By Peter Snell
When working with restaurant franchisors and franchisees, new prospects are often surprised by, or underprepared for, the “secret ingredients” the industry adds to franchise agreements and disclosure documents. It is imperative the franchisee takes the time to review the documents they are given before they enter into an agreement.
This article outlines a non-exhaustive list of topics prospective franchisees should consider when purchasing a restaurant franchise. A clear understanding of these items at the outset of a franchise relationship is vital to ensuring a successful venture. While the following information serves as a general overview, as always, prospective purchasers should seek legal counsel when reviewing any franchise disclosure document, or franchise agreement, related to their particular circumstances.
An often overlooked, yet crucially important aspect of establishing a restaurant franchise, is securing the appropriate real estate to operate the franchised restaurant—it is not always simple. Real estate related disclosure is usually found in the franchise disclosure document under items pertaining to franchisee restrictions, opening fees, initial investments, and location specific disclosure. Should a prospective franchisee have additional questions, they might consider asking them ahead of time because they affect the timing of start-up and profitability. Here are some questions a potential franchisee should ask:
- Does the franchisor provide the restaurant on a turnkey basis?
- Does the franchise agreement restrict where a franchised restaurant can be established?
- Can the space be leased directly from the franchisor or affiliated entity (and, is there a prescribed form of lease)?
- Does the franchisee need consent from the franchisor before finalizing a location?
- Does the franchise agreement mandate a particular layout or minimum square footage for the restaurant?
- Does the franchisor offer assistance in finding a suitable location, or negotiating with landlords?
- Does the desired location allow the operation of a franchised restaurant business?
- Will a building permit be required if a new structure, or renovation of an existing space, is needed?
In regards to the real estate questions above, new purchasers of a franchise should consider the proximity policy of their franchisor, and what level of exclusivity, or territory protection, they will be provided.
Unlike some product-based franchise systems, restaurant franchises do not grant owners exclusivity over customers (who can come from anywhere), and often provide limited, or no exclusivity from identical franchises establishing a business nearby.
Proximity and territory exclusivity related disclosure can be found in the franchise disclosure document under the territory and proximity section. These aspects of a franchise system can be critical to profitability, and should be considered by the franchise purchaser when making their own market and revenue estimates.
In addition to the general restrictions and obligations of most franchises, there are many restaurant-specific items addressed in the franchise agreement and disclosure document a prospective franchisee should consider. For instance:
- Does a liquor license need to be obtained?
- Who is responsible for obtaining any food preparation licenses, food handler certificate programs, or clearances from the health department?
- If music is played, is a license from the Society of Composers, Authors, and Music Publishers of Canada (SOCAN) required?
- Who approves of any waste disposal?
- Is menu labelling requirements (e.g. listing calories) handled by the franchisor?
- What are the provincial obligations placed on an employer regarding uniforms if they are provided to restaurant staff?
- Who is responsible for obtaining permits related to building codes, heating, ventilation, and air conditioning (HVAC), signage, electrical, mechanical, and plumbing?
- What are the obligations in regards to participating in food delivery services (those operated internally or in co-operation with third-party food delivery companies, such as Uber Eats, Foodora, DoorDash, etc.).
Information on these items can be found in multiple sections of the franchise disclosure document, though most of it can be found in the disclosing permit, licensing, and regulatory compliance section.
Timelines for opening a franchise
The time investment related to the above considerations is particularly important in the context of a franchised restaurant. Most franchise agreements stipulate the franchisee begin operations after a certain period. In fact, it is typical to see an obligation to find a suitable location and be up and running within a year of signing the agreement. However, franchisees need to keep in mind that in some urban centres, it can be difficult to find the appropriate location, and this can delay the ability to open the franchise within the required timeframe.
Before a prospective franchisee signs the agreement, they should consult with professional advisors, and consider whether the timelines set by the franchisor are realistic for the specific location, municipality, and province.
Opening a restaurant franchise comes with its own “secret ingredients.” Finding a suitable location, understanding a franchise system’s proximity and exclusivity policies, and obtaining the necessary approvals to establish the restaurant franchise can take a significant investment of time and resources. Therefore, it is important a franchisee has a clear understanding of their obligations so they do not find themselves inadvertently in breach of contract before they can even open for business.
Peter Snell is a partner and franchise lawyer at the Vancouver offices of Gowling WLG (Canada) LLP. For more information, please contact him via e-mail at firstname.lastname@example.org.