Key Aspects of a FRANCHISE AGREEMENT

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

A franchise agreement is a legally binding contract that governs the relationship between a franchisor and a franchisee, which is drafted strongly in favour of the franchisor (as they are in a position to heavily dictate the franchise arrangement that they offer to prospective franchisees). While the specifics can vary, there are several key aspects that are almost always included. Understanding these is crucial before signing, and it is highly recommended to consult with a knowledgeable lawyer, given that franchise agreements are heavily pro-franchisor.

A. Franchise Law and Disclosure Requirements

Franchise regulation is a provincial matter, with a number of provinces (i.e., Ontario, Alberta, British Columbia) having enacted franchise legislation. A key feature of provincial franchise legislation is the mandatory disclosure requirement. The franchisor must provide a Franchise Disclosure Document to the prospective franchisee at least 14 days before any agreement is signed or any payment is made.

The franchise disclosure document is intended to give the franchisee all the information they need to make an informed decision and must include:

• Financial Information: The franchisor's financial statements.

• Business Background: Details about the franchisor's business history, litigation, and bankruptcies.

• Franchise Agreement: A copy of the proposed franchise agreement and all other related contracts.

• Costs: A description of all fees and costs, including initial fees, ongoing royalties, and advertising fund contributions.

• Franchisee List: A list of all current and former franchisees, which you are encouraged to contact to ask about their experience.

B. Grant of Rights

This is a fundamental part of the agreement. It outlines exactly what the franchisor is giving the franchisee, which typically includes:

• Use of Intellectual Property: The right to use the franchisor's trademarks, trade names, logos, and other branding elements.

• Use of Business System: A license to use the franchisor's proprietary business model, operational systems, and confidential information (often contained in an operations manual).

• Territory: Defines the geographic area where the franchisee is permitted to operate. The agreement will specify whether this territory is "exclusive," meaning no other franchises can be opened within that area, or "non-exclusive."

C. Financial Obligations

This section details all the money the franchisee must pay to the franchisor. Key elements include:

• Initial Franchise Fee: A one-time payment to join the franchise system.

• Ongoing Royalties: Regular, recurring payments (often a percentage of gross sales) for the continued use of the franchisor's brand and systems.

• Advertising and Marketing Fees: Contributions to a national, regional, or local advertising fund.

D. Operational and Support Obligations

The agreement outlines the responsibilities of both the franchisor and the franchisee.

• Franchisor's Obligations: This includes providing initial and ongoing training, assistance with site selection and store build-out, marketing support, and a detailed operations manual.

• Franchisee's Obligations: This involves strict adherence to the franchisor's operating standards, including approved suppliers, product quality, business hours, and customer service.

E. Term, Renewal, and Termination

This section governs the lifespan of the franchise relationship.

• Term Length: The initial duration of the agreement (e.g., 5, 10, or 20 years).

• Renewal: Specifies the conditions under which the franchisee can renew the agreement, which often includes a renewal fee and the requirement to upgrade the premises to current standards.

• Termination: Defines the circumstances under which the agreement can be terminated by either party. This includes franchisee defaults (e.g., failure to pay fees, breach of the agreement) and the process for remedying a default.

F. Restrictive Covenants

These are clauses designed to protect the franchisor's business. They often include:

• Non-Competition Clause: Prevents the franchisee from operating a competing business during the term of the agreement and for a specified period (e.g., one to two years) after it ends.

• Confidentiality Clause: Requires the franchisee to keep the franchisor's proprietary and confidential information secret.

G. Dispute Resolution

The franchise agreement will outline how any disputes between the franchisor and franchisee are to be resolved. This may include a requirement for mediation or arbitration before any legal action can be taken.

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.

 

Key Aspects of a Franchise Disclosure Document: A Franchise Disclosure Document is a crucial legal document in Canada that provides a prospective franchisee with essential information about a franchise system. The franchise disclosure document is intended to help the potential franchisee make an informed investment decision. Read more.

 

Key Aspects of a Franchise Agreement: A franchise agreement is a legally binding contract that governs the relationship between a franchisor and a franchisee, which is drafted strongly in favour of the franchisor (as they are in a position to heavily dictate the franchise arrangement that they offer to prospective franchisees). While the specifics can vary, there are several key aspects that are almost always included. Read more.

 

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