The franchise business model is a popular way to do business across Canada. Each year, thousands of Canadians go into business for themselves but not by themselves by investing in a franchise.
In certain provinces there is a legal framework of legislation to help ensure that prospective franchisees are making an informed investment decision; once they have joined a franchise system, the legislation encourages franchisees and franchisors to deal with one another in good faith.
“Franchise law, in provinces with franchise legislation, assumes that franchisees need certain types of information to make informed decisions before they spend a lot of their money and a lot of their time on a franchise business,” says Chad Finkelstein, a franchise lawyer with Dale & Lessmann LLP.
Franchise legislation currently exists in British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island. Alberta’s franchise laws have been on the books the longest, enacted in the early 1970s.
“Those provinces enshrine and codify certain rights of the franchisee that generally exist in what’s called common law, things like franchisees’ right to associate, the mutual duty between franchisors and franchisees to act in good faith toward one another,” Finkelstein says. In provinces without specific franchise legislation, the franchise business relationship is usually governed by common and/or general business laws.
“The intention of the franchise legislation is to balance out what is often the imbalance of power between a franchisor and a franchisee. The franchisee is often a small business, a more ‘mom-and-pop’ type operation. Because of that, governments, over time, have perceived that there is potentially an imbalance between these large systems and the smaller investors,” says Peter Snell of Gowling WLG. “As a result, some provincial governments have implemented franchise legislation, which covers off, among other things, what information has to go into the disclosure document, as well as the duty of fair dealing, which creates a statutory obligation for a franchisor to deal fairly with its prospects and franchisees and not take advantage of them.”
For prospective franchisees, these are the components of franchise legislation that will have the largest impact on them right away. Franchise legislation helps potential franchisees make more informed decisions by requiring franchisors to provide serious franchisee candidates with disclosure documents. A franchise disclosure document is a written resource designed to provide franchisees with vital information that they need in order to make an informed decision about investing in a franchise opportunity. Franchise legislation outlines what information needs to be included in disclosure documents and how they need to be delivered to prospective franchisees. Under legislation, franchisees are prescribed a minimum amount of time to review the disclosure documents and consult franchise professionals, such as a lawyer, accountant and banker, to go over the documents in detail.
A franchise disclosure document must disclose all material fact, including, but not limited to:
- Background on the franchisor – history of the company, what it offers and how it is operated, how long it has been in operation, how many units/franchises it has, other brands it operates
- Background on the key players within the system, such as its directors and officers, and those one would deal with as a franchisee
- Any history of litigation, civil actions, convictions, bankruptcies, etc. of the franchisor and/or its directors and officers
- A summary of the trademarks and other intellectual property that are licensed under the franchise agreement
- A summary of the costs and fees required to start and run the franchise business
- An outline of the training and ongoing assistance provided by the franchisor
- A list of current and former franchisees and their contact details
- Financial statements and other fiscal information
Franchise legislation also provides for rights for established franchisees, such as the right to associate and share information with fellow franchisees.
Need Direction? Consult a Franchise Lawyer
Franchise legislation, disclosure and agreements are all complex legal issues and documents that prospective franchisees need to understand in order to enter into a franchise investment relationship with all the information they need. Luckily, there is help available to explain the ins and outs of the requirements, information, and contracts involved in franchising. Experienced franchise lawyers can provide clients with this guidance and are trained in reviewing complex legal documents. They can easily identify any areas or items that don’t comply with legislation or are outside the norm or stand out from what is typical.
Make sure that the lawyer you select to work with has experience in franchising. The Canadian Franchise Association’s membership includes law firms and lawyer that specialize in franchising. Visit the support services member directory at https://www.cfa.ca/SupportCategories to see listings for more than 50 firms and professionals across Canada.