The world of franchising can be difficult to navigate for prospective franchisees. If you are seeking to purchase a franchise business, it is imperative that you involve your lawyer and your financial advisor as early in the transaction as possible.

The two main documents involved in the purchase of a franchise in Ontario are the Franchise Agreement (FA), and the Franchise Disclosure Document (FDD). The FA is a contract between a Franchisor and a Franchisee. Put simply, the Franchisor sells to the Franchisee the right to use its business knowledge/know-how, intellectual property, and operations/processes in return for a fee. Some of the most well-known examples of franchised businesses that operate in Ontario include Tim Hortons, Subway, McDonald’s, RE/MAX, Domino’s Pizza, Dairy Queen, KFC, Wendy’s, Mr. Lube, and the list goes on. However, franchises in Ontario also include lesser-known businesses with few locations.

The fee structure in a FA can vary significantly from one franchise to the next, which is why it is important to have your lawyer review both the FA and the FDD and explain their intricacies to you before you sign. Your lawyer will help you to understand exactly what you will be expected to pay to the Franchisor during the course of your business relationship, including initial start-up fees, royalties, amongst other possible fees which may arise. In addition to the fee structure, your lawyer will also highlight the circumstances under which your FA may be terminated by the Franchisor, your right of renewal (if the term of the FA is limited), amongst other important terms of the FA.

The FDD is required to be provided by the franchisor to the franchisee prior to the signing of the FA. The specific rules around Franchise Disclosure are set out in Ontario’s Franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000.  The FDD typically includes information about the background of the business, litigation history, and financial statements. You must thoroughly review the FDD with your financial advisor/accountant prior to signing the FA. Missing or late franchise disclosure can lead to the opportunity for the Franchisee to cancel the FA within the time frames specified under the legislation.

Since FA’s typically involve the purchase of assets from the Franchisor, the Franchisee’s lawyer will also assist them to complete the closing of the asset purchase transaction pursuant to the terms of the FA.

If you are planning to purchase a franchise business, or wish to obtain more information, please contact our office at 905-270-6660 or info@kormans.ca for trustworthy and reliable advice.