Buying a franchise, in particular, a franchise of a reputable and established system can be a substantial investment. Not only are you investing your hard-earned money, you are contributing sweat equity too.
You may already know that franchising involves a franchisor granting a licence or right to a franchisee to carry on certain business activities using the franchisor’s system and trade name/trade-marks. You may also know that owning a franchise will involve the payment of ongoing royalty fees and the requirement to follow rules and standards in operating the business. But do you fully appreciate the legal risks and obligations of entering into a franchise relationship?
Obtain Independent Legal Advice
Generally, a franchise agreement and its related lease agreement are long-term commitments, so it is imperative that you understand the legal implications associated with these agreements. The franchisor will likely require you to obtain independent legal advice and have you and your advising lawyer sign a certificate to that effect. When seeking legal advice, it is wise to seek the advice of a lawyer skilled and experienced in franchise law.
Assess Your Legal Risks and Obligations
Your legal advisor can help you better understand the legal risks and obligations under the franchise agreements as they relate to matters both during and after the expiration or termination of the franchise relationship. Some of these matters not only include payment obligations such as ongoing royalty fees and marketing fees, but also include personal guarantees, products/services purchasing requirements, sale of the franchise, non-competition provisions, and the consequences of default, to name a few.
Some franchisees assume that if they assign their individual rights of the franchise to a corporation, that they are free from personal liability. Such an assumption may be incorrect. For example, even though an assignment agreement provides the franchisor’s approval of the assignment by the individual franchisee to a corporate entity, the agreement may still state that the individual can be held personally liable.
The franchise agreement will typically have restrictions and obligations in regard to the products and services to be purchased. Such restrictions and obligations would still apply even if you know of other suppliers that sell the same or similar products/services for less.
At some point during the term of the franchise agreement you may consider selling the franchise. Accordingly, you need to fully understand the requirements and procedures under the agreement in order to effect such a sale. Generally these include, among other things, seeking the franchisor’s approval, as well as your payment of a non-refundable transfer fee.
Another important matter to fully understand are your legal obligations as they relate to restraint of trade provisions, both during and after the expiration or termination of the franchise agreement. For instance, advising or lending money to someone operating a competing business may constitute a breach under the non-competition provisions of the franchise agreement.
Further, the franchise agreements may contain a cross-default clause which means that any default under one agreement is deemed to be a default under any or all other agreements. For example, a default in the payment of a royalty fee under the franchise agreement is treated as a default under the lease. A cross-default clause can be quite problematic in the case of a franchisee who owns more than one franchise location.
Make a Well-Informed Decision
The foregoing are just some of the many issues that a proper legal review of the franchise agreements and documents can address, to help you better understand their legal implications. Knowing your legal risks and obligations will enable you to make a well-informed decision as to whether buying a franchise is right for you.
At Mills & Mills LLP, we pride ourselves on providing expert advice to businesses of all sizes. Our clients know that by retaining us as their business lawyers, they will receive individual attention and establish meaningful relationships with our business law professionals while benefiting from knowledge and capabilities equal to the city’s largest corporate-commercial law firms. If you have questions about franchising, contact the business lawyers at Mills & Mills LLP at 416-863-0125 or send us an email.