You’ve found a franchise that seems like a hot business. You’ve talked to the Franchisor, and they want to take you on. They have sent you their franchise agreement for you to look over, and it looks like a lot of “legal stuff”. What do you need to know in order to move forward?
Disclosure: First, you need to have all of the necessary information. In Alberta (with a few exceptions) the Franchisor is required to provide ‘financial disclosure’ to you. This is required by the Franchises Act of Alberta, to ensure you are entering the purchase transaction with your eyes wide open: the stated objectives of the Act include “assist[ing] prospective franchisees in making informed investment decisions by requiring the timely disclosure of necessary information…” As such, the Act details the nature and extent of the information to be disclosed.
Structure: Second, you need to decide on a business structure, but practically-speaking, many Franchisors will require you to be incorporated. If not, you need to decide if you will incorporate or use some other business vehicle, such as sole proprietorship or a partnership. The advantages and drawbacks of each will depend in part on the Franchisor’s requirements and the type of business, as well as your own situation – and may well be worth getting some advice from a business lawyer experienced with franchises.
Other issues: You will need to make some business decisions regarding the value of the franchise business and the resulting opportunities. The liabilities you may be asked to take on will be a part of those decisions – e.g., some Franchisors will ask you to guarantee the obligations of the franchisee (if you are using a corporation to purchase the franchise). Past this, you may have some additional issues and need some further advice. For example, you may need to secure a storefront/location; this may bring up some leasing issues, and the interaction of your lease obligations with your franchise documents and obligations can be a complicated area.
Stephen Mogdan is a business lawyer who often deals with franchise transactions, and would be pleased to advise you. E-mail Stephen at scmogdan@stringam.ca or call 403-328-5577 for more information on this or any other business law topic.
