At the core of the franchisor-franchisee relationship is a contract that sets out the parameters of that relationship and the manner in which the franchisee must operate the franchised business. Entering into a franchise agreement is a significant legal commitment that requires a careful understanding of both the opportunities and the risks involved. Beyond the franchise agreement itself, there are many other legal elements that a franchisee may face, including the incorporation of a company, shareholder agreements, lease negotiations, and operational matters such as employment, permits and licensing, and supplier and vendor agreements.
For prospective franchisees, hiring a lawyer that specializes in franchise law is an important step to ensure that (a) the franchisee has understood the legal commitment they’re entering into and (b) that they have the adequate legal support to successfully operate the franchised business.
The legal landscape of franchise law in Canada
In Canada, six (soon to be seven) provinces have specific franchise legislation in place. Legislation is unique to each province, however they share a common purpose: to ensure that a prospective franchisee is provided with the information required to make an informed investment decision before purchasing the franchise. In addition, franchise legislation creates a legal framework that governs the relationship between franchisors and franchisees outside of the confines of the franchise agreement.
It is paramount that a prospective franchisee understands their statutory rights and the legal protections afforded to them by the franchise legislation in their province. On the other hand, if the prospective franchisee is located in a province that does not have franchise legislation, then the relationship between the franchisor and franchisee is governed by the law of the contract, and the prospective franchisee should understand that it cannot access statutory remedies; therefore, the negotiation of the franchise agreement becomes even more important.
Negotiating franchise agreements
The franchise agreement is the foundation of the franchisor-franchisee relationship. This contract will affect many aspects of the franchisee’s business, including financial obligations, operational duties, territory rights, and any restrictions during and after the length of the contract.
The franchisor will present a standard franchise agreement to the franchisee, prepared by the franchisor’s lawyer, which will contain various protections, rights, and remedies in favour of the franchisor.
An experienced franchise lawyer can provide invaluable assistance in reviewing and negotiating the terms of the franchise agreement. While some franchisors may be flexible, others may be more rigid in their terms. A franchise lawyer can help identify (a) contextual factors that ought to be reflected in the franchise agreement and (b) any clauses that are particularly onerous, atypical, or otherwise unfavourable to the franchisee, as well as suggested amendments.
Setting up the legal structure for the franchisee
Prior to signing the franchise agreement, the first important step for a prospective franchisee is to determine the appropriate business structure for them. Will they own the franchise as an individual or set up a separate entity to represent them? franchisee. Each business structures has its own advantages and disadvantages, the most common structures being:
- Sole proprietorship;
- Partnerships; and
- Corporation.
A lawyer with experience in the franchise industry can (a) provide guidance as to the most appropriate business structure, (b) explain the pros and cons of each form of entity, and (c) assist in the creation of the selected entity and ensuring that the jurisdictional requirements for operation are met.
Managing corporate governance and shareholder agreements
In many cases, franchisees incorporate corporations or enter into joint ventures with others to share the financial burden and operational responsibilities of running a franchise. If multiple individuals are involved in the franchise, it is essential to establish a comprehensive shareholder agreement that outlines the terms of corporate governance as well as the rights and obligations of the shareholders, and defines the dispute resolution process.
While any corporate lawyer can draft a shareholder agreement, a franchise lawyer’s input is vital as the shareholder agreement should be tailored to reflect the realities of the franchise agreement, both with respect to the practical operation of the business as well as the limitations and responsibilities of the franchisee. For example, the franchise agreement may specify that particular terms are included in the shareholder agreement as it relates to death, disability, and transfer, and failure to include such terms would be a violation of the franchise agreement.
Furthermore, any distribution of shares, liquidation of assets, or transfer of the business will be governed by both the shareholder agreement and the franchise agreement. It is important that these two documents work hand in hand to avoid any conflict.
Why hire a franchise lawyer?
Franchising offers an exciting opportunity, but is a serious legal commitment that requires careful planning and expert advice. Hiring a franchise lawyer is essential to navigating the legal complexities of franchise and/or contract law, negotiating fair and beneficial terms in the franchise agreement, and setting up the proper legal and corporate structure for the business. With the guidance of a skilled franchise lawyer, franchisees can protect their interests, minimize risks, and set themselves up for long-term success.
Cassandra Da Re
Partner
Dale & Lessmann LLP
cdare@dalelessmann.com