Franchises can be an amazing way to grow your business quickly, without the need for the increased capital and staffing you would need to open multiple locations yourself.
At its most basic level, by franchising your business, you control both your intellectual property AND how the franchise is run. The franchisee puts the money up, and the hard work in, but relies on your support and the know-how needed to stick to your business model.
Franchises are popular. Millennials are one of the keenest demographics, representing a third of interested franchisees. In fact, the Canadian Franchise Association estimates there are 1300 franchise brands across Canada (nearly 60 percent of which are from non-food verticals), and they are a huge benefit to our economy. According to a recent CBC report, “…they generate $96 billion in revenue every year, making them big business…franchising directly or indirectly employs almost one in 10 Canadians.”
Sounds like an immediate win/win, right? You make money from the upfront fees and down the road royalties, the person doing the leg work launches an already successful enterprise with solid brand value, the economy booms.
But, as with much of running a business, deciding to franchise is a step not taken lightly – and you could face legal pitfalls if you’re not careful.
Franchising: What You Need to Know to Avoid Unexpected Legal Pitfalls
Disclose, disclose, disclose! In Ontario, franchises are governed by the Arthur Wishart (Franchise Disclosure) Act. It imposes on potential franchisors the requirement to make full and complete disclosure about their business so that potential franchisees can make an informed decision about buying a franchise. There is similar legislation in BC, Alberta, Manitoba, New Brunswick and Prince Edwards Island.
The requirements are many and compliance is strict! Failure to properly disclose could lead to your franchisee having a legal right to rescind the contract up to two years after entering into it. Your franchisee can ask for all their money back, require you to buy back any equipment they purchased, and also file a claim against you for any damages they suffered from entering into the Franchise Agreement.
While the Regulations set out specific matters which need to be disclosed, they also require a franchisor to disclose any material facts. Many a court battle has been fought over whether such and such matter was a material fact or not. And be warned! Courts tend to be more sympathetic to the poor franchisee than the more powerful franchisor.
Contracts are your friend. Remember – you are building a relationship with your franchisee, so it is absolutely crucial that your Franchise Agreement is comprehensive and sets out CLEARLY both of your rights and responsibilities in said relationship. Will you require your franchisees to contribute to an advertising fund? What happens if they want to sell the franchise to someone else? How will you be able to enforce compliance with your brand requirements? How soon after being a franchisee can they launch a competing business?
All of the above needs to be in the contract – which definitely can’t be a two pager you’ve downloaded off the internet. These are complex documents – 25 to 30 pages long, and with exhibits and addenda can end up two to three times that length – the goal of which is to protect you both over the course of your business collaboration.
Never cut corners on a Franchise Agreement. You will regret it.
Protect your brand. Your franchise business will rise and fall on the strength of your brand. Potential franchisees will only pay to join if your brand is valuable and wields clout in the marketplace. As I wrote about last time, protecting your brand via trademarks, patents and copyright is VITAL. If you haven’t? Then anybody can jump in and replicate your years of hard work, use the name or replicate your systems and procedures. Why would anyone want to risk putting money behind a brand with that kind of risk? Why would someone pay you good money to use what others are using for free? Investing in registering domain names, filing trademarks to protect your brand and protecting your copyright and patents is crucial to the success of your franchise.
You might have gotten away with a bit of cut and paste, a little “internet search keyword contracts” when you were bootstrapping your way to success in the beginning.
Trust me when I say that franchising is not a DIY job. To avoid costly pitfalls, you need the help of someone who can help you successfully navigate the potentially treacherous waters of franchising. Or you risk losing everything you’ve poured your blood, sweat, and tears into over the years.
Stay tuned, because coming up we’ll talk about the importance of exit strategies. And why strategizing about your exit – even when you’ve barely gotten yourself out of the starting gate – is a key component to eventual success!