'Franchising' is the licensing, by the franchisor, of the right to engage in a business that uses a whole system or method developed by the franchisor for the conduct of that business.

Franchising also involves granting a license to use the franchisor's trademarks and other intellectual property (IP) rights, such as copyrights, designs and patents (if any), along with the know-how built up by the franchisor over time.

Franchise Agreement Content

When the whole system is licensed to you (the franchisee), this is typically called a 'business format' franchise. The central document in this arrangement is the franchise agreement. This agreement, between you and the franchisor, grants you the rights to use the system, usually at a specific location and within a defined territory, for a specific term of years. It also provides for consideration to be paid by you to the franchisor for the rights to operate the business. This is usually an initial franchise fee, including an agreement to pay continuing royalties, usually on a weekly or monthly basis, based on the gross sales of the franchised business.

The franchise agreement will govern the ongoing working relationship between you and the franchisor throughout its term. This makes it the most important document in the whole franchising process. Its significant terms include:

• Renewal rights you will have at the end of the term;
• Exclusivity of the territorial rights granted to you for your defined territory;
• Training and ongoing assistance the franchisor will provide to you;
• Arrangements for group advertising by all of the franchisees forming a part of the franchise chain, as well as for local advertising within your territory;
• Designation or approval of suppliers;
• Your ability to assign the franchise agreement to another party; and
• Provisions governing default and termination of the franchise agreement, as well as dispute resolution provisions and post-termination rights and obligations.

Franchise Operating Rules

The franchise agreement is also the central document within which the operating rules of the franchise are laid out. It details the franchisor's obligations to you, which, apart from the provision of the operating manuals and any required software, includes initial/ongoing training and assistance, development plans for the location, administration of group advertising and a list of suppliers.

The franchisor will impose certain ongoing controls over your method of operation, along with the condition and appearance of your franchised location. This is done to achieve standardization and uniformity among all of the operating franchised businesses in the chain.

Maintaining standards

The franchisor, to protect its trademark and other IP rights (along with the goodwill and public image of the franchise), will impose quality control (QC) standards and specifications to be followed by all franchisees. This applies not only to operations, selling products and performing services, but also to all marketing and advertising that promotes the franchised business.

However, the franchise agreement should fall short of imposing controls over your day-to-day business decisions and matters having to do with the employment of your staff. As an independent contractor and businessperson, these problems should be yours to deal with.

Limiting group activity and benefits

The franchise agreement will also set forth the parameters of any group activities and benefits pertaining to the whole chain. These should cover:

• Operation of the group advertising fund;
• The supply chain for products, supplies and services;
• The offering of any group insurance and benefits plans for you and your staff members;
• Use of any rebates received by the franchisor for use in advertising; and
• The conduct of any group services. Examples include call centres for directing customer orders to franchisees and maintenance of a main website, with links to each franchisee's web page.

The franchise agreement will normally also include controls over:

• The leasing, construction, maintenance and appearance of your location;
• The signs, fixtures, equipment and (in some cases) computer software to be used in the franchised business; and
• The ongoing training and appearance of your staff.

Expiration of the agreement

Should the franchise agreement expire without being renewed, or be terminated, the franchisor's controls will also prevent you from competing with the franchisor and its business within its former territory for a number of years (often two), following the date of expiration or termination. You must maintain confidentiality of the franchisor's trade secrets and other information used in operating the business, and cannot solicit the franchisor's customers, employees, suppliers or other franchisees. In some cases, you must also assign the telephone numbers and Internet domain names associated with the franchisor's trademarks over to the franchisor.

Is it Time to Sign Your Franchise Agreement?

Of course, as a prospective franchisee, you should always seek independent legal advice before signing the franchise agreement. A lawyer experienced in franchising, and acting in your interests, can explain the complexities of the agreement, make sure you properly understand it and advise you if any of its terms are open to negotiation.

Despite its complexity, your franchise agreement will prove a perpetually useful tool. If drafted well, it will clearly set out the rules and obligations you need follow every day of your life as a franchisee.

Leonard Polsky is a franchise lawyer with Gowling Lafleur Henderson, LLP, in the Vancouver office. He can be contacted via e-mail at leonard.polsky@gowlings.com.