How a Franchise Agreement and a Franchise Disclosure Document differ
There are two documents that are of vital importance...
Buying a franchise is often considered an easy route to owning your own business. However, you are about to invest one of the largest sums of money you will ever invest in your life. You need to do your homework, and you need to understand exactly what you and your money are getting into.
The following are a few tips that ought to be considered when buying a franchised business. This isn’t an exhaustive list, but it should get you thinking about the kinds of information that it is important to get at the outset, before you invest your money.
A franchise is the right to use a brand and commercial system, usually within a particular territory. When you’re buying a franchise, therefore, ensure you know the strength of the brand. It is strong? Is it well protected? Are the franchisor’s trade-marks registered? Is the franchisor’s portfolio of trade-marks a large one? Is the commercial system that you are going to use a strong one? Well-run? Will it provide value to you if you join the system? Check the backgrounds of the operators of the franchise system. How long have they been operating? Have they operated in this line of business before, or are they newcomers.
- Ensure the franchisor is financially healthy. Demand up-to-date financials. (In fact, you should have gotten these from the franchisor before you signed or paid for anything. If not, go to a lawyer immediately.) Ensure you understand them, or take them to a professional who does. If you have questions, ask. Get answers in writing.
- Ask existing franchisees how they like the system. Are they making money (as a whole)? Are they receiving adequate support? Are the royalties and fees paid to the franchisor appropriate to their revenues? Talk to as many franchisees as you can, so you know your information is accurate. Get a list of lawsuits the franchisor is involved in. If a lot, it may signify the franchise system has issues.
- Take all sales numbers with a grain of salt and a healthy dose of skepticism. Demand hard data, and ask for all assumptions that underlie any financial projections you are given, in case those projections are not met down the road. Get all financial promises in writing.
- Understand what you’re buying, and what you will be required to do. Remember, your franchise agreement will last many years. You only get the benefit of what’s in the franchise agreement and the lease, so check those documents carefully. How long is the franchise grant for? Do you get an exclusive territory? How big? Can the franchisor encroach on that area? Can you renew? If so, for how long, when do you provide notice, and how much does it cost? How much are the royalties you need to pay? Are there other fees? Do you need to buy particular supplies from particular people? What kinds of things will allow the franchisor to kick you out of the system? In your proposed lease, check its term, renewal rights (ensure they match the franchise agreement), how rent will increase in the future, and what violations of your lease allow the landlord to terminate the lease agreement. Know your obligations in both agreements. You will have to uphold your end of the franchise agreement for the full term of the agreement, so make sure you understand what you are agreeing to for the next five, ten, or even twenty years.
- Finally, don’t hesitate to get professional help. Make sure a lawyer reviews the proposed documents you are being asked to sign, and consider hiring a lawyer to negotiate clauses in your favour. Also, know what you are entitled to during the purchase process. Franchise law is complex, and differs in each province and territory in Canada. For example, in Ontario at least:
A franchisee must receive a disclosure document 14 days before they sign anything or pay any money to the franchiser. If not, the franchisee can cancel its agreement within two years. If the disclosure document is missing information, a franchisee can cancel its agreement within 60 days:
- Franchisors and franchisees must treat each other in good faith and with fair dealing
- Misrepresentations (incorrect information) can give rise to liability
- If these issues arise for you, go immediately to a lawyer to discuss your situation
Overall, you’re about to spend a lot of hard-earned money on this investment, and hopefully you will be in the business for many years. The things you sign now will be your obligations for years to come. Spend a little time and money now to ensure the best future for your investment.
