Negotiating your franchise agreement

Franchise assessment
For these reasons, before determining what is worth trying to negotiate, you should focus on assessing the franchisor and the franchise system.

While you may be purchasing tables, chairs and other physical assets related to the business, remember that, conceptually, you are not buying the franchise rights. You are only acquiring the legal right to use the franchisor’s business system and trademark for the term of the agreement and any subsequent renewals. When such a term is over, the franchisor has no obligation to offer you a new one. So, in a way, you are only renting the rights.

As mentioned, if you live in Alberta, Manitoba, Ontario, New Brunswick or Prince Edward Island, the franchisor must provide a disclosure document to you under the laws of the province. Make sure you read both this document and the franchise agreement carefully and review and discuss them with your legal and financial advisors.

If you live in another province, while a disclosure document is not legally required, the franchisor may well provide one for you anyway. And if it does not, you should ask why not.

Typically, a prospective franchisee is required to pay a deposit when signing a confidentiality agreement, which protects the franchisor’s trade secrets. You should check if the deposit is wholly or at least partly refundable if the franchise deal does not proceed further—and whether or not it would be paid back immediately.

Another matter of trust is whether you are dealing with the owner of the franchised concept, an area developer or master franchisee who owns the rights to a particular geographic region or a salesperson who represents all sorts of franchises. Their role will affect their perspective.

You should check into training and where it will be held. Extensive, comprehensive training for a new franchisee is a good thing.

If the franchisor will build out the premises, you should check for assurances you will not have to pay for any cost overruns that may be encountered beyond the agreed-upon price.

Some U.S.-based franchisors do not ‘Canadianize’ their franchise agreements (see page XX), so they may include legal concepts that do not directly apply in Canada and omit those that do, such as the goods and services tax (GST) and withholding tax payable on royalties crossing the border. If you are presented with a U.S.-style disclosure document, you have to ask yourself why the franchisor has not adapted it for the economic and comparative realities of the Canadian market. What does that say about the company?

Also, if the franchisor does not have a registered trademark in Canada, you could be stopped from operating under that brand. The franchisor’s ownership and control of its trademark can be verified with a database search through the Canadian Intellectual Property Office (CIPO) website at www.cipo.ic.gc.ca.

Contact existing franchisees of the system to check if they are content and making a good living. Check if there is any current litigation between franchisees and the franchisor. This information should be in the disclosure document, along with a list of franchisees, but if the list is not complete, you should go beyond it to contact unlisted franchisees, too.