Due Diligence For Prospective Franchisees
Some of the most recognizable businesses in the Canadian marketplace – Tim Hortons, Popeyes and Domino’s Pizza – are thriving franchises. With the high level of brand name recognition among consumers, it is no wonder that franchises are highly popular among entrepreneurs. However, not every franchise is a financial success story. Often times, negative consequences occur when little or no due diligence is performed the signing of contracts. Keep reading to learn about what you need to consider in order to minimize your risk as a prospective franchisee. Alternatively, call Kahane Law Office in Calgary to start your franchise due diligence with a franchise lawyer.
You Are Renting A Business System – Not Buying It
When purchasing a franchise, many people think they are buying business. This is not the case. You are buying a license to carry on business under the franchisor’s business system. You also receive a license to the rights to use the franchisor’s trademark for a period of time. Typically, the term of the agreement ranges from 5 to ten years. Once the time is up, the rights revert back to the franchisor. Franchise due diligence includes reviewing what you actually receive for your investment.
What Are The Costs Of Owning A Franchise?
This is a critical component of franchise due diligence. Depending on the agreement, the initial fee for operating a franchise ranges from $10,000 to $100,000. In addition, you will likely have to pay an ongoing royalty based on gross sales that usually varies between 5 per cent and 8 per cent. Most franchisors also require the franchisee to make financial contributions to a fund that the franchisor uses to advertise the brand nationally and/or regionally. Other times, requirements to renovate or re-brand cost a lot of money to the franchisee.
Review The Franchise Disclosure Documents (FDD)
Legally, in Alberta, franchisors must provide prospective franchisees with a FDD no less than 14 days before the franchisee signs an agreement. Failure to comply with disclosure obligations can mean serious legalramifications for the franchisor. Remember to review the Franchise Disclosure Documents thoroughly with your lawyer and/or financial advisor as it details material facts about the franchise and help you assess the merits of this investment. Note that the contents of the FDD generally get written for the franchisor’s benefit, even when legal action is leveled against the franchisor.
Remember: In British Colombia, Newfoundland, Nova Scotia, Saskatchewan and Quebec, franchisors lack the legal obligation to provide you with an FDD. This means that, in the event the franchisor fails to disclose a material fact pertaining to the franchise, there will be no statutory remedies available.
The following are a few of the key aspects (not not nearly all) of what to look for:
Who is Guaranteeing the Contract?
An important thing to note in a franchise agreement is who has to guarantee the contract. Whenever possible, do not sign a contract where you and your spouse has to guarantee the contract. If you do, this means that if the business fails, the franchisor can sue both of you. Try to limit liability so that only one of the franchisees assumes all the risk. You may also wish to consider capping a personal guarantee to a definitive amount.
Will You Have Exclusivity?
In the franchise agreement, it states whether you will be getting exclusive rights to operate the franchise. It also states whether that right can be reduced or lost in the future. Exclusivity is an important component as it may be fore a very small geographic region or an entire country. The specific details matter.
Who Owns the Trademark?
Figure out whether the franchisor actually owns or controls the trademark. You may use the Canadian Intellectual Property Office search engine to look up trademark registrations and applications.
Speak with Other Franchisees
Even if they are not in the same country, you should speak with other franchisees to glean valuable insight about what it is like operating the franchise. You can ask how much money they are making, whether they are happy with the franchisor and if they would invest in it again.
Talk To A Franchise Due Diligence Lawyer In Calgary
Keep in mind that, as with any other investment, purchasing a franchise involves a high degree of risk. Whether you wish to speak with a franchise lawyer about reviewing or drafting a FDD or a franchise agreement, the experienced corporate lawyers at Kahane Law Office are here to help. Please reach us toll-free at 1-877-225-8817 (or 403-225-8810 locally in Calgary, Alberta), or email us directly here.