Franchise Agreements Key to Success
When it comes to the business of franchising, the stakes are always high. Franchisors want to protect their brands and ensure smooth expansion; franchisees need a solid system to build a business on. But when things go awry for whatever reason, the consequences can be enormous.
There are plenty of examples of legal wrangling in the world of franchising, including the much-publicized battle Tim Hortons has found itself embroiled in. Some of its franchisees have proposed a $1.95-billion class-action lawsuit, claiming the company is charging puffed-up prices for the frozen and reheated treats Tims serves. A hearing is scheduled for November to determine whether the suit can proceed.
And there are plenty more examples. Earlier this year, the Ontario Court of Appeal sided with hundreds of franchisees of Quiznos Canada by ruling their class-action lawsuit could proceed. The group alleges the franchisor and others illegally conspired to enhance and fix the prices of supplies used by franchisees in their businesses. In July, the same court ruled that franchisees of Midas Canada could not be forced to waive or release their rights to participate in class-action lawsuits to sell or renew their franchise agreements.
Regardless of the outcomes, these are the kind of situations that can get messy — fast. And corporate franchise lawyer Joseph Adler, a partner with Toronto-based Hoffer Adler LLP, warns “class-action [lawsuits] are on the rise.
“[Franchisees] gang up together and they create a much more liable threat to the franchisor,” he says.
Avoiding such threats starts with drafting a good franchise agreement. These agreements are the cornerstone of the relationships between franchisors and franchisees. “The franchise agreement is central — absolutely core — to the relationship,” says Lorraine Mc-Laughlin, president and chief executive of the Canadian Franchise Association. “I can’t underscore how important it is to take a franchise agreement to a lawyer … who specializes in it.”
While the aforementioned cases don’t necessarily have anything to do with the quality of the franchise agreement, there’s no question such agreements guide the relationship between the parties. Nor does a lawsuit necessarily indicate a bad franchise system, Ms. McLaughlin says.
There are plenty of reasons these disputes can end up in court — a franchisee who consistently fails to meet quality standards or volume targets, for example — but the point
is not to end up there in the first place. “It takes essential energy that needs to be spent on building the system and diverts it to something that’s negative, costly,” Mr. Adler says. “It will eat you up.”
Michael Bateman, president and chief executive of Grade Learning, a chain of learning centres in Ontario, does his due diligence to ensure he never ends up in court, and so far it’s worked. He spent weeks in consultation with lawyers and stakeholders to ensure his franchise agreement was up to snuff.
“If you start with common sense and deliver on what you say, then it’s fairly simple,” he says.
“It’s when things are left and the communication is not flowing properly that things can go astray.
“It’s almost like a marriage. If everybody understands what the expectations are … then really the agreement isn’t something that’s looked at again.”
For every franchise relationship, two key documents should be drawn up and maintained: The franchise agreement, which lays out the terms of the relationship between franchisor and franchisee, including expectations of both parties; and the disclosure document, which lists mainly the financial information about the inner workings of the company.
Together, these documents help protect the company brand, set clear expectations, provide an accurate snapshot of the company’s financial health, lay out the type of franchising model (single unit, multiple unit, area development or master agreement), exit strategies, additional fees and other critical factors in the relationship.
In 1993, when Grade Learning was founded, Mr. Batement immediately put an agreement in place because he planned on franchising from the start. In 2000, he revamped the disclosure document and continually updates it. This year, it underwent another overhaul because of changes to laws and other factors.
“The disclosure document is more of a living, breathing thing that can change on a quarterly basis,” he says.
“As laws change or as situations occur where there was some learning, you change them over time. You want to make sure that people are clear as to what the opportunity is and the company’s objectives.”
Alberta, Ontario and Prince Edward Island have enacted legislation governing franchising, while New Brunswick is expected to do so early next year, and Manitoba expects to have laws in place in about a year, Ms. McLaughlin says, noting CFA members, whatever province they operate in, are required to have franchise agreements and disclosure documents available.
Both sides in the relationship need to have someone who specializes in franchise law review the documents before signing anything, she recommends. Ideally, it helps set the tone for a positive relationship.