Franchises can be an amazing way to grow your business quickly and without the need for the increased capital and staffing you would need to open multiple locations on your own. They can also be fraught with legal pitfalls. Here’s what you need to know before starting a franchise.
1. 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 the franchise agreement. That rescission means your franchisee can ask for all their money back, require you to buy back any equipment they had purchased as well as claiming against you for any damages they suffered due to 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 some matter was a material fact or not and courts tend to be more sympathetic to the poor franchisee than the more powerful franchisor.
2. Contracts are your friend
The key relationship will be between you and your franchisee. It is absolutely crucial that the Franchise Agreement be comprehensive and clearly set out both of your rights and responsibilities in the 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? It all needs to be in the contract.
3. Protect your brand
Your franchise business will rise and fall on the strength of your brand. Potential franchisees will only pay to join your system if your brand is valuable, if it means something in the marketplace. If you haven’t protected your brand and your intellectual property and anyone can use the name or can replicate your systems and procedures, 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.
Franchising is not a DIY job. To avoid costly pitfalls, you will need the help of someone who can help you successfully navigate the potentially treacherous waters of franchising.
If setting up a franchise is in your future, let’s have a chat.