On February 1, 2017, British Columbia (B.C.) became the sixth province in Canada to introduce franchise legislation with the coming into force of the Franchises Act, and Franchises Regulations, respectively. Whether you are inquiring into becoming or already are a practicing franchisor or franchisee, you should be informed as to what your legal obligations and rights are when franchising in B.C.
Advantages of Choosing to Franchise in B.C.
The Franchise legislation in B.C. is remedial and is intended to address the perceived imbalance of power in the franchisor-franchisee relationship.
Some of the advantages to franchising in B.C. include:
- The Disclosure Obligation
In accordance to franchise legislation in B.C., a franchise disclosure document must now be delivered to prospective franchisees at least 14 days before the execution of a franchise agreement or any consideration on account of the franchise is paid.
The franchise disclosure document includes information, such as:
- the cost to buy a franchise;
- financial statements of the franchisor;
- risk warning statement; and
- operating cost estimates and earnings projections.
This 14-day period provides the franchisee adequate time to review and consider their investment in the franchise system without having to pay any fees or non-refundable deposits.
- Ongoing Obligation to Disclose – Statement of Material Change
Franchisors should be mindful that they have an ongoing obligation to provide prospective franchisees with notice of any material changes that arise after the franchise disclosure document has been given to the prospective franchisee. This ensures total transparency between the franchisor and franchisee right up until signing.
- Wrap-Around Disclosure Documents
Similar to other franchise regulated provinces (except Ontario), section 2(3) of the B.C. Franchises Act, permits franchisors to use “wrap-around” disclosure documents that were prepared for use in another jurisdiction. They are permissible for use in B.C. as long as additional information specific to B.C. franchise legislation is included.
- Duty of Good Faith
The Franchises Act imposes a duty of fair dealing on franchisors and franchisees regarding the performance and enforcement of the franchise agreement and sets out remedies in the case of a breach. This duty requires that the parties act in good faith and in accordance with reasonable commercial standards.
In summary, franchise legislation in B.C. is geared towards assisting franchisees in making an informed investment decision while also providing the franchisor with certainty as to disclosure obligations. This ensures both the franchisor and franchisee are clear on their expectations and are fully invested in the success of the franchise.
Common Drawbacks to Consider When Franchising
As with any business model, franchising has its disadvantages and it is important to keep these in mind when deciding if franchising is right for you. Some of the main drawbacks to franchising a business can include:
- Up Front Costs
At the outset, prospective franchisees should expect to invest a large sum in start-up costs such as the franchise fee, professional fees, inventory, insurance, rent, and so forth.
- Little Flexibility
Franchising is premised on franchisors retaining enough control to ensure replicability across their brand. As a result, franchisees give up a considerable amount of control in comparison to operating their own company.
- Profit Sharing
In a franchise system, there is a balance between the profit distribution between the franchisor and the franchisee. The franchisee needs to make a return on their investment through gross sales and the franchisors need to make a return in the form of royalties.
All of the advantages and general disadvantages should be considered before an individual decides to pursue a franchise. Franchisors who are doing business in B.C. or who are considering expanding into B.C. should consult with the lawyers at Sodagar & Co., to ensure they are up
to speed with franchise legislation in B.C.