1. Vancouver Franchise Show
Legal Aspects of Purchasing a Franchise
September 23, 2012

2. Presenter Eric Mollema BProc LLM 20 years legal experience
15 years of franchising experience
20 years of business experience
Short bio

3. YOU MUST KNOW WHAT YOU ARE GETTING INTO
Franchising
YOU MUST KNOW WHAT YOU ARE GETTING INTO
Franchising is the practice of using another Company’s successful business model to your own benefit; or
Franchising is:
A form of business organization (franchised business)
in which a Company that already has a successful product or service (the franchisor)
enters into a continuing contractual relationship (franchise agreement)
with other businesses (franchisees)
operating under the franchisor's trade name (license)
and usually with the franchisor's guidance (training)
in exchange for a fee. (royalty)
You have to pay monthly royalties – that is what franchising is about
You cannot say “What is the franchisor doing for me?” when you are using its setup

4. Franchise Legislation
BC is different…
Franchise Legislation in
Alberta
Manitoba
Ontario
New Brunswick
Prince Edward Island
Acts focus on the protection of the Franchisee through disclosure
Other provinces? For information purposes only!
USA - Franchising commands 43% of total retail sales and service dollars

5. Legal Process Disclosure Non Disclosure Agreement
Franchise Application
Franchise Agreement
Pre-purchase Investigations – 12 things to look out for:
Compatibility of Franchisor & Franchisee
Not too much competition
Good location
Risk of the venture
Large enough territory
Sufficient working capital
Reasonable initial franchise fee
Other fees & costs
Sufficient training
Success of other franchisees
Is there a satisfactory exit strategy
Profitability
Most legal problems stem from insufficient pre-investigation

6. Disclosure What must be disclosed
Material information about the franchise network
Franchisor information
Financial information
Financial statements
Operational information
Rights & Obligations of Franchisor and Franchisee
Current & past franchisees
All arrangements regarding the relationship
The prospective franchisee must be able to make a 100% informed decision
95-97% of all franchises are still in business after 5 years

7. Franchise Agreement
Each franchise network has a very specific franchise agreement
No two franchise agreements are the same
Franchise agreements are based on common franchise principles and will “look the same”.
However BEWARE, they are not!
There is no such thing as a “standard franchise agreement”

8. Franchise Agreement
Parties
Grant
Term
Fees
Costs
Payment
Franchisee Acknowledgements
Exclusivity
Franchisor Obligations
Performance requirements
Store location & Lease agreements
Leasehold improvements
Operation of the Franchised Business
Territory
Copyright
Manual & Confidentiality
62.2% of all new USA businesses fail within 6 years

9. Franchise Agreement 1 in 12 establishments is a franchise Advertising
Marks
Accounting, Records, Reports, Audits and Inspections
Insurance
Restrictive covenants and trade secrets
Start-up package
Sale, assignment and transfer
Control of the Franchise
Security for Payment
Frustration of the Agreement
Substitution
Death or Incapacity
Termination
Guarantor’s covenants
General
Schedules
1 in 12 establishments is a franchise

10. Who is the purchaser What are the requirements of the Franchisor
If an incorporated company is required
Who will the directors be?
Who will the shareholders be?
Name reservation
Incorporation of the company
Articles of Incorporation
Optimal Share Structure
Accountant input
Shareholders Agreement
Loan Agreements
Security documents
Employment Agreements
Registrations & Records Office
Start-up copyrights
A new franchise opens every 8 minutes of every business day

11. Other legal matters Lease Lease agreement Employees
Letters of Appointment
Employment agreements
Business licenses
An average franchise employs between 8 – 14 staff

12. Tips of the day Do not go it alone!
Ask an expert! It is part of the investment in your franchise!
Learn as much about franchising as you can.
(Read the hand-out: “Buying a Franchise is like getting married”)
Ask questions (Questions to ask your franchisor)
USA franchise sales total over 1 Trillion per year

13. “Thank You” Any questions?–

14. Franchise Agreement Parties Franchisor Franchisee Indemnitor
The person who owns the franchise network and who sells the franchises.
Franchisee
You – the person who is interested in buying a franchised business from the franchisor.
Indemnitor
or Surety or Guarantor or Principle Co-debtor
This is the person who stands in for the franchisee should something goes wrong. This usually refers to the debts of the franchisee to the franchisor, but in some cases can be extended to include acting in a certain manner in the place of the franchisee.
Usually this is the applicant personally who stands in for the franchisee (his incorporated company)

15. Franchise Agreement Grant The rights granted usually are:
The franchisor grants certain rights to the franchisee which are described here.
The rights granted usually are:
Right to operate a franchised business – exclusive or non exclusive
Licensed rights to use the franchisor’s marks, system, etc.
Right to a territory
Franchisee’s limited rights to access National or Regional contracts
Circumstances where under the rights may be suspended
Minimum performance requirement o retain rights

16. Franchise Agreement Term Initial term Renewal period Effective date
This referrers to the contract term which is also the period for which the franchise is awarded.
You do not “buy” a franchise and have the rights “forever”
Initial term
This is the first term of the agreement – usually between 3 to 5 years.
Renewal period
This is any further periods, after the Initial Term, for which the agreement is resigned or renewed.
Effective date
The date when the agreement becomes effective.
This may differ from the signature date.

17. Franchise Agreement Fees Initial Franchise Fee Royalty Fee
This is the up front amount that must be paid to receive the right to the franchise for the first time.
It usually has a non-refundable portion (administration fee) and a refundable portion which is only payable if the franchise application is successful.
No fees of any kind should be paid directly to the franchisor before 14 days have elapsed from the date of disclosure.
Royalty Fee
This is a recurring monthly fee that the franchisee must pay to the franchisor.
Usually based on monthly sales or turnover.
Advertising Fee
This is a fee or a portion of the franchisee’s income that is paid to the franchisor to do advertising on the behalf of all the franchisees collectively.
This is over and above the royalty payment.
Renewal Fee
This is a fee paid to the franchisor for the privilege of renewing the franchise agreement for a further period.
This can be made up in various ways.
Relocation Fee
When a franchisee relocates its franchise, this fee is payable to the franchisor to compensate it for its efforts to assist you.

18. Franchise Agreement Costs Build out or setup Initial stock
This is the cost, in addition to the initial franchise fee, payable to the franchisor for the setup of the franchise. This is usually for signs, branding, shelves, etc. (everything that is going to be used in the franchise that is not stock)
Initial stock
This is the cost, in addition to the initial franchise fee and the build out or setup costs, payable to the franchisor to enable it to purchase your startup inventory
Cost of incorporation
The legal cost of having the franchise entity incorporated.
Usually payable directly to the lawyer.

19. Franchise Agreement Payment When? Where? How? Default Interest Tax
What happens in the case of default
Interest
What interest rate is payable on arrears payments
Tax
Who pays what
No-setoff
Franchisee not allowed to do deductions on the royalties
Application of payments
How are the payments of the franchisee to be applied. Interest, then penalties, then fees?

20. Franchise Agreement Franchisee Acknowledgements General
Confirms the Franchisor’s investment in the system
That goodwill and customer association with marks have been established
Franchisee must operate franchisee in conformation with the system
Franchisor must have some control over the franchise
Independent investigation
Confirmation that the franchisee investigated the business opportunity independently
Trading name
Confirms the trading entities and that the franchisee has no right thereto
Trading entity
Confirms in what entity the franchise must be operated.
This is usually in an incorporated company
Success of the business
Confirms that the franchisee does not quarantine the success of the business
Further businesses
Establishes the franchisor’s right to open other related or unrelated businesses or initiatives
Uniformity of agreements
Confirms the right of the franchisor to request that the franchisee resign a further franchise agreement.
This is to ensure that all the franchisees have the same agreement and are thus treated equally in law.

21. Franchise Agreement Exclusivity
Franchisee must deal with the Franchisor exclusively
Franchisor’s rights outside of this exclusive arrangement
Referrers t National and Regional Contracts, Internet Marketing and E-Commerce.

22. Franchise Agreement Franchisor Obligations Supply the franchise model
Site selection assistance
Operations manual
Training
Operating assistance
Start-up package
Marketing
Inspections & Evaluations
Delegation of services by the franchisor
Other programs and business models
Notification of legal proceedings
Compliance with Governmental requirements
Pricing

23. Franchise Agreement Performance requirements
This section sets out what is expected from the franchisee
What is required of the franchisee
This usually focuses on the areas that are critical for the franchisee to succeed and can include: sales, operations, financial, target dates, etc.
What is the minimum performance that is acceptable to the franchisor
This is the minimum targets, set by the franchisor.
Normally, if the franchisee does not reach these set targets, there will be consequences, i.e. fines, lost of certain rights and even loss of the franchise opportunity.

24. Franchise Agreement Store location & Lease agreements
Approved location
This section describes and regulates all aspects with relating to the location from which the franchised business will operate. It describes the process which will be followed to obtain this location and what each party’s involvement in the process will be. Usually the franchisor must approved the location in writing.
Lease of premises
This section sets out the arrangements required by the franchisor in relation to the lease of the approved location. Specifically it handles with the arrangement relating to head leases, subleases, assignment of leases, etc.
Any additional provisions
Any additional arrangements are noted here. This section usually deals with renewals of the lease, consent of the landlord to the operation of the franchised business from the location, prohibits subleasing, modifications, upgrades, etc.
Relocation
All arrangements relating to the relocation of the franchised business is noted here. This usually relates to notice, approval, etc.
Furnishing lease to franchisor
The franchisor usually requires a copy of the lease for safekeeping.

25. Franchise Agreement Leasehold improvements Obligation to construct
When a suitable location has been agreed on, it must be changed to comply with the requirements of the franchisor.
Subject to what is agreed, this can be done by the franchisor or the franchisee.
If it is the franchisor’s responsibility, the cost is usually include in the amounts paid to the franchisor.
If it is the franchisee’s responsibility, the franchisor must supply the specifications.
Obligation to construct
The franchisee must do the required changes.
Governmental approvals
The necessary requirements relating to the changes must be obtained from the relevant authorities, i.e. plans, approvals, permits, etc.
Use of qualified architect and engineer
To limit liability to everyone, only qualified professionals may be used.
Use of qualified contractor
To limit liability to everyone, only qualified contractors may be used.
Construction of improvements
Construction must be done as prescribed by the franchisor
Securing approval
The franchisor must approve the final product
Timeframe
Regulates when the construction must start and be finished.
Construction insurance
Normal construction insurance must be in place during the construction phase.

26. Franchise Agreement Operation of the Franchised Business
Duties and obligations of the franchisee
This section describes in detail the duties an obligations of the franchisee in relation to the franchised business.
System modifications
The franchisor has the right to modify its system and the franchisee must implement such changes.
Internet
All arrangements relating to the franchisor’s online systems, websites, social media presence, etc.
Franchise gatherings
Purchase and Sale of Products
Discounts, Rebates and Bonuses
Transfer of funds
Contact mechanisms
Use of the approved location
Standards
Employee policy

27. Franchise Agreement Territory Location of the store Allocated area
Describes the extent of the franchisees area of operation and the type of rights he has thereto.
Location of the store
Location from which the franchised business will operate.
Allocated area
Describes in words the allocated area;
Geographically – the are know as the municipal district of Maple Ridge.
Radius – a radius of 10 kilometers from the approved location
Exclusive use
Describes the specific area that the franchisee will have exclusive use of, if any.
Non exclusive use
Describes the specific area that the franchisee will have non-exclusive use of, if any
Map
The map of the area is usually attached as a schedule to the franchise agreement.
It is common practice to use electronic geographical representations such as Google Maps.

28. Franchise Agreement Copyright
cop·y·right [kɒpi-raɪt] [kop-ee-rahyt]
noun 1. the exclusive right to make copies, license, and otherwise exploit a literary, musical, or artistic work, whether printed, audio, video, etc.: works granted such right by law are protected for the lifetime of the author or creator and for a period of 50 years after his or her death.
Description of the franchisor’s copyrights and the arrangements relating thereto.
This usually pertains to the franchisor’s manuals and system documents.

29. Franchise Agreement Manual & Confidentiality
Compliance with the manual
The franchisee is expected to comply with the content of the manual. Breach may be seen as breach of the franchise agreement leading to a contractual default.
Non-disclosure
The content of the manuals are subject to non-disclosure arrangements
Manual the property of the franchisor
The franchisor stays the owner of the manuals. The franchisee only has the right of use thereof.
Keeping the manual confidential
The franchisee may not disclose the content of the manual to third parties.
Keeping the manual current
The franchisee is obliged to keep the manual current.
Irreparable harm from disclosure of confidential information
Disclosure of the content of the manual to third parties may lead to harm to the system and damages to the franchisor and its franchises. This section gives the franchisor extended legal rights which it can enforce against the franchisee in case of breach.
Individuals associated with the franchisee
Not only the franchisee is bound by this section. Usually all shareholders, directors, employees and immediate family are included.
Translation of the manual
Regulates the language and alternatives
Applicability
Regulated to whom this section is applicable.
Survival
The content of this section usually survives the termination of the agreement and the franchisee stays bound thereby for an agreed period.

30. Franchise Agreement Advertising Local advertising Regional advertising
Advertising done directly to the benefit of the franchised business. May be done by the franchisee or the franchisor.
Regional advertising
Advertising done by the franchisor or the regional franchisees together.
National advertising
The franchisor’s national advertising initiatives
Advertising funds
Advertising levies (agreed deductions for the exclusive use for advertising) is usually paid into a separate account which is referred to as the advertising fund. This section sets out arrangements relating to this fund.
Opening promotion
Franchisees are usually expected to have an opening promotion.
Internet, e-commerce and electronic advertising
Arrangements relating to the rights of the franchisor and the franchisee in this regard.
Advertised price deviation
Some franchisor’s allow franchisees to have their own special promotions. This section regulates the extent to which the franchisee may deviate from prescribed pricing models during these promotions.
Franchisee developments
This section regulates franchisee initiatives that may be adopted by the franchisor.
Franchisee Advisory Committee
Arrangements regulating franchisee input through the FAC in relation to advertising.

31. Franchise Agreement Marks Protection No permanent interest
This sets out the protection agreed to in relation to the franchisor’s trademarks and patents.
No permanent interest
The franchisee only obtains a right to use the trademarks and patents of the franchisor.
Franchisee’s obligations with respect to the marks
What the franchise may r may not do in relation to the trademarks and patents
Infringement or change
What happens if there are trademark or patent infringements.

32. Franchise Agreement
Accounting, Records, Reports, Audits and Inspections
Bookkeeping, accounting and records
Prescriptions relating to bookkeeping, accounting methods and the keeping of records
Reports and financial information
What reports are required by the franchisor at what stages and what financial and other information these report must contain.
Inspection and audit of books and records
The franchisors right to inspect and audit the books and financial record of the franchisee.
Auditor’s report to be final
The report of the auditor of the financial situation of the franchisee to the franchisor is considered to be the correct version.

33. Franchise Agreement Insurance Types of insurance Policies Copies
The types of insurance required by the franchisor is listed and described. This usually includes content insurance, fire insurance, general and specific liability insurance, key man insurance etc.
Policies
Sets out the requirements the franchisor insists must be included in the policy. This usually relates to acceptability of the insurer, insured amount, beneficiary, renewal, etc.
Copies
The franchisor may insist on having a copy of the latest insurance policy on file.
Placement of Insurance by the Franchisor
On default of the franchisee, the franchisor may insure on the franchisee’s behalf.

34. Franchise Agreement Restrictive covenants and trade secrets
These are the non-compete arrangements
Competition during the terms of the agreement
Arrangements applicable while the franchise agreement is still in force
Competition after termination of the agreement
Arrangements applicable to the franchisee after the franchise agreement is terminated
These arrangements are usually applicable for an agreed period in an agreed area.
Acknowledgement of a corporate franchisee
As the franchisee may be a incorporated company which was erected for the specific purpose of housing the franchised business, it may not continue after termination. The franchisor will want to enforce the content of this clause against everyone involved in the franchised business, especially the key individuals. These individuals are bound personally by the content of this section.
Applicability
The people to whom this section is applicable is set out herein.

35. Franchise Agreement Start-up package Initial branding
This refers to the items included in the initial franchise fee or other amounts that is supplied by the franchisor to the franchisee before opening of the franchised business. This may be anything! Usually it refers to corporate clothing, signs, business cards and letterheads, promotional items, etc.
Initial stock and material
This refers to the initial stock in trade that the franchisee requires to open the business.

36. Franchise Agreement Sale, assignment and transfer
This refers to the sale of the business or the shares of the business, whatever the case may be, and the arrangements that the parties agree to.
Assignment by the franchisee
The franchisee agrees to certain conditions that will be applicable when its sells its shares. This usually deals with the suitability of the purchaser as a franchisee and the obligation of the purchaser to qualify as a franchisee.
Right of first refusal
Franchisors usually reserve a right of first refusal to purchase the franchised business. These arrangements are noted in this section.
Sale of shares or other interest in the franchisee
If the franchisee is a corporation or a partnership, the arrangements are slightly different and are noted here.
Assignment by franchisor
The franchisor will not be bound by any agreement for sale and purchase if it is not done according to this section and cannot be forced to assign any rights to the purchaser.

37. Franchise Agreement Control of the Franchise
This section described the franchisor’s rules relating to who may, and may not, control of the franchised business and franchisee.
The franchisor may reserve a right to take control of the franchised business in certain circumstances
Examples: Death or Incapacity of the franchisee, uncontrolled loss situation, default, etc.

38. Franchise Agreement Security for Payment
Arrangements ensuring the payment of any outstanding amounts to the franchisor is agreed to in this section.
This usually takes the form of the franchisee’s assignment of his rights to the business’s stock, debtors, etc. to the franchisor as security.

39. Franchise Agreement Frustration of the Agreement
Frustration of the agreement refers to actions by the franchisee that has the effect that the franchisor cannot enforce the agreement, such as:
Unauthorized sale of the franchisees shares;
Insolvency of the franchisee
Death of the franchisee
This section regulates the rights of the franchisor in such cases and the obligations of the franchisee

40. Franchise Agreement Substitution
Either party may do what is required by the other in cases where that party cannot, or will not, act as is required by the franchise agreement.
This usually give the franchisor the right to sign documents on behalf of the franchisee.

41. Franchise Agreement Death or Incapacity
This section deals with what happens on the event of the franchisee’s death or permanent incapacity.
It also sets out what permanent incapacity is deemed to be.

42. Franchise Agreement Termination Events of termination
Events that are considered as ending the relationship between the franchisor and the franchisee. These usually include: non payment of fees, failure to complete initial training, franchisee in breach of a term of the franchise agreement, failure to observe rules, not open for business, etc.
Effect of termination
What happens when he agreement is terminated. This section regulates the process that is followed after termination which usually includes; ceasing to use the franchisor’s marks, stop doing business as a franchisee, return manuals, etc.
Rights of the Franchisor
What rights does the franchisor have? Usually to buy the stock of the franchisee.
Exercise of the Franchisor’s rights
Further rights; sett-off of owed amounts against money due, transfer of permits and business licenses,
Additional remedies
Describes any additional remedies that the franchisor may insist on.
Survival of covenants
States which sections of the franchise agreement survive the termination of the agreement.
Failure to act not to affect rights
States that the franchisor’s failure to act does not effect or negate its rights in terms of the franchise agreement.

43. Franchise Agreement Guarantor’s covenants Guarantee and Indemnity
A guarantor is a person who stands in for the financial, and sometimes other obligations of the franchisee.
This is usually the natural persons involved in a corporate franchise but may be a third party in the case of a natural person franchisee.
Guarantee and Indemnity
This section defines the extent to which the guarantor is guaranteeing. This usually relates to payments and amounts owed. It can however refer to specific actions such as managing the franchised business, etc.
The guarantor also indemnifies the franchisor against any liability relating to the franchise,; losses, claims, etc..
Waiver of right to proceed
The franchisor may act against the guarantor directly.
Any dealings binding on Guarantor
Any actions between the franchisee and the franchisor is binding on the guarantor, if he was part thereof or not.
Settlement binding on Guarantor
Any settlement reached between the franchisor and the franchisee is binding on the guarantor, of he was part of the negotiations or not.
Bankruptcy of the franchisee
The guarantor stays liable even if the franchisee is bankrupt.
Guarantor’s covenants binding
The successors of the guarantor are bound by the terms of the agreement even if he passes away, etc.
Guarantor to be bound
Confirms that it is the intent of the guarantor to be bound by the franchise agreement.

44. Franchise Agreement General provisions Amendment & prior agreements
Entire agreement
Indemnification of the franchisor
Right to injunctive relief
Legal fees
No liability
Legal relationship
Joint and severable
Severability of the agreement
Notice
Headings & section numbers
Applicable laws
Time of the essence
Waiver of obligations
Franchisee and Guarantor defined, use of pronoun
Lawful attorney
Default cumulative
Further assurances
Binding agreement
When agreement is binding on the Franchisee
Rights of the Franchisor are cumulative
Force Majeure
Counterparts
English language
Good faith
Good name
Signature clauses
Think before you sign!
This is your absolute last chance.

45. Franchise Agreement Schedules Definitions & General Interpretation
Contract Information
Franchisor’s Protected Marks
Territory Map
Start-up Package
Company Resolution
Confirmation of New Shareholder, Director or Manager
Disclosure of Franchisee’s Interest in Other Entities
Head Lease Arrangements
Conditional Assignment of Lease
Option and Shop Lease
Personal Guarantee
Assignment of Franchise Agreement
Renewal Agreement
Franchise Renewal Promissory Note
Authority to Act
Software Support and Maintenance Agreement

46. Disclosure Topics covered Advertising Attachments Public Figures
Background Information
Business Summary
Computer Software
Continuing Fees
Costs of Establishing the Franchise
Directors and Officers Information
Estimated Initial Investment
Financial Performance Representations
Financial Statements
Financing
Franchisee's Obligations
Franchisor’s Obligations
Further Costs
Legal Matters
Non-disclosure
Obligation to Participate in the Operation of the Franchised Business
Outlets and Franchisee Information
Patents, Copyright and Proprietary Information
Prior Business Experience
Public Figures
Rebates and Discounts
Receipt
Renewal, Termination and Transfer
Restrictions on Sources of Products and Services
Restrictions on what the Franchisee may Sell
Start-up Package
Territory
Time To Open
Trademarks
Training