question. A disclosure statement must be given to a prospective franchisee at least 14 days before any franchise agreement is signed or before any money is paid to the franchisor. This helps to ensure that the franchisee knows exactly what they’re getting into before it’s too late. Things that are to be included in the franchise disclosure statement include copies of all franchise agreements, recent financial statements, information about the franchisor and its chief operating personnel, and details about any criminal convictions, court judgments, or bankruptcies against the franchisor and its directors, officers, and managers. A disclosure statement must also describe the franchise business, any fees that are payable, the geographical area covered by the franchise, and any restrictions on the products the franchisee is permitted to sell.
The disclosure statement of the franchisor is very important, and there are consequences if the rules and regulations set out in the Franchises Act are not followed. If there is a misrepresentation in the disclosure statement, and the franchisee suffers a loss because of it, the franchisee has the right to sue the franchisor for damages. In addition, if the required disclosure is not provided, the franchisee has the right to cancel the franchise agreement within the earlier of either 60 days after disclosure is provided or 2 years after the franchise is granted. If the franchisee cancels an agreement for lack of disclosure, the franchisor is obligated to compensate the franchisee for any losses the franchisee suffered in connection with the business.
If you have any questions about franchises or are thinking of entering into a franchise agreement, it is important to receive legal advice. At SN Law office we will help you in reviewing your franchise agreement, disclosure statement and lease agreement and can also assist you in incorporating your corporation. Please CONTACT SN Law Office for a free consultation.