If you’ve thought about starting your own business, you may have considered running a franchise. Although starting a franchise carries fewer risks than starting a wholly independent business, franchises in Alberta are subject to additional rules and regulations. This article provides an overview of franchisors’ and franchisees’ rights and obligations under Alberta’s Franchises Act.
What is a franchise?
Franchising describes a package deal in which a franchisee pays a franchise fee and a certain percentage of sales in exchange for help from a parent company, or franchisor. The franchisee uses the franchisor’s trademark and runs the business, and the franchisor acts as counsellor and advisor.
Under this model, the franchisor provides a tested and proven package, thereby helping to mitigate the risks normally associated with starting a business. The franchisor usually retains some rights related to advertising and quality control, while helping the franchisee with
- site selection, including feasibility studies, demographic analysis and location selection
- lease negotiation
- startup financing and initial operating costs
- on-call assistance
- continuing support
- bookkeeping procedures
- advertising and marketing
- research and development
- discounts on products and equipment
What defines franchises in Alberta?
A number of federal and provincial laws apply to franchising. Various federal laws (e.g., Competition Act) govern income tax, competition, privacy, packaging and labelling, and intellectual property.
Franchises in Alberta have a state legal definition. Under the Franchises Act (Alberta), you are a franchise if you’ve been granted the right to engage in a business
- in which goods or services are being sold, offered for sale, or distributed, under a marketing or business plan prescribed by the franchisor
- associated with a trademark, service mark, tradename, logo or advertising of the franchisor or designating the franchisor
- that involves either payment of a franchise fee or the franchisee’s continuing financial obligation to the franchisor and the franchisor’s significant continuing operational controls on the operations of the franchised business
The Franchises Act
- requires franchisors to disclose necessary information about the franchise to the prospective franchisee
- provides for legal remedies in the event of any breach of the Act
- governs the relationship between franchisors and franchisees, and is intended to promote fair dealing between the parties
Additional provincial laws govern consumer protection legislation, sales taxes, liquor licensing and class action.
What are a prospective franchisee’s rights under the Act?
If you’re considering buying a franchise, you have certain rights, and the franchisor has specific obligations. The franchisor must give every prospective buyer of a franchise a copy of a disclosure document. Formalities prescribed in the Franchises Act relate to the release and contents of the disclosure.
Franchisors must deliver a disclosure document at least 14 days before the prospective franchisee signs any agreement or pays any consideration relating to the franchise (unless the payment is fully refundable).
The franchisor must ensure that the disclosure document provided to the prospective franchisee contains
- anything the Franchises Regulation state must be included in the disclosure document
- copies of all proposed franchise agreements
- financial statements, reports and other documents the regulations require
This disclosure is intended to help the prospective franchisee make an informed decision before entering into any franchise agreements.
Do franchisees have any other special rights?
The Franchises Act governs the relationship between franchisors and franchisees. A franchisor may not prohibit or restrict a franchisee from forming an organization of franchisees or from associating with other franchisees in any organization of franchisees. A franchisor (or its associate) must not directly or indirectly penalize a franchisee for engaging in any such association activities. Where a franchisor infringes upon a franchisee’s rights to associate, the franchisee may claim damages against the franchisor.
The Act imposes a duty of fair dealing on both parties. This includes the duty to act in good faith and in accordance with reasonable commercial standards.
What else do I need to know?
Whether you’re a franchisor or a prospective franchisee, failure to know about applicable franchise legislation could place your business and your reputation at risk. Sound legal advice can help.
At Lift Legal, we can help you draft and revise franchise agreements and disclosure documents. Look to us for sound legal advice about your business’s corporate and commercial needs, including buying or selling your franchise.