Succeeding as a franchisee: What you need to know

By Joseph Y. Adler

A lot has modified over the past 30 years in franchise regulation, and the creator has been lucky to witness and take part on this transformation first-hand. The franchising panorama modified most profoundly for Ontario-based franchisors, franchisees, and potential franchisees in 2000, when the Arthur Wishart (Franchise Disclosure) Act was handed into regulation. The identical was true of the opposite provinces as a result of passing of comparable franchise disclosure laws.¹ This new franchise statute imposed a substantial disclosure obligation upon franchisors within the province, which had not beforehand existed. Granted, no registration of disclosure paperwork was required, as continues to be the case in sure states within the U.S. Nevertheless, potential franchisees at the moment are entitled to obtain a disclosure doc containing essential details relating to the funding they had been about to make, not less than 14 days previous to signing any settlement with the franchisor or paying any cash to the franchisor (with some restricted exceptions).

Although there are nonetheless alternatives for abuse—and misleading, fraudulent, and extremely mismanaged franchisors do proceed to look once in a while—it may be mentioned the franchise disclosure laws has largely succeeded to stage the enjoying discipline considerably between franchisors and franchisees. Potential franchisees are given the chance to be higher educated and knowledgeable in regards to the funding they’re about to make, and most critically, they now have a sturdy treatment to pursue if this disclosure obligation is breached by their franchisors.

But, there may be a lot to be desired for change within the present laws, as its many ambiguities proceed to hassle franchisors. For instance, franchisors proceed to wrestle with what to incorporate of their disclosure paperwork, because the definition of “materials truth” is just far too vast. A easy expanded checklist of things to be disclosed by regulation, alternatively, would set up a way more definitive understanding of the disclosure obligation earlier than them.

For probably the most half, nevertheless, the disclosure laws has served its objective effectively. The speculation underlying the laws is better-informed franchisees could have extra alternatives for achievement, and the pursuits of franchisors and franchisees can be extra aligned. Additional, potential franchisees will refuse to put money into franchise techniques demonstrating little success so far. Nevertheless, this isn’t at all times the case, as far too many potential franchisees are keen to signal franchise agreements they haven’t but learn—with out authorized illustration, or with enter from unqualified legal professionals with no experience in franchise regulation. That is unlucky, however it’s to be anticipated. Potential franchisees are sometimes far too involved about spending cash on authorized recommendation, as they usually haven’t but had the expertise of working with a business lawyer, not to mention a franchise lawyer.

But, as is the case with any funding and with any main authorized settlement, a better-informed franchisee is preferable to a non-informed one. When potential franchisees begin searching for recommendation about buying a franchise, they’re usually in a state of euphoria about what they understand to be probably the most thrilling enterprise alternative accessible. Not a lot might dissuade them from pursuing the chance. It will be important, nevertheless, for potential franchisees to keep away from getting caught up on this pleasure over proudly owning their very own enterprise, and to conduct intensive due diligence earlier than making a dedication. That is notably essential as a result of buying a franchise normally includes a considerable funding, a long-term dedication, and if issues flip bitter, vital liabilities.

Understanding the enterprise mannequin

A potential franchisee ought to first admire how the franchising enterprise mannequin differs from an independently owned firm. Regardless of widespread knowledge on the contrary, a franchisee doesn’t actually “personal” a franchise in any respect, however somewhat is licensed to function one.

Additional, franchise relationships are usually long-term, one-sided contractual relationships, largely in favour of franchisors. Many franchisors go to nice lengths to watch and management the way in which their franchisees function their companies, as a result of franchisors’ comprehensible need to guard and improve the worth of their manufacturers. On this sense, franchisees don’t actually have a lot discretion over how they function their companies, as they’re sure to adjust to very stringent guidelines imposed upon them by their franchisors. Nevertheless, some franchise agreements are so stringent, they border on abusive. Franchise counsel is effectively suited to level out and try to deal with such eventualities.

In search of skilled recommendation

One shouldn’t underestimate the significance of retaining professionals with related expertise as early within the course of as doable.
A potential franchisee ought to seek the advice of with a franchise lawyer, for instance, who can assist them perceive their rights and obligations below relevant franchise laws and interpret the disclosure doc, the franchise settlement, and the provide generally.

A franchise lawyer also needs to provide full authorized recommendation surrounding the acquisition of a franchise. If a potential franchisee intends to buy an present franchise unit, somewhat than a newly established one, then they need to rent a franchise lawyer to help with the required due diligence earlier than coming into a binding, unconditional cope with the prevailing franchisee. This course of will embody the identical forms of searches usually undertaken when planning to purchase a non-franchised enterprise.

As well as, a potential franchisee ought to retain knowledgeable accountant with experience in franchising, to assist assessment the monetary statements disclosed by the franchisor within the disclosure doc. This assessment could reveal sure strengths and weaknesses of the franchisor and its system. Whereas consulting with these accountants, the possible franchisee also needs to put together a marketing strategy, to reach at a extra correct evaluation of (a) the worth of the franchise to be bought and (b) the feasibility of deriving a return on funding (ROI) inside an affordable interval.

From time to time, a franchisor could make a monetary efficiency illustration, similar to a historic declare, through which case a potential franchisee ought to fastidiously assess the knowledge with its skilled advisors. It also needs to try to substantiate the accuracy of the representations with as many present franchisees as doable.

Lastly, a potential franchisee is inspired to seek the advice of with its bankers to acquire any vital financing and to solicit their opinions, from a monetary perspective, in regards to the franchise system into account.

Reviewing authorized paperwork

The franchisor’s disclosure doc, if up-to-date and precisely ready, will comprise some crucial items of details about the franchisor and its franchise system. This info might very effectively decide whether or not a potential franchisee ought to resolve to go forward with the acquisition.

Most significantly, the disclosure doc ought to checklist the enterprise addresses, phone numbers, and names of present franchisees, together with the final identified contact particulars for franchisees who’ve left the system throughout the final fiscal yr (i.e. instantly previous the date of the doc). Potential franchisees are strongly inspired to contact these franchisees to search out out extra about each the franchisor and the system.

Different sources of data

Along with conducting a complete assessment of the disclosure doc and franchise settlement with skilled advisors, a potential franchisee ought to conduct additional due diligence by canvassing different sources of data. If the franchisor’s shares are publicly traded, as an example, then a potential franchisee ought to assessment any public doc filed with the relevant provincial securities fee. It will also be helpful to go to business and franchise affiliation web sites to higher perceive the enterprise into account. This will likely additionally present additional perception into any of the franchisor’s rivals. Different on-line sources price testing embody web sites detailing complaints in regards to the franchisor and the franchise system.

Enterprise points

Along with the authorized points surrounding a franchise, potential franchisees ought to fastidiously look at the enterprise points surrounding the franchised enterprise. For instance, is the system well-established and mature, or is it new, with restricted demonstrated success so far?

An ongoing course of

These due diligence methods, which signify most of the steps any potential franchisee ought to take when contemplating the acquisition of a franchise, are very important in minimizing the dangers related to such a significant funding resolution. Nevertheless, you will need to notice soliciting authorized, accounting, and different skilled recommendation earlier than buying the franchise is simply step one. There’s additionally a lot worth in procuring continued skilled recommendation after the acquisition. Savvy, profitable franchisees perceive this worth, but sadly, different franchisees have all too usually realized in regards to the prices of not searching for out skilled recommendation the exhausting approach.

Notes

¹ Presently, franchise laws exists within the provinces of Alberta, Manitoba, Ontario, New Brunswick, Prince Edward Island, and British Columbia.

Joseph Y. Adler is a franchise lawyer and accomplice at Hoffer Adler LLP, a Toronto-based boutique regulation agency with expertise with greater than 540 franchise techniques. He will be reached at 416-977-3444 or at jadler@hofferadler.com.