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llp Franchises - Burnet, Duckworth & Palmer LLP · PDF file Franchises Franchises,...

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  • Franchises Franchises, D

    ealerships & D

    istributorships Burnet, Duckworth & Palmer llp is a leading Canadian law firm of over 140 lawyers in the city of Calgary, Alberta.

    BD&P provides premier legal service in all areas of business law, most notably in banking & finance, commercial transactions, commercial real estate, construction, employment & labour, energy, insolvency & restructuring, intellectual property &

    technology, regulatory, securities and tax. In addition, BD&P is widely recognized for its experience in most areas of litigation at all levels of Canadian courts. BD&P is committed to understanding and meeting the needs of its clients and prides itself

    in providing high quality, innovative and timely service.

    For further information on all of BD&P’s practice areas and services, please visit our website at www.bdplaw.com.

    2400, 525-8th Avenue SW, Calgary, Alberta T2P 1G1 Phone: 403-260-0100 Fax: 403-260-0332

    www.bdplaw.com

  • Franchise businesses are everywhere and their numbers continue to grow. It is difficult to drive down a street in a commercial part of a city without seeing a number of franchise businesses. For many individuals, franchises provide an enticing opportunity to own and operate one’s own business. For the franchisor, selling a franchise provides an opportunity to expand the reach of the franchise system without being concerned with the day-to-day operations of the individual franchised business.

    The purchase and sale of a franchise business can be a wonderful opportunity for both parties and at the same time can represent risks for both parties. Therefore, it is important for the parties to make an informed decision before entering into a franchise relationship and to ensure that an appropriate franchise agreement is in place.

    The Franchise Business

  • Franchises, D ealerships &

    D istributorships

    1Nature of the Franchise Relationship Very generally, a franchise is a business where one party, the franchisor, establishes the branding and the manner by which the franchised business is to operate and the other party, the franchisee, becomes responsible for the day-to-day operations of the franchised business. In exchange for being permitted to own and operate the franchised business, the franchisee will make periodic payments to the franchisor and comply with the franchisor’s specific operating requirements. Usually, for any given franchise system, there will be one franchisor and many franchisees. As well, there is no reason a franchisor cannot own and operate one or more franchises.

    It is through the consistent use of the franchise branding and the consistency in the offering of the products and services by all franchisees that significant goodwill in the marketplace is developed. This goodwill increases the value for both the franchisor and the franchisees.

    Types of Franchise Businesses

    Benefits of the Franchise Relationship A franchise system enables the franchisor to concentrate on developing and expanding the franchise system while not having the responsibility for the day-to-day operations of the franchise outlets. Each franchise outlet is typically owned and operated independently by a third party, the franchisee. This structure permits the system to grow significantly faster than it could otherwise.

    From the franchisee’s point-of-view, the franchisee is able to own and operate a business that may already have significant goodwill in the marketplace. As well, the franchisee is able to participate in a system that has already been proven to be successful. This removes a significant amount of the risk associated with starting up a business. Another benefit to the franchisee is the fact that the franchisor typically provides a significant amount of guidance to the franchisee in the day-to-day operations of the franchised business. Since the franchisor has already figured out what works and what does not work for the particular business, the franchisee will have the benefit of that information.

    • Fast food restaurants • Full service sit-down

    restaurants • Automotive services • Automotive dealerships • Employment and staffing • Cleaning • Coffee vendors

    • Moving and storage • Real estate brokerages • Retail sales • Fitness • Health and beauty • Security services • Hotels • Financial services

    • Pest control • Printing • Education • Dry cleaning • Lawncare • Weight control • Dating and

    introductions

  • 2 From the consumer’s standpoint, a franchise system represents a known offering of goods and services, reducing the risk to the consumer of an unsatisfactory experience. As an example, consumers know exactly what they will be getting when they order a Big Mac at a McDonalds even though the customer may never have been at that particular McDonalds location. Consumers will also have comfort in other matters such as the standards of cleanliness and safety that are maintained by McDonalds.

    Risks of the Franchise Relationship Of course, franchises have their risks. From the franchisor’s point-of-view, one of the most significant risks arises from the loss of direct control over the manner in which the franchised business is operated. A single bad experience at a franchise outlet may result in a consumer refusing to visit every other franchise outlet in the future.

    For the franchisee, there are also a number of risks and obligations. The most notable obligation is the ongoing payment requirement to the franchisor just for the right to operate the franchised business. These payments would not have to be paid if the franchisee started a business independently of the franchise system. However, these fees often represent the additional value to the franchisee due to brand recognition and the existing goodwill in the marketplace as well as the reduced risk through being able to own and operate a proven business model. Another risk or limitation to the franchisee is that the franchised business must be operated within the strict requirements set by the franchisor. This may limit the modifications the franchisee may make to the product and service offering. This lack of control over the business may be a source of frustration for the franchisee as he or she may not be able to pursue available opportunities. However, most franchisors do provide for some flexibility, recognising that market conditions may differ from location to location. For example, McDonalds offers the McLobster in the Maritimes and the Ebi Filet-O in Japan, which is basically a burger made from shrimp.

    Financial risk is certainly a potential for any franchisee. By signing a franchise agreement, the franchisee is making a long-term commitment to operate the franchised business. If the franchised business is not profitable for any number of reasons, the franchisee could suffer substantial losses over an extended period of time.

    Franchise Legislation Currently only Alberta, Ontario and Prince Edward Island have franchise legislation, all of which is fairly similar and which simplifies compliance across Canadian jurisdictions. New Brunswick may soon adopt its own franchise legislation. Because there are some notable differences in the legislation, it is important to ensure that proper expertise is engaged.

    Franchise legislation contains a number of specific obligations. Most notable among the obligations is the franchise disclosure document and the requirement that the franchisor deliver a franchise disclosure document to the potential franchisee. This is discussed in more detail further on in this publication.

  • Franchise legislation also contains a number of remedies for the franchisee in the event the legislation has not been complied with. Most notable is the right of the franchisee to cancel the franchise agreement and to be compensated for any damages the franchisee has suffered if the franchisor fails to deliver the franchise disclosure document within the prescribed time limits. As well, in the event the franchise disclosure document contains a misrepresentation, the franchisee will be entitled to compensation for any loss suffered as a result of the misrepresentation.

    Franchises, D ealerships &

    D istributorships

    3

  • 4 When a Franchise Exists at Law Given the requirements of franchise legislation and the consequences of failing to comply, it is important to know when franchise legislation applies to the relationship. Not all relationships will give rise to a franchise relationship. That said, the legislation is drafted fairly broadly, so it captures many types of relationships, even those that have not historically been considered to be a franchise relationship.

    Under Alberta law, a “franchise” is defined to include a right to engage in a business (i) where goods or services are offered for sale in association with a trademark owned by the franchisor (ii) under a marketing or business plan prescribed by the franchisor and (iii) which involves ongoing financial obligations to the franchisor. If these elements are present then the parties are in a franchise relationship — it does not matter what the parties call the relationship or what the agreement states about the nature of the relationship. Once a franchise exists, the requirements of the legislation come into play.

  • Franchises, D ealerships &

    D istributorships

    5Franchise Disclosure Documents As discussed above, one of the key requirements of franchise legislation is th

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