News & Updates

Top 10 Issues in Deciding to Franchise in Canada

November 06, 2023

Put simply, a franchise relationship is an ongoing contractual relationship that is found to exist under provincial franchise legislation where the franchisor grants (for a certain period of time) the franchisee the right to use the franchisor’s trademarks and other intellectual property and business methodology (often within a specific territory or at a specific location only) in exchange for a fee. In most cases, a franchise relationship requires that the franchisor exercises significant control over, or offers significant assistance in, the franchisee’s method of business operation. In a franchise relationship, the parties are independent contractors and neither party is an agent for the other party. This designation as a “franchise” is fact-based and occurs when the statutory definition is met, whether a company intends to operate as a “franchise” or not and irrespective of how the parties themselves describe the arrangement. As such, when utilizing distributorships or granting licences in Canada, it is important to consider the potential implications of franchise legislation and the extent of a company’s involvement in and/or control over the operation of the new distributor or retailer.

Here are the top 10 issues to consider in deciding whether to franchise your business in Canada:

1. Franchising lends itself to relatively rapid and inexpensive growth.
   • The franchisor typically requires less up-front capital than it needs to open its own units since the franchisee usually has to put up the initial costs of construction (in addition to any fees it has to pay to the franchisor).
   • Since the franchisee will be running the business location, the franchisor can save on the employment-related and other operational costs that would accrue if it were to open and operate the units itself.
2. Be careful not to grow “too fast”.
   • The relatively low-cost ability to expand through franchising has led many franchisors to become overly aggressive and optimistic in its development targets. Care must be taken to ensure a sufficient availability of inputs, franchisor support and supervisory capability and, of course, customer demand, at every stage of the system’s growth.
3. Does the franchisor have a distinctive brand to offer?
   • In order for franchising to make sense, the franchisee must feel it is getting a benefit (i.e., a marketing boost) from branding its business under the franchisor’s mark.
   • Appropriate protection of the marks by the franchisor (and the ability to license others to use them) is critical.
4. Does the franchisor have a profitable existing system or prototype unit?
   • In order to get franchisees to buy into the franchisor’s system, the franchisor should be able to demonstrate the viability of the franchise system’s customer offering, through either a single existing prototype or chain of outlets.
   • The longer the unit or units have been operating profitably, the better.
5. How easy is it to duplicate?
   • The franchisor must be able to demonstrate that its concept can be readily duplicated and is portable from location to location. The success of the existing business should be driven primarily by a winning formula (that is being licensed by the franchisor to the franchisee) and not the individual characteristics of a particular owner/manager or location (which a franchisee will likely not be able to replicate).
   • Consistency and uniformity of the content and quality of the customer offering between and among units is critical to the success of any chain, franchised or not. Customer loyalty emanates from delivering what the franchise system’s customers expect to receive on a consistent basis.
6. Does the business model make sense?
   • The franchisee’s required investment and fee/royalty obligations should still allow for a reasonable return.
   • The franchisor’s profitability should be achievable/sustainable on the strength of ongoing operations and not be reliant on initial franchise and development fees.
7. Franchise legislation may apply.
   • In the jurisdictions in Canada with franchise legislation in effect (currently Alberta, British Columbia, Manitoba, New Brunswick, Ontario and Prince Edward Island), unless an exemption is available, the franchisor will have to prepare and deliver to each prospective franchisee a detailed disclosure document containing, among other things, the franchisor’s financial statements.
   • The franchisee’s principal remedy for the franchisor’s failure to meet its statutory disclosure requirement is rescission - i.e., the ability to walk away from the franchise agreement and to require the franchisor to reimburse the franchisee for all of the franchisee’s losses in establishing and operating the franchised business (including operating losses and third party claims).
   • The franchisor will also have to abide by a duty of good faith and fair dealing, which will require it to take the franchisee’s interests into account whenever it performs under or enforces the franchise agreement (but not to put such interests ahead of its own).
   • For franchises in Québec, the Québec civil code has provisions that govern the performance and enforcement of standard form agreements (like franchise agreements) including a duty to perform these agreements in good faith.
8. The franchisor must be prepared to have its business and reputation ride significantly on the efforts of third party franchisees, rather than employees it can control directly (and the franchisor will want to avoid any appearance of having any control over its franchisees’ employees to avoid potential joint employer liability).
   • If managed properly, this can lead to a more successful network than one that is corporate-owned, since the people running each outlet (i.e., franchisees) are generally more entrepreneurial and more highly incentivized to run a successful business and generate profits than are primarily hourly employees with less skin in the game.
9. Does the franchisor have the right orientation and personnel?
   • A good franchisor’s personnel are typically focused on franchise sales and support, rather than operations.
   • The franchisor and its employees must appreciate, and ideally embrace, the interdependence between the franchisor and its franchisees.
10. Third party liability is less direct, but still present.
    • Apart from indirect impacts on the franchisor’s brand and reputation, the franchisor will still be seen as a deep pocket for aggrieved third parties, and thus a target in any litigation. However, liability may be harder to establish, subject to issues of control, joint employer and vicarious liability.

Bottom Line: If the operational pre-conditions of a distinctive brand and a successful, portable formula are present, franchising can be a faster, more cost-effective way for a franchisor to expand its network than opening and operating its own outlets. It is, however, a different model, based on interdependence and mandated disclosure and good faith, rather than on control, and thus requires a different focus (and attitude) on the part of the franchisor. It should also be recognized that the skills and talents required to successfully operate a business directly (including strong branding and operational excellence) are very different than the skills and talents required to successfully franchise a business. 

Successful franchising requires (among other things) strong recruiting and screening of qualified franchisees, an economic model that allows for profitable operations by both the franchisor and its franchisees and strong training and on-going support.

Tags: franchise, Franchising, Intellectual Property, trademark