Area of Law: Business Law
Answer # 234
FranchisesRegion: Ontario Answer # 234
Franchises are a popular way for people to buy and run businesses.
What is a franchise?
A franchise is a contract or agreement where a franchisor gives a franchisee the right to start a business under a business system that already exists. Under the franchise agreement, the franchise business usually uses the name or trademark of an existing company and conducts the same type of business as the existing company. The franchisee has a right to use the name or trademark of the existing company, and the franchisor gets to have some control over the franchisee’s business. The franchisor also has a continuing right to receive payments from the franchisee.
Advantages of owning a franchise
There are four main advantages to owning a franchise. First, you are able to operate your own business while still having the security of working with a large company. Second, you may not have to be an expert at running your own business because you will usually receive support from the franchisor. For example, the franchisor may provide such things as ongoing training and business advice. Third, you enjoy the benefit of using the franchisor’s reputation. As a result, there is less business risk for you if the franchise has developed a successful product. Fourth, it may be easier to borrow money to buy a franchise than to start an independent business.
Disadvantages of owning a franchise
There are also several disadvantages to owning a franchise. Depending on the franchisor and the franchise agreement, the franchisor may maintain a substantial amount of control over new franchises. In typical franchise situations, the franchisor will set the opening and closing times of the franchise, determine what is to be sold and how it is to be sold, and will put restrictions on the ability of the franchisee to sell his or her franchise. You should discuss these issues before you enter into a franchise agreement.
Another disadvantage of franchises is that franchisees usually have to pay an up-front fee simply to begin using the business name. To continue using the name, the franchisee will usually have to pay a set fee either every month or every year. These fees can be substantial. In exchange, the franchisee gets to use the franchise name and sell the franchise product. People will know your business name and you will not have to spend time developing a marketing plan or customer recognition of your business.
The Franchise Disclosure Act
Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 or Franchise Disclosure Act is the law that governs all types of franchise relationships. The Act focuses on pre-sale disclosure, and impacts the way in which franchisors carry out the sales of their franchises. Detailed regulations governing the franchisor’s behaviour are also a part of the Act, and franchisors must provide prospective frachisees with a ‘disclosure document’ before accepting any payments from prospective franchisees and before having prospective franchisees sign any agreement related to the franchise.
Franchisors are now required to disclose many important facts, such as the business background of the franchisor and its directors, partners and officers, and the litigation history of the franchisor. The disclosure document must contain copies of all franchise documentation to be signed by a prospective franchisee, including any restriction in the sourcing of supplies.
While the Act is largely about pre-sale disclosure and applies only to franchises sold after January 31, 2001, everyone should be aware of two very important provisions that affect existing franchise relationships:
- The Act prohibits a franchisor from interfering with its franchisees’ right to associate, and
- It provides that “Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.”
The obligation to deal fairly and conduct oneself in a commercially reasonable manner is an obligation imposed on both the franchisor and the franchisee and applies to all franchise agreements including those made before the Regulations.
More information about operating a franchise in Ontario can be found from the Government of Ontario, Business and Industry website.
There are many complicated legal issues involved in buying and operating franchises. Consult both a lawyer and an accountant when planning to enter into a franchise agreement.
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