A large amount of retail trade in Canada is now conducted through franchise organizations. A franchise permits you to acquire the know how of an experienced franchisor and apply it for your business so that you minimize the time and cost of learning your business.
The Franchisor who provides support and the franchisee who is an independent businessman are legally separate parties. The franchise agreement governs the relationship between the two parties. The Franchisor usually provides the trade names, group advertising, assists with setting up the outlet and sometimes provides the supplies required to carry out the business.
Many franchises in Canada are sub franchises of American companies that have given their master franchise to a Canadian company which in turn gives you the franchise agreement. If you are dealing directly with an American company you will need to think about which court you will sue in, American or Canadian, if there is a breach.
Financial position of Franchisor
Unless there are extremely well known franchises like the McDonalds you should inquire into the financial backing of the franchisor. You should not presume that the franchisor is financially strong. You should ask for the names of the key persons in the organization and their backgrounds and experience because it is their experience that you are paying for through the franchise fee. Attached is a list of questions you can ask the franchisor. This is not an exhaustive list. All possible inquiries should be made.
Technical know how
The franchisor should have sound technical know how of the industry in which the franchisor provides his service to the franchisee. The franchisee is relying on it to start the business.
Sales and marketing are important. For the franchisor it is important that he describes his service and background in a brochure to the franchisee. The marketing of the service or product by the franchisee to the customers is also very important in building up the business. In both cases it is very crucial that the claims made are not exaggerated. If they are there will be some disappointment and some will end up taking it to the court and that can be a very expensive exercise. Under the Business Practices Act it is an offence to mislead or misrepresent through advertising or other means what you are providing.
Guarantee of Supply
One should investigate what guarantee is being given by the franchisor that the goods will be supplied and if there is a default in the supply of goods.
Usually the franchise agreements will provide for an exclusive territory. This territory should be carefully reviewed and any studies available from a franchisor as to that locality should be obtained.
It is very desirable when dealing with a large franchisor to have the agreement made by the Franchisee in the name of a company so that in the event of a dispute only the company remains liable.
The Franchisee should find out what training and at what cost is being provided by the franchisor. The experience of other franchisees is very useful in determining the nature of this service provided.
It is important to review the agreement with respect to the prices for the supply of goods in the future.
Some franchise dealers have market studies made of the population and the consumption. Any such study should be reviewed carefully before signing the agreement.
Provisions should be made for the termination of the franchise. It is usually by way of a written notice to the other party and provides for the return of materials, inventory, etc.
The Franchisor usually provides for mass marketing and allows the Franchisee to use the trade marks and other techniques to be used.
The Franchisor makes his income from the mark up on the sale of his goods to the Franchisee and may also charge a percentage of the revenue of the Franchisee’s sales.
We will be pleased to guide you through all the steps required in setting up your franchise, either as a franchisor or as a franchisee. In a franchise, the factors outside of the legal agreement are as important as the agreement itself.