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Buying a franchise from the U.S. for the Canadian market

TIM HORTONS INC. - Free wireless internet coming to Tim HortonsBy Gary R. Duvall
Whether a food-service franchisor is headquartered in Toronto or Chicago, many aspects of buying a franchise are the same. There are, however, special issues that need to be investigated by any prospective Canadian franchisees before they buy a franchise from a U.S.-based franchisor—especially given the U.S.-based franchisor is, for its part, likely less knowledgeable about Canada than about the U.S.

The need for localization
There are many distinctions between the Canadian and American legal environments for franchising as a business model. The two countries also have different business environments, which will affect how food-service franchisees can operate.

Some of these differences relate to infrastructure and supply chains. Several franchisors based in Canada, for example, have noticed an expectation on U.S. consumers’ part for free wireless-fidelity (Wi-Fi) access in cafés and restaurants. While this trend is also certainly growing in Canada, particularly with large-scale deployments by Tim Horton’s and McDonald’s Canada, there are still some parts of the country where providing Wi-Fi service would be considered an unnecessary overhead expense.

More significantly, U.S.-based franchisors’ back-office systems may not provide payroll and tax reports customized to Canadian realities. Food suppliers used by franchises in the U.S., especially, may not be useful to those in Canada. And strategies for finding and leasing restaurant sites will differ between the two countries (as well as between markets within each country).

Small or first-time food-service franchisors based in the U.S. and selling into Canada may not yet even realize such localizations are necessary. So, it is important for prospective Canadian franchisees to investigate these matters in advance.

canus2Master franchising
Some cross-border franchising is managed by using a master franchisee as an intermediary (although this practice is less common now than it was a few decades ago). A master franchisee is assigned a territory, then authorized by the franchisor to customize the franchise system, sell franchises and support and consult with franchisees in that territory.

The master franchisee shares the fees and royalties paid by the franchisees with the franchisor. Generally, a prospective Canadian franchisee working with a U.S.-based system will be better off if there is a master franchisee for the country or province, as then there will be two levels of service (i.e. from the master franchisee and from the franchisor) for the same cost as one. This is still the most common structure for franchising into the province of Quebec, for example.

Litigation and legislation
Conventional wisdom suggests the legal environment for businesses in the U.S. is more litigious than in Canada. Nevertheless, as more provinces in Canada have passed franchise legislation, litigation has increased. Some Canadian franchise lawyers believe the country’s litigation environment is trending toward the experiences of the U.S.

Compared to some Canadian provinces’ relatively recent franchise legislation, franchisors in the U.S. have already experienced nearly 40 years of franchise legislation and related litigation. So, they tend to be very transparent and legally cautious when dealing with prospective franchisees. They must deliver a franchise disclosure document to prospective franchisees in all states, for example, and these documents are currently about 20 to 30 per cent longer than their Canadian provincial counterparts.

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