Overview
To franchise or not to franchise? That is the question many business owners ask themselves. Before jumping into the waters of scaling your business via the franchising route, you should ask yourself two key questions: (1) Is my business venture already a franchise? and (2) If not, should I franchise my business?
What is a franchise?
Your business venture may be a deemed franchise even if you did not intend to create a franchise model. Where a business venture fits into the definition of a franchise under legislation or applicable case law, the venture will be subject to franchise law regardless of the intentions of the business owners. Generally, a business relationship is a deemed franchise if certain elements are present, including, but not limited to:
- Payment The payment of money as a condition of commencing operations (akin to the franchise fee), or payments in the course of operating the business (including royalties or licensing fees);
- Name Rights The right to offer goods or services associated with a trademark or trade name; and
- Control The exercise of significant control over, or the offering of significant assistance in, the business including building design and furnishings, locations, business organization, marketing strategies or training.
Legislative requirements relating to franchises cannot be contracted out of or waived.
If your business venture is a franchise, you must comply with the disclosure obligations imposed by the provincial laws wherever the deemed franchisee is located. Failing to provide the required disclosure can lead to financial penalties and a right for the deemed franchisee to rescind the agreement between the parties. Where rescission is available, the deemed franchisor may be liable to compensate the deemed franchisee and return the franchisee back to its position prior to purchase of the franchise. This could include refunding all monies paid to the franchisor, purchasing all inventory, equipment and supplies purchased by the franchisee, and compensating the franchisee for all losses incurred to establish and operate the franchised business.
The franchise model is not for everyone. There is a common misconception that franchising is an easy way to boost your business’ revenue. However, not all business models and concepts make good franchises. Before you engage legal counsel to create a franchise agreement and disclosure package, ask yourself the following questions:
Is it the right type of business to franchise?
There is a multitude of factors to take into consideration, including whether the brand is distinctive and strong enough to attract franchisees. If the business’ trademarks are not registered or registrable, the business may not lend well to franchising. Your business should have a strong system and business process in place and described in writing in a details operations manual. The ease with which you can define and recreate the unique elements of your business system will also be a factor. A system that is too complicated or difficult to reproduce should not be franchised. You should also consider whether the business would be successful in other geographic areas.
Is your business franchise-ready?
If sales are down, say for example during a global pandemic, it may be the wrong time to franchise. Franchisors must provide financial disclosure during the disclosure process and franchisees are unlikely to buy-in when a business does not look profitable at that point in time.
Do you have the time and resources to franchise?
Franchising takes significant time, capital investment and effort. As a franchisor, you will be responsible for training and helping your franchisees find good locations and get up and running. Franchisors also have ongoing obligations to continuously disclose any changes in the business or brand that may affect the franchisees and must continuously protect the franchise’s brand/trademarks.
You will also be responsible for ensuring consistency among your franchisees with respect to their training, recipes (if applicable) and processes. Consistency can include everything from store hours to scripts for workers. After all, would it even be a McDonald’s if the person at the drive-through didn’t ask, “Would you like fries with that”?
Franchising is not a hands-off business growth model where you are able to sell a number of franchises, sit back and watch the royalties roll in. Sloppiness, store closures and even certain inconsistencies among franchisees reflect poorly on the entire brand and business. In order to keep all of the franchises running smoothly and consistently you will need to be ready to move from a store-level management role into a role where you will be marketing, supporting and overseeing the management, training and operations of all of your franchisees on an ongoing basis.
Next steps if franchising is right for you
Engaging a lawyer from the outset can save you time and money. An experienced franchise lawyer can help you avoid potential pitfalls.