Want to buy a franchise? Read this first

If you're considering “buying” a franchised business in Canada and you live in Ontario, Alberta or PEI (and soon, New Brunswick), consider yourself lucky because they have specific legislation that protects franchisees.

In the current Canadian “disclosure jurisdictions” of those three provinces, the franchisor is required by law to give prospective franchisees a Franchise Disclosure Document, and a franchise agreement cannot be entered into until at least 14 days after the delivery of that document to the franchisee. In Ontario, no deposit can be provided or any other contract entered until that time period passes.

The three provinces provide substantial remedies to franchisees when the franchisor has not provided the disclosure document, or the franchisor has entered into a franchise agreement before the expiry of the 14-day “cooling off period,” or the franchisor has failed to disclose (or has improperly disclosed) a material fact.

It's a substantial legal document, and it must contain all agreements the franchisee is required to enter (including subleases and general security), as well as the franchisor's most recent audited or reviewed financial statements.

Here area few important things to know about the disclosure document:

  1. Once you've read it in detail, speak to a franchise lawyer. Franchise law is a fairly specialized area of practice in Canada, and there's a lot of crucial information in the disclosure document, particularly relating to costs and fees to acquire and operate the franchised business. Remember that franchisors spend tens of thousands of dollars on their own lawyers to draft these documents. Part of the lawyer's job is to ensure that all material facts related to the franchise are disclosed, but another part is to “spin” any unhelpful or negative facts in such a way that they are not perceived as poorly as they could be. Your franchise lawyer should be able to help you with that.
  2. Some of the key items that must be disclosed involve whether franchisors or their principals are involved in any litigation, whether they've been involved in bankruptcy proceedings over the past six years, or whether they are involved in administrative proceedings such as an investigation under securities legislation. Pay attention to these sections carefully. If there is litigation against or initiated by the franchisor, you may be able to access some of the court pleadings directly to get a better handle on what the allegations are.
  3. The disclosure document will list current and former franchisees. Whether they are in Moncton or Nanaimo, talk to them. If they are nervous about discussing the franchise with a total stranger like you, or they fear it could get them into trouble with the franchisor, consider asking three simple questions:

    • Are you happy you bought it?
    • Are you making money?
    • If you had to do it all over again, would you buy it?

    If the answers are no, no and no, this should give you a pretty good indication as to whether you should make this investment. Happy franchisees will tell you they're happy and they will rave about their franchise. Unhappy ones won't. Out of fairness, speak to more than one franchisee and as many former franchisees as you can. The disclosure document should list them all.

  4. U.S. franchisors may provide you with a copy of their disclosure document for the United States (now called an FDD). Some American franchisors who don't do much business in Canada will presume, incorrectly, that “Canada's the 51st state anyway, so why should it matter if I give them my U.S. document?”

    It matters a lot because the U.S. Disclosure Document may describe facts that have no bearing on the franchise opportunity in Canada. An unmodified U.S. disclosure document will not contain certain information required to be disclosed here.

    It may also give a misleading impression of the franchise opportunity, given the franchisor's experience in the United States may be rosy. But for economic, tax and other comparative reasons (costs of supply and inventory, disposable incomes of customers, currency fluctuations, and the effect of GST and other taxes on a Canadian franchisee) that “rosiness” might not be as easily replicated across the border.

    If you are presented with a U.S. disclosure document and franchise agreement that hasn't been “Canadianized” to comply with the laws of Ontario, Alberta or PEI (or other laws of Canada applicable to businesses), then you have to ask yourself why the franchisor hasn't bothered to do it. Can it not afford it? Maybe it says something about how the franchisor will deal with you if you “buy.”

  5. Carefully assess all start-up costs disclosed in the document and ask the franchisor (and existing franchisees if possible) if these costs are reasonably accurate. You don't want to get into a franchise and expect to pay $300,000 for construction only to find the cost is closer to $400,000. Don't forget to factor in GST, provincial taxes, rent and other operating costs. Get an accountant to help you with this.

    And don't think for one moment the business is going to make money the second you open the doors. It will take some time to turn a profit, and you need to have enough financial resources, stamina and wherewithal to live through the startup phase.

  6. If you are in a province like B.C., where there is no law requiring the franchisor to give you a disclosure document, but the franchisor does business in Alberta or Ontario, then it has a disclosure document it gives out to prospects in those jurisdictions, and there is no good reason why you shouldn't be able to review it.
  7. Vancouver franchise lawyer Tony Wilson is the author of Buying A Franchise In Canada – Understanding and Negotiating Your Franchise Agreement and he is ranked as a leading Canadian franchise lawyer by LEXPERT. He is head of the Franchise Law Group at Boughton Law Corporation in Vancouver and acts for both franchisors and franchisees across Canada, many of whom are in the food services and hospitality industry. He is a registered Trademark Agent, an Adjunct Professor at Simon Fraser University and he also writes for Bartalk and Canadian Lawyer magazines.

    Tony can be reached at: 604.684.1800 or via Email: twilson@boughton.ca