Research to do BEFORE purchasing a franchise
Advice from a Canadian franchise lawyer
So you want to own a small business and have decided that a franchise may be the way to go. The first question you need to ask yourself is what type of business do I really want to operate. If you fail to answer this question at the outset, there is a pretty good likelihood that you will simply waste time investigating business opportunities that are not suitable for you. For example, why would anyone spend the time to investigate a maid service franchise or a restaurant franchise if they have absolutely no interest in being involved in or operating a maid service business or a restaurant?
Once you have identified the type of business you would like to operate, you need to determine whether there are any franchisors that offer franchises in that line of business and whether they are currently offering any franchises in your area. After identifying a list of appropriate franchisors, you then need to closely investigate those franchisors, their franchise systems and the franchise opportunities that they are offering.
There are a number of ways that a prospective franchisee can and should investigate a franchise opportunity before acquiring a franchise, including:
- Contacting the current and former franchisees of the franchisor. A prospective franchisee can obtain a substantial amount of information about the franchisor and the operating success of the franchises simply by talking to the franchisor’s franchisees.
- Talking to the franchisor’s representatives. It is important to obtain as much information as possible from the franchisor’s representatives about the franchisor and the franchise opportunity. In particular, a prospective franchisee should ask the franchisor’s representatives about the training offered by the franchisor, ongoing support services, assistance with acquiring the products to be sold from the franchise and all other services that the franchisor offers to its franchisees.
- Conducting internet searches on the franchisor. It is surprising how much information is readily available about most franchisors on the internet.
- If the franchisor has franchises in Alberta, Ontario or the United States, obtain a copy of the franchisor’s disclosure document. The franchisor’s disclosure document will contain a substantial amount of information about the franchisor and the franchise system.
- Obtain and review a copy of the franchisor’s franchise agreement. It is advisable that anyone who is serious about acquiring a franchise obtain the assistance of a lawyer who is familiar with franchise matters to review the franchise agreement and ensure that the prospective franchisee fully understands the terms of the agreement before making the decision to acquire a franchise.
- Obtain as much information as possible about the area in which the franchise will be located. For example, if you are considering the acquisition of a franchise that targets children, you will want to obtain demographic information about the area to ensure that there are a significant number of children within the catchment area of the proposed franchise location.
Although some of the information listed above is readily available to a prospective franchisee, other information can only be obtained through the franchisor. Frequently, franchisors will not release full and complete information about their franchise systems until a prospective franchisee signs a franchise application agreement and in some cases, pays a deposit to the franchisor.
The purpose of a franchise application agreement is generally to protect a franchisor and to obtain relevant personal and financial information about the prospective franchisee. Almost all franchise application agreements will provide that any information that the franchisor provides to the prospective franchisee will be confidential and must not be disclosed to any third parties without the consent of the franchisor (regardless of whether the prospective franchisee ultimately acquires a franchise.) Theses types of provisions can result in a prospective franchisee being held legally liable for substantial damages if the prospective franchisee improperly discloses any confidential information that was provided by the franchisor.
In addition to confidentiality terms, franchise application agreements usually provide that the prospective franchisee consents to the franchisor obtaining a credit report and other financial information concerning the prospective franchisee. A franchisor will assess a prospective franchisee based on this information as well as the other personal and financial information that the prospective franchisee provides to the franchisor. In addition, many franchisors will conduct detailed interviews of the prospective franchisee to ensure that the individual candidate meets the franchisor’s criteria for its franchisees.
It is also common for a franchisor to require a prospective franchisee to pay a deposit at or around the time that the franchise application is made. Each franchisor’s policy with respect to the payment of a deposit and the conditions under which such deposit is refundable are different. However, most franchisors will require that a prospective franchisee pay a deposit in the range of $5,000 to $10,000. In those provinces without franchise legislation, it is not uncommon for franchisors to stipulate that all or a portion of the deposit is non-refundable in order to cover the anticipated expenses the franchisor will incur in processing a prospective franchisee’s application.
In Ontario and Alberta the payment of deposits is regulated by legislation. The Ontario franchise legislation prohibits the payment of a deposit by a prospective franchisee or the signing of any agreement relating to a franchise until at least 14 days after the franchisor has provided a disclosure document to the prospective franchisee. In Alberta, the legislation is somewhat less restrictive and permits the payment of a fully refundable deposit by a prospective franchisee prior to receipt of a disclosure document.
Being a franchisee is often a very rewarding experience. However, you might find that your experience as a franchisee is less than ideal if you fail to fully investigate the franchisor and the franchise opportunity prior to acquiring a franchise. It is only through investigation and the obtaining of advice from experienced professionals that a franchisee can fully understand all of the risks and obligations associated with acquiring a franchise.
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