What is a franchise?
Many consumers will be familiar with the concept of a franchise; indeed, some consumers may be interested in acquiring and operating a franchise. But what is a franchise, exactly?
At its most general level, a franchise is a business model by which the owner of a distinctive system of goods or services (the “franchisor”) licenses to someone else (the “franchisee”) the right to sell the franchisor’s goods or services using the franchisor’s distinctive trademark; the license granted is usually restricted to a specifically defined geographic area and is limited in duration to a specific period of time. In exchange for that license, the franchisee pays the franchisor certain fees.
Sometimes, the term “franchise” refers to the license itself.
In Ontario and many other jurisdictions, for the business model at issue to qualify as a “franchise”, the franchisor must either exercise significant control over the franchisee’s operation or provide significant assistance in relation to the franchisee’s operation.
For instance, the definition of “franchise” under Ontario’s franchise statute, the Arthur Wishart Act (Franchise Disclosure), 2000 that is mainly used is:
a right to engage in a business where the franchisee is required by contract or otherwise to make a payment or continuing payments, whether direct or indirect, or a commitment to make such payment or payments, to the franchisor, or the franchisor’s associate, in the course of operating the business or as a condition of acquiring the franchise or commencing operations and in which,
(i) the franchisor grants the franchisee the right to sell, offer for sale or distribute goods or services that are substantially associated with a trade-mark, trade name, logo or advertising or other commercial symbol that is owned by or licensed to the franchisor or the franchisor’s associate, and
(ii) the franchisor or the franchisor’s associate has the right to exercise or exercises significant control over, or has the right to provide or provides significant assistance in, the franchisee’s method of operation, including building design and furnishings, locations, business organization, marketing techniques or training.
In most cases, it will be clear from the nature of the parties’ business relationship that they are in a franchise relationship – there will be a written franchise agreement, clear use of the franchisor’s trademark, and evidence of the franchisor’s control or assistance, as well as evidence of the franchisee’s payment of fees to the franchisor; disputes can arise, however, if:
- One or more of the parties did not intend to enter into a franchise relationship but intended merely to enter into a mere licensing relationship.
The distinction between a franchise relationship and a mere licensing one can be significant because franchisors are legally required to provide extensive financial disclosure to consumers interested in becoming franchisees and their failure to provide such disclosure can entitle the franchisees to exercise very significant legal remedies, such as the right to “rescind” the franchise agreement: rescission is a legal remedy by which a franchisee can “undo” the franchise agreement as if it had never been entered into and demand that the franchisor financially restore the franchisee to the franchisee’s financial position as it existed before the franchisee had ever entered into the franchise agreement. The franchisee’s exercise of its rescission remedy can be very expensive for the franchisor.
- The parties did not enter into a written franchise agreement. In those circumstances, it may not be clear what the nature of the business relationship was, and whether, for instance, the franchisor exercised the sufficient degree of control, or offered the sufficient amount of assistance, for the relationship to be characterized as a franchise one.
- The parties entered into a generic or “placeholder” franchise agreement, which did not grant the franchisee a specific territory out of which to operate. Sometimes, franchisors enter into such agreement in the expectation that a specific territory will be granted subsequently; however, the use of such generic or placeholder agreements should be considered risky, in Ontario at least – recent caselaw suggests that, when no specific territory is identified in the franchise agreement, there has been no “grant” of a franchise at all.