Are you thinking about starting a franchise business? A franchise relationship allows the franchisee’s business to grow faster than it would using its own resources. A franchise is a long-term contract between a franchisor and franchisee. The franchisor (owner) transfers a trade-mark or trade name to the franchisee for use in its business. A franchise allows the franchisee to run a business in relatively streamlined and simplified manner, since the franchisee follows the franchisor’s guidelines and procedures. To illustrate the ease of a franchise, it has been described as a “business in a box”.
The franchisee typically pays an initial fee in exchange for the franchisor’s expertise, business model, goodwill and business practices. The franchisor, in turn has the ability to monitor the franchisee’s operation, as well as provide advice and assistance. In exchange, the franchisee typically pays an ongoing fee. A franchise relationship is distinct from other relationships in that there is a key element of control on the part of the franchisor over the franchisee. The control allows the franchisor to protect its products, techniques, intellectual property and business methods. The franchise agreement contains key details about the relationship, fee and operation of the franchisee business.
The governing legislation for franchises is the Arthur Wishart Act (the “Act”), which came into effect on January, 31st, 2001. Pursuant to that Act, franchisors must provide prospective franchisees with “relevant and meaningful information” about the franchisor, its principles, the organization, and system prior to the franchisee investing in the franchise. Furthermore, the disclosure must be accurate, clear and concise. It must contain a certificate signed by the franchisor certifying the truth and completeness of the disclosure. There is also a duty of “fair dealing” contained in Section 3 of the Act. Accordingly, the franchisor and franchisee must act in good faith and pursuant to reasonable commercial standards.
There are many advantages to a franchise relationship. As mentioned above, it allows the franchisee to grow the business quickly based on a successful and established business idea and brand. The franchisor helps the franchisee with start up costs in the form of equipment, training, marketing, etc. In addition, you can use the purchasing power of the franchisor to further grow the business. Some franchisors also may grant the franchisee a level of independence and creative freedom. Typically, franchises have a lower failure rate than other business models.
Prospective franchisees should keep in mind that there is typically less flexibility in running your business and the initial and ongoing fee may be high depending upon the franchise. Franchisee may also not have a great deal of legal protection, since the franchise agreement is drafted by the franchisor and therefore typically favours the franchisor. It will be important for franchisees to have their lawyer review the franchise agreement and disclosure documents prior to entering into the business venture.
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