• The prospective franchisee will normally be required to sign a deposit and confidentiality agreement, which also protects the franchisor's trade secrets. Is the deposit wholly or at least partly refundable if the deal doesn't proceed? Is it to be paid back immediately if the deal doesn't proceed?

• Is the prospective franchisee dealing with the owner of the franchised concept, an area developer or master franchisee who owns the rights to a particular territory, or a salesman who sells all sorts of franchises?

• How extensive is the training and where is it held? Extensive and comprehensive franchisee training is a good thing.

• Some U.S. based franchisors don't “Canadianize” their agreements. The agreements can contain U.S. legal concepts not directly applicable in Canada. Canadian concepts, such as GST ad HST, are also omitted, and U.S. based Franchisors aren't always aware that withholdings tax must be paid on royalties crossing the border. As well, is the price for the franchise rights in Canadian or U.S. dollars?

• If the franchisor is "building out" the franchised premises itself, what assurances do you have that you will not have to pay for cost overruns the franchisor has encountered over and above the price you agreed to pay?

• Does the franchisor own or control the trademark? This can be verified by a database search on the Canadian Intellectual Property Office Web site. If the franchisor does not have a registered Canadian trademark, others could stop the franchisor (and you) from operating under that brand.

• Are other franchisees in the system content and making a good living? Is there litigation between the franchisees and the franchisor? Prospective franchisees should get a list of all franchisees in the system and talk to as many as possible. Check the disclosure document for a list of franchisees and a description of any litigation.

• Should both the husband and wife of a “mom 'n' pop” restaurant franchise personally guarantee the franchise, or should only one party take on that risk? Maybe the personal guarantee can be capped at some predetermined amount.

• What assurances are there that the type of food products for sale by the franchisor can be bought by the franchisee at competitive prices? Are there customs problems bring the products into Canada for resale? If the Canadian dollar goes down to 80 cents, but the food products must be bought from an American supplier in the U.S. does that make the business unviable? What if the Franchisor's special "Pizza Dough" ( or other special food products that Franchisor insists on you using) has to be shipped from Ontario to B.C. and freight costs are one third of the cost of the dough itself?

There are dozens of other issues that prospective franchisees have to consider before making what might be the most important financial decision of their lives. The questions are as important as the answers, and one of the keys to survival when buying a franchised business is doing your homework on the franchisor.
 

About the author:

Vancouver franchise lawyer Tony Wilson is the author of Buying A Franchise In Canada – Understanding and Negotiating Your Franchise Agreement and is ranked as a leading Canadian Franchise lawyer by LEXPERT. He is head of the Franchise Law Group at Boughton Law Corporation in Vancouver and acts for both franchisors and franchisees across Canada, many of whom are in the food service and hospitality industry. He is a registered Trademark Agent an Adjunct Professor at Simon Fraser University and also writes for Bartalk and Canadian Lawyer magazines.