The Basics of Becoming a Franchisee

Beginning a new franchise can be extremely challenging, making the professional advice of a franchise lawyer invaluable.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Embarking on the path of becoming a successful franchisee demands an incredible amount of time and effort, given that there are only a limited number of truly successful franchisees, with those that have set themselves apart and hit the pinnacle of franchise operations and profitability. This begins with understanding the core concepts of a business franchise. By comprehending these franchise business concepts, the gap between yourself and the franchisor will not be so great, such that you might better understand what the franchisor is in fact attempting to achieve through its franchising arrangements.

Franchise: A franchise is a legal arrangement that is determined by the franchising legislation of the jurisdiction within which the business arrangement and operations occurs, such that the arrangement can exist even if the parties are not aware of there being a franchise arrangement or the parties may have sought to contract out of a franchise arrangement, the franchising legislation takes precedence and imposes a franchise arrangement upon the parties and all the legal obligations attendant thereto [more about Franchise].

Franchisor: A franchisor is the business entity that grants rights to a franchisee to conduct business under its the brand name and/or trademarks in a manner that it has prescribed and controls [more about Franchisor].

Franchisee: A franchisee is an individual or business entity that acquires the rights to operate their business using the name and trademark of the franchising company and agrees to follow the business model that is established by the franchisor [more about Franchisee].

Franchise Disclosure Document: A Franchise Disclosure Document is a detailed document that a franchisor provides the franchisee during the initial stages of purchasing a franchise. It is designed to provide franchisees with vital information that they need in order to make an informed decision prior to investing in a franchise opportunity. Prospective franchisees in Canada are given a minimum of 14 days to review the document prior to signing on with the franchise. A typical disclosure document will include things such as the history of the company, the products or services it offers, how the franchise is operated, and how many units or franchises it has. It will include information on key decision makers in the company, including its directors and officers. It will outline the costs and fees required to start and run the business, and will include financial statements and other fiscal information. It will also include a summary of the trademarks and intellectual property licensed by the franchise agreement and it will outline the training and assistance provided by the franchisor. In sum, it covers most of the details a potential investor would need to know before moving forward [more about Franchise Disclosure Document].

Franchise Agreement: A Franchise Agreement is a comprehensive and legally binding contract that establishes the terms of the relationship between a franchisor and a franchisee, establishing how the franchisee is to carry out its franchised business in conformity with the established franchise system [more about Franchise Agreement]

Term of Agreement: Within the Franchise Agreement, the franchisee will find the length of time for which the franchise agreement is valid (how long the franchise relationship will run) referred to as the term of the agreement. This length of time will differ for each franchise but typically runs between five and 15+ years, with the typical time frame being a 10 year term [more about Term of Agreement].

Initial Franchise Fee: The initial franchise fee is a one-time, upfront payment that a prospective franchisee pays to a franchisor to enter the franchise system. The initial franchise fee is essentially an entry fee that grants the franchisee the right to use the franchisor's brand, trademarks, and proprietary business systems, subject to the franchisee's ongoing compliance its obligations under the franchise agreement [more about Initial Franchise Fee].

Renewal and Transfer Fees: Beyond the initial franchise fee and the regularly recurring fees (e.g., royalty fees), it is important to keep in mind that other franchisor-imposed fees that may come later in the process with certain significant events during the course of the franchise. After the time period covered by the franchise agreement has lapsed, the franchisor may charge a renewal fee to renew the agreement [more about Renewal and Transfer Fees].

Royalty Fees: Royalty fees (royalties) are obligatory payments that are made on a regular, ongoing basis from the franchisee to the franchisor. Royalty fees can be payable on a weekly, monthly, or annual basis, depending on the franchise system. Types of royalty fees include: Fixed: A flat fee that remains at the same set number from the beginning to the end of the franchise agreement. Fixed Percentage: Rather than a set number, the franchisor will determine a set percentage based on the gross sales that the franchise location acquires. It will always remain at this percentage for the entire length of the franchise agreement. Variable Percentage: This percentage can either increase or decrease depending on several factors. An increasing percentage means the franchisee will pay a higher percentage the more gross sales they obtain, while a decreasing percentage means the franchisee pays a lower percentage as their gross sales increase [more about Royalty Fees].

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

The Basics to Becoming a Franchisee: Embarking on the path of becoming a successful franchisee demands an incredible amount of time and effort, given that there are only a limited number of truly successful franchisees, with those that have set themselves apart and hit the pinnacle of franchise operations and profitability. This begins with understanding the core concepts of a business franchise. Read more.

 

Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.

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