Resources for Educators

Legal Aspects

Because the franchise business model is built upon a contractual relationship between franchisee and franchisor, it relies on contracts and other documentation. This means that there are many legal aspects that need to be considered when buying a franchise or franchising a business. There are also certain rights and obligations under the law which apply to the franchise relationship.

What laws exist around franchising in Canada?

In Canada, there are franchise laws that dictate certain elements of franchise operation. These are called Franchise Disclosure legislation and regulations.

Franchise Disclosure laws in Canada are provincial, not federal. The provinces which currently have Franchise Disclosure laws in place are British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island. Each of these province’s laws are similar, but are distinct, and there are some differences between provincial legislation.

Generally, disclosure regulations prescribe the information that franchisees must receive before signing a franchise agreement with a franchisor. The purpose of this legislation is to ensure that franchisees receive certain information that will help them make an educated decision about whether or not to invest in a franchised business. It also encourages franchisees and franchisors to deal with one another in good faith.

CFA members are encouraged by the CFA Code of Ethics to provide this disclosure regardless of whether provincial legislation is in place.

What is a Franchise Disclosure Document?

When a prospective franchisee is interested in investing in a franchised business, they will receive a Franchise Disclosure Document from the franchisor. This document is a comprehensive summary of pertinent information about the franchise system.

A typical franchise disclosure document may include information such as:

  • Background on the franchisor and the key players within the system, including its directors and officers;
  • 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;
  • 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 the current and former franchisees and their contact details; and
  • Financial statements and other fiscal information.

As noted previously, the disclosure document must meet requirements set out in any provincial franchise legislation. It’s also worth noting that these documents are meant for serious prospects only, and are not meant for or provided to the general public.

Prospective franchisees are given a minimum of 14 days to review the document prior to signing on with the franchise.

Franchise Agreements

When it’s time to sign on the dotted line, the two parties—franchisee and franchisor—will be signing on to a Franchise Agreement. A Franchise Agreement is a legally binding document that explains in detail the obligations and responsibilities of the franchisor and franchisee. Every Franchise Agreement is different, because terms, conditions, and methods of operation vary depending on the franchise system.

However, some areas typically covered by the agreement are:

  • Fees
  • Intellectual property rights granted
  • Training and operations
  • Term length and how to renew
  • Conditions for terminations
  • Requirements after the agreement expires
  • Territory
  • Advertising and marketing (design and renovations)
  • Performance Requirements
  • Insurance requirements
  • Indemnification
  • Causality
  • Resale and contingency for death and incapacity

Franchising Legal Counsel

As you can see, there are many elements to navigate when it comes to Franchise Disclosure Documents and Franchise Agreements, which is why it’s advisable that a prospective franchisee retain a franchise lawyer to help them through the process. (New franchisors should also seek counsel from a franchise lawyer when franchising their business!)

It’s a common misconception that any lawyer will be able to help with this process—in reality, franchise law is a specialty in law, and it’s very important that franchise disclosure documents and franchise agreements are created and reviewed by franchise lawyers.

Franchise lawyers can help prospective franchisees understand the process and identify anything out of the ordinary.

Because the franchise business model is built upon a contractual relationship between franchisee and franchisor, it relies on contracts and other documentation. This means that there are many legal aspects that need to be considered when buying a franchise or franchising a business. There are also certain rights and obligations under the law which apply to the franchise relationship.

What laws exist around franchising in Canada?

In Canada, there are franchise laws that dictate certain elements of franchise operation. These are called Franchise Disclosure legislation and regulations.

Franchise Disclosure laws in Canada are provincial, not federal. The provinces which currently have Franchise Disclosure laws in place are British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island. Each of these province’s laws are similar, but are distinct, and there are some differences between provincial legislation.

Generally, disclosure regulations prescribe the information that franchisees must receive before signing a franchise agreement with a franchisor. The purpose of this legislation is to ensure that franchisees receive certain information that will help them make an educated decision about whether or not to invest in a franchised business. It also encourages franchisees and franchisors to deal with one another in good faith.

CFA members are encouraged by the CFA Code of Ethics to provide this disclosure regardless of whether provincial legislation is in place.

What is a Franchise Disclosure Document?

When a prospective franchisee is interested in investing in a franchised business, they will receive a Franchise Disclosure Document from the franchisor. This document is a comprehensive summary of pertinent information about the franchise system.

A typical franchise disclosure document may include information such as:

  • Background on the franchisor and the key players within the system, including its directors and officers;
  • 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;
  • 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 the current and former franchisees and their contact details; and
  • Financial statements and other fiscal information.

As noted previously, the disclosure document must meet requirements set out in any provincial franchise legislation. It’s also worth noting that these documents are meant for serious prospects only, and are not meant for or provided to the general public.

Prospective franchisees are given a minimum of 14 days to review the document prior to signing on with the franchise.

Franchise Agreements

When it’s time to sign on the dotted line, the two parties—franchisee and franchisor—will be signing on to a Franchise Agreement. A Franchise Agreement is a legally binding document that explains in detail the obligations and responsibilities of the franchisor and franchisee. Every Franchise Agreement is different, because terms, conditions, and methods of operation vary depending on the franchise system.

However, some areas typically covered by the agreement are:

  • Fees
  • Intellectual property rights granted
  • Training and operations
  • Term length and how to renew
  • Conditions for terminations
  • Requirements after the agreement expires
  • Territory
  • Advertising and marketing (design and renovations)
  • Performance Requirements
  • Insurance requirements
  • Indemnification
  • Causality
  • Resale and contingency for death and incapacity

Franchising Legal Counsel

As you can see, there are many elements to navigate when it comes to Franchise Disclosure Documents and Franchise Agreements, which is why it’s advisable that a prospective franchisee retain a franchise lawyer to help them through the process. (New franchisors should also seek counsel from a franchise lawyer when franchising their business!)

It’s a common misconception that any lawyer will be able to help with this process—in reality, franchise law is a specialty in law, and it’s very important that franchise disclosure documents and franchise agreements are created and reviewed by franchise lawyers.

Franchise lawyers can help prospective franchisees understand the process and identify anything out of the ordinary.

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