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About Franchise Law

Buying a franchise is one of the most popular ways to go into business. But did you know that it doesn't mean actually buying a business? A company (called the "franchisor") sells the right to use its business systems and brand name to another person (called the "franchisee"). Before becoming a franchisee, ask yourself:

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What are the benefits?

There are many reasons for entering into a franchise business, including

  • established business system
  • brand name recognition
  • joint advertising and promotion
  • joint purchasing

First of all, you get a proven system of operations. This might include a business plan, manuals, methods of production, and training. For example, in a MegaDonuts franchise, you may be shown how to make, package, price, and serve doughnuts.

You also get to use an established brand name, and benefit from brand recognition and trust.

Franchisees usually participate in a larger advertising and marketing plan, on a local, or even international scale. For example, MegaDonuts might have a promotional tie-in with the latest Space Warriors blockbuster movie, where customers who buy a 12-pack of doughnuts receive a free toy.

You become part of a larger network of franchisees that may be able to purchase supplies, machinery, services or other items at a leveraged discount.

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What is the role of my lawyer?

For most established franchises, there is very little room for negotiating changes to the franchisor's standard-form agreements. Your lawyer's role is to review all the terms, and fully explain what you are getting and what obligations you are taking on.

She may assist you in investigating the background of the franchisor, and warn you of any potential problems (see "What background checks should I do?" below).

Your lawyer may also explain how the franchisor has or has not exercised its rights in the past with other franchisees, and give you a fuller picture than the one painted by the franchisor in its brochures.

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What background checks should I do?

The more you know about the business, the more clearly you will be able to decide if the franchise is right for you. Before going into a franchise, there are many types of investigation you should do. Some you can do yourself, and others require a lawyer or accountant. Here are some typical areas to check:

Other Franchisees

Talk to other franchisees in the chain who have been in markets similar to yours. Find out if they are happy with their business, if they are profitable, if there are disputes with the franchisor, and what the problems are.

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Other Jurisdictions

It might help to investigate other regions. Alberta and the U.S. have more disclosure requirements. Getting a copy of a disclosure statement or similar documents from there may yield useful information. You could also contact the Canadian Franchise Association for more information about the franchisor.

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You should do corporate searches to ensure that the franchisor is a valid company. You should also do a "personal property registry" search to see if there are any claims on any equipment which the franchisor is selling to you. Some franchises are location-specific, and it's important to review the head lease on the location.

Perhaps the most vital search is a trademark search, to confirm that the franchisor owns all the brand names, logos or symbols of the franchise. The franchise may be less valuable if the franchisor does not own the trademarks.

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What agreements do I need to sign?

Being a franchisee isn't the same as operating your own business. The franchisor has many rules and regulations which you must follow. If you don't, the franchisor usually has the right to remove you and sell the franchise to someone else. Sort of like "Big Brother."

The franchisor usually has standard-form agreements, which it will ask you to sign. It's very important to review them carefully with your lawyer so that you know exactly what your obligations are. Usually, they include

Franchise Agreement

The franchise agreement is the main agreement, and it is usually very long. This describes the promises and obligations of both the franchisor and the franchisee, and will describe in detail how you must run the business. It usually covers topics like

  • fees - initial franchise fees and ongoing royalties
  • term and territory - how long and which exclusive area
  • training - how much and who pays
  • authorized services and supplies - where to get what you need
  • reporting - sales reports, financial statements, etc.
  • advertising - joint and local
  • restrictive covenants - non-competition and confidentiality
  • personal guarantee - from you for your company
  • default - what happens if you break the contract

See "Getting Past the Legalese" for a more detailed explanation of these terms.

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Trademark and Intellectual Property Agreement

A franchisee is granted a license to use the franchisor's systems and trademarks in connection with the franchise business. Trademarks can be words, designs or logos which distinguish the franchisor's products or services in the marketplace. A lot of money may be spent to build up the brand name of the franchise.

Your right to use the trademarks may be set out in the franchise agreement or in a separate agreement. Until recently, the Trademarks Act required franchisors to record the licensing of their trademarks to franchisees by registered user agreements. The law no longer requires registered user agreements.

You're only granted a limited license to use the trademarks, and don't own any interest in them. You won't be able to use the franchise name, symbol, logo or slogan after the trademark or franchise agreement ends.

The franchisor's operations manual may be confidential property constituting a trade secret owned by the franchisor. The manual should describe in detail how the business is to be managed. The franchisor will insist that the manual not be photocopied or loaned to others and that its contents not be disclosed. You must return all manuals to the franchisor once the business relationship ends.

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In many franchises, the franchisor enters into a head lease with the landlord over a location, and then subleases the location to the franchisee. This gives the franchisor greater control over the franchisee and more involvement in the location of the business.

For example, if you don't pay the rent, the franchisor may pay the landlord, take over the location, and either operate the business itself or sell the franchise to a new franchisee. Any default by a franchisee under the franchise agreement or any related agreement may trigger the franchisor's right to take over.

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More questions? Phone us at (604) HELP-LAW.

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Legal disclaimer:  The information provided on Lawyers-BC.Com is not intended to be legal advice, but merely conveys general information related to legal issues commonly encountered. Your access to and use of this Web site is subject to additional terms and conditions.

This page last updated: October 5, 1999
© copyright 1999 Lawyers-BC.Com Services Ltd.