A Franchise is a business whereby the owner licenses its operations. The license grants a Franchisee access to a Franchisor’s proprietary business knowledge, processes and trademarks, thus allowing the Franchisee to sell a product or service under the Franchisor’s business name. In exchange, the Franchisee generally pays the Franchisor an initial start-up fee and recurring licensing fees. Franchisors may also seek royalties based on gross sales of the franchise. The franchisee is required to conform to the standards of the system. Depending on the type of business, a Franchisor could set specific prerequisites in terms of experience and qualifications.
There are about three forms of franchise arrangements:
In Ontario, the sale and purchase of a franchise is governed by the Ontario provincial Statute Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 – Bill 33 (the “Act“). The Act was drafted to ensure transparency between a Franchisor and a Franchisee. To protect the Franchisee, section 5(1) of the Act provides that a Franchisor must disclose and deliver all important facts relating to the franchise, financial statements, copies of all relevant agreements to be signed by the Franchisee, and any other statements that help in making the investment decision to the Franchisee at least 14 days before signing a Franchise Agreement or any other relevant agreement and before paying anything in relation to the Franchise.
Section 5(5) of the Act also provides that the Franchisor has a duty to disclose to and notify the Franchisee with a written statement of any material change regarding the franchise or the disclosure provided above as soon as reasonably possible before signing the agreement or paying anything in relation to the franchise. These provisions however have a long list of exceptions listed in section 5(7) of the Act.
The penalty for non-disclosure, according to section 6(1) of the Act, is that a franchisee may rescind the franchise agreement, without penalty or obligation, up to two years after entering into the franchise agreement if the franchisor never provided the disclosure document. Rescinding an agreement or contract means, legally, putting all parties back in the position they were before they entered into the contract.
To close the Purchase and Sale of a Franchise in Ontario, the Franchisor and Franchisee come together by signing a Franchise Agreement which includes ancillary documents. A modern franchise agreement package could include:
Although most franchisors present the franchise agreement as non-negotiable, some provisions are negotiable. Terms that are negotiable could be:
The smaller the franchise system, the more concessions will be made.
Franchise Agreements are long and complicated, they must be read and understood in their entirety by Franchisees. This is your lawyer’s role. We ensure that you understand fully the commitment made, and we assist in the negotiation of changes. A franchise lawyer will attempt to protect your interests as much as possible and advise you of clauses that will tie you to severe liabilities. We draw your attention to red flags and assist you in limiting them to the maximum extent.
Rana Charif has experience with corporate acquisitions of multi-million dollar startups in Ontario. She has worked for a multi-billion and multinational company in Toronto where she has drafted, legally reviewed and negotiated numerous commercial agreements, commercial real estate leases and purchases of small businesses. She is a Franchise Lawyer Toronto that can not only assist you with overseeing your franchise purchase or sale transaction, but also negotiating terms to ensure that your liability is limited. Rana works closely with clients to guarantee that they fully understand every clause in their contract.
July 27, 2021