Exporting a Franchise Concept to Another Province (Canada)

                                                       QUESTION CORNER

Question from a franchisor (Manitoba):  I have a well established franchise network in Manitoba.  We are considering developing our franchise concept outside of the province.  We are presently looking at the provinces of Ontario and Quebec. What is the best structure for developing a franchise concept in another province? From a legal perspective, what are the differences in laws governing franchising that would favour one province over the other (Quebec and Ontario)? 

Answer: While there are a number of development structure available to franchisors that wish to develop their franchise concept in another province (direct investment, granting franchises, regional development, master franchising, joint venture, acquisition of a competitor, etc.), the best development structure for a franchisor will depend on a number of variables specific to its industry, concept, human resources, competition in the target market, financial resources, etc.

It would be too long to describe and analyse all the development structures for exporting a franchise concept in Question Corner. Instead, we will look at some general steps to undertake that are well known and have a proven track record to maximize the chances of success when exporting a franchise concept to another province. Afterwards, we will take a quick look at “direct investment”, a development structure that also has a proven track record.

After the decision on the development structure, the first step is to hire a person (employee or representative) that will be physically present in the province, knows the target market, has experience with the franchise business model and has knowledge of the industry the franchisor operates in.

A second step is to undertake a study of the target market by primary sources of information (visit the market, contact franchise and industry associations in that province, participate in conferences and other information providing events in the target market, contact the provincial government, etc.) and secondary sources of information (industry, franchise and government publications and internet sites, specialized magazines, newspapers, etc.). National accounting firms may also be an important source of information.

It is also an important step to undertake a preliminary study of the environment in the province concerned (competition, legislation, barriers to entry, etc.) and to plan the human and financial resources to support the development structure that a franchisor has chosen.

The next step would be to undertake a market study in the areas where the franchisor wishes to open franchise stores. This implies finding a company in the province that specializes in market studies.  Eventually, a franchisor will also require a publicity company from that market.

To come back to the development structure, one of the structures that have had success is direct investment. For the franchisor, this involves an important investment in manpower and financial resources. This structure implies for the construction and operation by the franchisor of a few retail stores situated in different areas of the province.  The structure has the advantage of providing the franchisor with information on the reaction of consumers to the franchise concept enables the franchisor to make adjustments to the concept to adapt it to the target market and provides the franchisor with information on the perception of the concept by the target market and potential franchisees.

The stores should be operated for a period of about one (1) year to evaluate the potential success of the concept in the province before selling the stores and starting to develop the network across the province. I also suggest that the franchisor continue to operate at least one “corporate store” in the province to maintain a presence there, to continue to gather information on that market and to use as a training center for eventual franchisees.

The main barriers to this type of structure are the financial investments, the investments in human resources and the fact the franchisor is taking all the risks.

It should be noted that a development structure can (and sometimes must) be different from one province to another and even from one area to another (in the same province), depending on the franchise concept, the industry the franchisor is in, the competition and the other factors hereinabove mentioned.

As for you second question, Quebec and Ontario have systems of law with different origins. Quebec is principally governed by the Quebec Civil Code (“QCC”) which is codified or written law, while Ontario is governed by common law (judgements from the courts of Ontario).  Even if the origins of the two systems of law of the two (2) provinces are different, they are both subject to and governed by the same federal laws and have certain similar provincial laws.

 With respect to laws specifically governing franchising, Ontario has the Arthur Wishart Art (Franchise disclosure), 2000 (the “Act”) which provides that franchisors must provide prospective franchisees with what is called a “Disclosure Document”. The contents of the Disclosure Document are provided in the Act and its regulations and include the disclosure by the franchisor of information on its activities, its previous history and that of its directors and officers, information on the franchise agreement, general information on the investment by a franchisee and a copy of the franchisor’s financial statements.
 
 In Quebec, there are no specific laws governing franchising. There are provisions in the QCC that address “contracts of adhesion”.  A contract of adhesion is a contract in which the essential stipulations were imposed or drawn up by one of the parties, on his behalf or upon his instructions, and were not negotiable. There is also jurisprudence (case law) which is judgments that interpret the law and the general regime in the CCQ (including the duty to act in good faith). Finally, there is the Charter of the French Language which imposes the use of french in contracts.  However, if the parties agree, they can use a contract drafted in english by adding a clause to that effect in the contract.
 
 Finally, to guarantee the debts of a franchisee and become a secured creditor, Ontario has the Personal Property Securities Act (General Security Agreement and P.M.S.I.) and Quebec has specific provisions in the QCC on Moveable Hypothecs and Installment Sales (similar regime to the Personal Property Securities Act).

 Now, if we summarize the differences in applicable laws to a franchisor developing a franchise network in Quebec vs. Ontario, the franchisor developing in Ontario has to have a Disclosure Document drafted and distributed to eventual franchisees and his franchise documentation reviewed to make sure it conforms to Ontario law (There would only be a few changes).

The franchisor developing in Quebec may have to have his franchise documentation translated to French, 3-4 new provisions added to his existing franchise documentation and have a Moveable Hypothec prepared (standard forms exists). The Moveable Hypothec replaces the General Security Agreement.

From a legal work perspective, the amount of work and the financial investment in legal representation is similar, whichever province a franchisor chooses to develop in and, in each case, will represent a very small amount of the total investment the franchisor will make in either province when you consider store construction and operation, accounting, publicity, rent, etc.

While there are a number of development structures to develop a franchise concept outside a province, prior to choosing one, the franchisor sets an objective and establishes a development strategy. This will assist the franchisor in choosing the development structure best suited to his development plans.

Also, while it is important to know the differences in franchise legislation from one province to another when considering to export a franchise concept, there are other important factors to be considered, like the costs of labour, the rent, the costs of building a store, the competition, the acceptance of the concept, etc.

For those that are receiving the bulletin for the first time, I will explain how this take this service entitled “The Question Corner” works. There are no subscription or user fees. To use this service, all you have to do is send a question on franchising or business law in general to c.pellan@hotmail.com and, on Friday, I will choose a question of general interest and answer it by email. I will not be giving any legal opinions through this service, but rather providing advice, pointing you in the right direction or providing points of reference to assist to resolve a problem or to answer questions that are asked.

The questions and answers will be sent to other franchisors that may have the same question or wish to comment the question or my answer (unless otherwise indicated in the email), without identifying the person that asks the question.

If an answer to a question is urgent, please specify it in the email. I will provide by best efforts to respond to the question as quickly as possible.

Cordially,

Claude J. Pellan, Attorney and Consultant
Franchise and Business Law
www.claudepellan.com