16 minute read
ASK THE EXPERTS
QASK A LEGAL EXPERT What are the main differences between a franchise and a license agreement—and which should I choose?
AIF YOU’RE CONSIDERING PARTNERING with a recognized brand to establish a new retail business, or expand an existing one, you may be faced with the decision of choosing between a franchise arrangement versus a license arrangement. While these two business models share certain common features, they’re not the same, and it’s important that you understand the legal and functional differences before making your decision. Whether a relationship constitutes a franchise has significant legal and business implications. Franchising is regulated at the provincial level in Canada. There are currently six provinces (British Columbia, Alberta, Manitoba, Ontario, Prince Edward Island, New Brunswick, and Newfoundland) with enacted franchise legislations in Canada. Parties operating franchises in these provinces will be subject to applicable provincial franchise legislation, including pre-sale disclosure obligations and a statutory duty of fair dealing, among other rights and obligations. A company will typically start franchising once its business concept is established and proven and its brand enjoys a level of recognition or goodwill in its sector. Such businesses are attractive to entrepreneurs seeking to leverage the goodwill of a recognized brand, the efficacy of established, proven operating systems, and a higher level of support. Occasionally, a fast growth or emerging business with aggressive expansion aspirations will dive into franchising immediately to accelerate its growth. Extra care and diligence should be applied when considering such franchise opportunities. A license, on the other hand, is a grant from one party (a “licensor”) to another (a “licensee”) whereby the licensor permits the licensee to use certain intellectual property. A commercial license is typically restricted to the use of the licensor’s intellectual property in the course of the licensee’s business, and can include the trademarks owned by the licensor as well as its processes and trade-secrets or a product. Unlike franchises, there is no legislation in Canada specifically regulating the grant of a license. Accordingly, the relationship between a licensor and licensee will be governed by established contract law principles and the terms of the agreement executed by the parties. A company licensing its intellectual property to third parties under a license agreement may direct how its intellectual property can and can’t be used, but it won’t typically require adherence to a particular operating system or business model, nor will it provide the level of support received under a franchise agreement. In a licensing model, the entrepreneur pays to use the intellectual property, but is generally free to structure and operate its business as it chooses.
Whether the differences highlighted above between licensing and franchising are a “pro” or a “con” will depend entirely on the particular circumstances and personality of the entrepreneur assessing the opportunity. There’s no right or wrong choice, and one model isn’t necessarily better than the other.
At their core, both models allow an entrepreneur to operate a business using another party’s intellectual property. To determine which model is best for you, ask yourself the following questions: 1. What is your goal? What do you hope to achieve? 2. What is your personality and business style? Are you a risk taker or risk averse? Does the idea of starting your own business excite or terrify you? 3. Consider your type of business and the predominant business models in your selected industry. 4. Is the company you are considering well known in your jurisdiction? 5. Does the company have an established operating system and a proven record of success? 6. How much control do you want to retain over your business? Do you want a high level of control and autonomy, or do you prefer the security of working within an established system and having the main elements of your business planned for you? 7. How much support will you need? 8. How much money are you able to invest? 9. How quickly do you want to go to market? 10. Are the additional legal protections afforded under franchise laws important to you?
As you answer the above questions and consider the differences of franchising and licensing through the lens of your specific circumstances, goals, and personality, the most appropriate model for you will become apparent.
Helen Fotinos
Partner, Lead of Franchising and Distribution for Canada
Dentons LLP
416-863-4547 helen.fotinos@dentons.com
Ilan Levy
Associate, Franchising & Distribution
Dentons LLP
416-863-4511 Ilan.levy@dentons.com
QASK A FRANCHISE EXPERT As a new franchisor, what type of support should I provide to my franchisees?
AIF YOU’VE DECIDED TO FRANCHISE YOUR BUSINESS, you may be wondering how much support you will need to provide to help your franchisees succeed.
Let me start by saying that supporting your franchise owners at a high level is extremely important, for several reasons. Firstly, it’s going to help you maximize your potential. Increasing the revenues that your franchisees collect increases your royalties. Secondly, it’ll help you to build strong relationships with your franchisees and increase the respect that they have for you, which will allow you to implement changes if you need to and give you a greater level of influence with your franchisees. It’ll also ensure that your franchisees validate well for you in the sales process. Validation is the term that we use in franchising to mean whether your franchisees say great things about you—and those recommendations will help you to sell franchises going forward. And finally, it’s going to help you reduce the chances of any litigation in your system. But bear in mind, when we’re talking about support, one size does not fit all. Some companies, for example, will have physical locations; some companies don’t. Some companies are going to expand much more aggressively as franchisors. Some might do multi-unit offerings, some might do area development offerings, some might do other kinds of offerings as well. The industry you belong to is also going to determine the level and type of support you’ll need to provide. For example, if you’re in the restaurant industry, you may need to provide a lot more support, because if your franchisee’s not welltrained you can poison your patrons. I break the kind of support you provide your franchise into two basic buckets. The first is the onboarding bucket: what you’re going to do to help franchisees when they first get started. These are things like site selection, lease negotiation, facility design, construction, and initial training. This can come in the form of remote training, on-site training, training at your head office, and grand opening support. In each of these areas, it’s important that you document the processes that franchisees are expected to follow, and the support resources that are available to the franchise owners. Franchisees who are first-time business owners, in particular, are going to look to you for detailed guidance about how to get started. Areas like site selection and lease negotiation are very important if you have a site-dependent business. Be sure that if you’re going to be involved in this, that prior to accepting any location that the franchisee wishes to pursue, it’s important that they’ve completed their due diligence and that you’ve completed whatever due diligence is part of your process. Make sure that the LOI (letter of intent) that they submit and the lease they sign contains the use clauses and other terms that are going to help protect your brand, your intellectual property, and their interest as well.
When it comes to ongoing support, this encompasses areas like business coaching, training, ongoing marketing research and development, supply chain management, and finding new and better pricing. It’s also important to implement benchmarking, especially looking at KPIs (key performance indicators) within the system, to measure your franchisees’ success.
Make sure that when you’re talking to your franchisees, that they understand what kind of ongoing support and training you’re going to be offering. The ongoing support that you provide your franchise owners should focus on helping them to continually increase revenues and control their costs. Additionally, your job is to make sure that you establish your credibility as an effective business coach for them.
In order to understand your franchisees’ needs, you should make sure that you have detailed data coming from the franchisees, from a POS (point of sale) or CRM (customer relationship management) system, and that you’re getting monthly financial statements from the franchisee.
If you develop credibility with your franchisees through a strong, relational system of support, you’re going to be able to implement changes in the system and improve your franchisees’ performance, which will in turn help grow the system much more quickly and with a greater level of quality.
This article was adapted from Franchise Canada’s How to Franchise Your Business video series. Watch the full video and find more helpful content here!
Mark Siebert
CEO
iFranchise Group
www.ifranchisegroup.com
WHEN OPENING A BUSINESS AS A FRANCHISEE, you’ll want to ensure that you’re adequately insured. Proper insurance allows you to recover from a financial loss during the occurrence of a specific event. Such events might consist of an employee or customer being injured at the business premises, business interruption due to fire or flood, theft, or even employee fraud. Each of these events can cause the franchisee to have a loss of income and also cause the franchisor to incur a loss of royalties.
As you make tenant improvements and stock inventory prior to opening your business, you’ll want to have insurance coverage commence immediately upon taking possession of the premises.
Typically in a franchise agreement, or within the operation manual, there will be specific insurance requirements that you’re obligated to get from insurance providers. Typical insurance requirements include: • Comprehensive public liability insurance: coverage in case a customer, employee, or any other person suffers bodily injury while on your premises or as a result of your service or products • Product Liability Insurance: for physical loss or damage to inventory • Property Damage Insurance: for property damage due to fire, flood, smoke, vandalism, etc. • Business Interruption Insurance: for financial loss from closing of the business due to damage or destruction of property • Employment Practices Insurance: coverage arriving from such claims as discrimination, wrongful dismissal, or harassment • Workers Safety Insurance: coverage for employees at the workplace • Auto Insurance: coverage for delivery vehicles, etc.
The franchise agreement will normally require the franchisee to add the franchisor as an additionally insured third party to the insurance policy and provide a copy of the insurance certificate for the franchisor’s records. These requirements are in place to protect the franchisee and the system as a whole and typically don’t cost anything more to the franchisee. This also allows the franchisor to claim any lost royalty payments from the insurance company and to protect themselves against lawsuits (which may arise against them through no fault of their own) as a result of such things as personal injury. The franchisee is required to indemnify the franchisor from all fines, suits, claims, or actions of any nature related to the operation of the franchisee’s business. Without adding the franchisor, you would be assuming the financial risk, which defeats the purpose of the insurance. It allows the franchisor to operate efficiently and protects them from potentially spending financial resources on issues that are at an individual franchisee location level.
The cost of insurance will vary depending upon numerous factors including, but not limited to, the geographical area, type of business, deductable amounts, and the dollar amount of the coverage. Franchise systems that have reached a certain size will often negotiate a group policy with a preferred supplier in order to pass savings on to the franchisee. The franchise agreement will often state that the franchisee may be required to purchase insurance from a preferred supplier. This allows all franchisees in the system to take advantage of the franchise system’s size and buying power.
In addition to the required business insurance, franchisees will want to look at optional insurance packages to further protect themselves and/or their employees.
For example: • Life Insurance • Disability Insurance • Critical Illness Insurance • Health Plan Insurance
Employees are increasingly expecting and seeking higher standards for medical service and financial security. Group insurance and benefit plans for employees allow employers to be competitive and attract and retain good employees. A group plan is significantly lower in cost compared to individual coverage.
This article is by no means an exhaustive list of the insurance available. Not all coverage will apply to your specific circumstance. Your specific insurance needs will vary depending upon the nature of the business and exposure to potential liabilities. Consult with your franchisor to determine the specific needs required and consult with an insurance broker. They will be able to assess your specific circumstances and provide advice as to what products are best for you and your business. Be sure to have them fully explain the specific details of the
insurance policy and the coverage and the restrictions that apply. A list of insurance companies specializing in the franchise model can be found on www.cfa.ca.
Ultimately insurance is planning for worst-case scenarios. With insurance in place you can focus your energies on building a successful business and not be worried about financial loss due to hardships that are often outside your control.
AS A FRANCHISEE, one of the roles you’ll spend a lot of time in is the area of recruiting staff. Unless you’re running a one-person operation, this will be an important part of your business. Recruiting staff is an ongoing function of management and well-selected employees can dramatically improve the success of the business.
Although some franchisors will assist the franchisee in hiring staff during the start-up phase of a new location, it’s typically the franchisee’s responsibility once the location is up and running. Most franchise agreements will clearly state that you’re required to maintain a sufficient number of staff, you must take the necessary steps to ensure that they’re trained, and that your staff represent the brand well to ensure good customer relations. The franchise agreement will typically further clarify that, as a franchisee, you’re responsible for all decisions related to hiring, firing, training, wages, hours supervision, and discipline. The employees are clearly working for you and not the franchisor.
Staff requirements vary depending on the type of business you invest in. A full-service restaurant may have as many as 80 to 100 employees, whereas retail concepts may require only one or two. Staffing requirements may also vary depending upon seasonal variations. For example, retail tends to have higher staffing needs during the Christmas shopping season.
In industries where there is a high need for labour, progressive franchisors have developed recruitment departments to address current labour shortages in Canada and also have programs to bring in foreign workers. Progressive franchisors also look at ways to reduce the labour needs of the franchisees through outsourcing certain aspects of the operations.
The type of staff you require will vary depending upon the business model. Often the business will rely on you and your staff’s ability to build relationships with customers and sell your product. As a result, you’ll typically want employees who are people oriented. You’re looking for staff that reflect that brand’s values, have the ability to learn, and are available the hours required. The more flexible employees are, the easier scheduling will be.
Have clarity on the staffing needs of the business before hiring your staff. The franchisor will often provide details of staffing needs in the operation manual, as well as provide specific job descriptions and tools to assist you in the recruitment process. The franchisor will also typically provide tools in the form of leadership training, staff surveys for feedback, and recognition programs for staff retention.
The recruitment process will vary but typically involves the following steps: 1. Advertising to generate enquiries 2. Reviewing resumes or applications 3. Conducting interviews, either individually or by groups 4. Checking references 5. Orientation and training
The franchisor, based on the experience of existing franchisees, can provide you with best practices for the entire recruitment process.
What you pay employees is dictated by labour laws as well as what is required to attract employees in your specific market. Today’s market is competitive and you’ll want to be aware of what other companies are paying by doing a quick survey of the market.
The cost of employees goes beyond the pay cheque. Depending upon the business and market, there will be the costs of employment taxes, workers compensation, and benefits. But the biggest cost is the cost of employee turnover. You’ll want to ensure that you take the time to hire the right employees and then provide a great work environment that will encourage good employees to stay. You can improve staff retention and reduce your hiring
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costs by becoming an “employer of choice.” Employees today are looking for: • Career development and advancement opportunities • Ongoing and progressive training • Recognition • A fun environment • Flexible work hours and time • Fair treatment • Involvement and consultation with management
Throughout the recruitment process, you need to be aware of the employment standards and labour laws that are applicable to your area. Provincial Human Rights Codes prevent employers from discrimination when hiring and managing employees. There are certain questions that cannot be asked during the recruitment process such as those regarding race, age, sexual orientation, and religion. Instead you need to focus on the position being filled and identifying the characteristics that a successful candidate needs to fill this role. There are also privacy laws to be aware of. You don’t want to disclose your employees’ personal information. It’s the franchisees’ responsibility to become familiar with all applicable laws and to adhere to them.
Your business success is dependent upon you finding the right people who will deliver great customer service. No matter how good your employees, it doesn’t diminish the need for you to be involved in the business. Sales and customer satisfaction often increases when a franchisee is actively involved in the day-to-day operations. All franchisors will agree that there’s nothing that can replace the dedication and commitment of a franchisee who has a vested interest in the success of the business and who has made a financial investment.
STUDY QUESTIONS
TUTORIAL 13
1. Typically in a franchise agreement, or within the operation manual, there will be specific insurance requirements that you’re obligated to have including:
a) home owner’s insurance b) travel insurance c) auto insurance
2. Proper insurance allows you to recover from a financial loss during the occurrence of a specific event such as:
a) employee or customer injury b) business interruption from fires or floods c) theft and fraud d) all of the above
3. A group plan with the franchise system is significantly lower in cost compared to individual coverage. True or False?
a) True b) False
4. All insurance needs are the same for all franchised businesses. True or False?
a) True b) False
TUTORIAL 14
1. Most franchise agreements will clearly state:
a) that you are required to maintain a sufficient number of staff b) who you can and cannot hire c) that all staff are employees of the franchisor
2. The cost of employees goes beyond the pay cheque. Some other costs are:
a) per diems, profit shares, and RRSP contributions b) clothing allowances, transportation reimbursements, and housing c) employment taxes, workers compensation, and benefits
3. As a franchisee, your employees work for you and not the franchisor. True or False?
a) True b) False
4. Provincial Human Rights Codes prevent employers from discrimination when hiring and managing employees. True or False?
a) True b) False
Answer Key: 1) c 2) d 3) a 4) b Answer Key: 1) a 2) c 3) a 4) a
