To start a franchise relationship with a franchisor, franchisees must enter into a franchise agreement. Each franchise agreement will differ based on the franchise and will contain certain obligations that franchisees must comply with. As a franchisee, it’s important to understand the terms of your franchise agreement, and your rights and obligations under the agreement.
This article will touch on eight general obligations franchisees have once they sign a franchise agreement.
- Personal guarantees
- Confidentiality and non-competition
- Authorized products and services
- Permits and licences
- Operation manual
- Obligations under the law
You will be required to pay a franchise fee. This upfront initial fee becomes payable once the franchise agreement is signed. You may also be required to pay royalties to the franchisor, which will either be charged as a percentage of your gross sales or as a mark-up on products purchased.
You will also be required to pay initial and ongoing costs such as facility costs, licensing fees, marketing fees, initial staffing costs, grand opening advertising fees, rent, insurance, and purchasing the support, marketing, and training materials from the franchise. All costs will be outlined in the franchise agreement and franchise disclosure document.
A franchisor will commonly require a franchisee to provide a personal guarantee. A personal guarantee ensures the guarantor is held personally liable for the amounts owed by the franchisee, and that they comply with the terms of the franchise agreement.
Confidentiality and non-competition
Most franchise agreements require you to keep all the information that you learn about the franchise system confidential. This obligation applies even after the franchise relationship has ended.
Franchise agreements also have a non-competition clause. This clause states that for an agreed period of time after the franchisee leaves the system, they cannot compete against the franchisor within a certain geographic area.
Each franchisor will require you and other members of your management team to attend and successfully complete their specified training program before opening a franchise. You will generally be responsible for the fees related to the training program, as well as subsequent attendance and completion by yourself and your management team, and any other related expenses.
Authorized products and services
Often, the franchisee must agree to use only the equipment, products, supplies, documents, and signage and provide only the services that the franchisor has approved. The franchisee may also be required to use only the suppliers that the franchisor specifies, which could include the franchisor themselves and their affiliates. The franchisee may also be required to comply with the franchisor’s pre-established standards for appearance, function, and performance of the franchise.
Permits and licences
Typically, franchise agreements contain provisions which will require you to obtain all business permits and licences necessary to open that specific franchise. Failure to comply with licensing laws may result in a breach of the franchise agreement and fines from external third parties, such as regulatory bodies and government agencies.
You must also comply with the franchisor’s operation manual. The manual outlines the day-to-day operations of the business and specifies the standards and procedures of the franchise system, as well as the franchisee’s particular obligations in the operation of the franchise. The operation manual may set out how you can hire and train employees, the franchisor’s standards and procedures, maintenance of product quality, and marketing strategies.
Obligations under the law
Each provincial franchise legislation requires that the franchise transaction and relationship between the franchisor and franchisee be governed by a duty of fair dealing. This means that you will have a statutory obligation to act in good faith towards the franchisor and in a commercially reasonable manner.
You will also be required to comply with relevant legislation that imposes specific standards and requirements such as employment legislation, work health and safety legislation, and food safety legislation. You should ensure that you are fully aware of all current legal requirements and obligations that you must adhere to, based on the specific franchise you plan to operate.
A franchise agreement will outline within its terms what obligations and rights you have. The fulfillment of all obligations under a franchise agreement is essential to the success of your franchise relationship and the franchise. It’s important that you understand the terms you’re agreeing to before signing a franchise agreement.
All potential franchisees should seek the assistance of a legal professional to guide them through the franchise agreement and help them understand their rights and obligations upon signing.
Cassels Brock & Blackwell LLP