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Mr. Claude J. Pellan,
L.L.B., B.Comm., Attorney

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Manuel d'exploitation - Considérations légales ?

Number 18 – July 1st, 2009

FRANCHISING

Operations Manual:  Legal Considerations?

1.   Introduction

It is my experience that most franchisors, when preparing their Operations Manual, don’t have it reviewed and completed by their attorney or in-house legal counsel.

It is important for a franchisor to provide its franchisees with a well prepared and complete Operations Manual. The contents of the Operations Manual provide a franchisee with the practical day-to-day information it requires to operate a franchise according to the standards, norms, procedures and guidelines of a franchisor.

Whether a franchisor is selling a franchise or its franchise network, the Operations Manual represents part of the value of the goodwill of the business of the franchisor, just like the franchise and other agreements. A better prepared and more complete Operations Manual is also worth more to an eventual franchisee and/or purchaser.

The contents of an Operations Manual can also determine whether or not a potential franchisee will purchase a franchise and/or which franchise it will purchase as well as how much a franchisee is willing to pay for a franchise.

Furthermore, a well prepared and complete Operations Manual may save a franchisor time and money. For example, how complete an Operations Manual is will, in part, determine the amount of time and money a franchisor will spend on training a franchisee, initial and continuous, and ultimately, the satisfaction of a franchisee with respect to the purchase of a franchise. It can also determine the success of a franchisee in the operation of a franchise.

A standard Operations Manual typically contains the history of the franchise, definitions, general plans for a site, publicity information and samples, required equipment, rules on leasehold improvements, a description of the decorations and other accessories, methods for the recruitment and selection of personnel, job description of personnel, signage requirements, etc.

What this article is proposing to franchisors is to consider incorporating legal material in their Operations Manual. This exercise does not mean incorporating complete laws in an Operations Manual, but only pertinent extracts of laws that apply to the industry and activities of a franchisor.

2.   Legal Material

Since we are governed by a Constitution in Canada, federal, provincial and municipal governments have the power to make laws. Therefore, certain federal, provincial and municipal laws may apply to the industry and activities of a franchisor.

Hereafter please find a non exhaustive list of certain laws that contain pertinent extracts that could be incorporated into an Operations Manual.

Federal Legislation

Federal laws could include the Competition Act (misleading representations, deceptive marketing practices, price setting, etc.), the Criminal Code, the Consumer Packaging and Labelling Act, the Textile Labelling and Advertising Regulations, the Weights and Measures Act, the Copyright Act, the Trademark Act, the Personal Information Protection and Electronic Documents Act and the Canada Labour Code.

Provincial Legislation

In the Province of Quebec, there are the Consumer Protection Act, the Roadside Advertising Act, the Charter of the French Language and an Act respecting hours and days of admission to commercial establishments.

In the Province of Ontario, there are the Consumer Protection Act, the Business Practices Act, the Environment Quality Act and the Retail Business Holidays Act.

In the Province of British Columbia, there are the Consumer Protection Act, the Freedom of Information and Protection of Privacy Act, the Trade Practice Act and the Holiday Shopping Regulations Act.

3.   Why incorporate extracts of laws in an Operations Manual?

The answer depends on a number of factors: the industry in which the franchisor operates its business, its activities, its philosophy, the latitude it gives its franchisees to operate their franchises, the sophistication of franchise concepts and/or franchisees, its internal and external policies and practices, etc.

The exercise of incorporating legal material in an Operations Manual makes it more complete, increases the value of the goodwill of a franchise and of the business of the franchisor and also enables the franchisor to save time and money in the operation of its network.

For example, if franchisees of a network are permitted to carry out local advertising, you want them to know the dos and don'ts related to advertising. If franchisees label and/or package their products (ex. private label products), you want them to be able to do it properly to avoid complaints from clients and/or penalties from federal/provincial authorities.

Marketing mistakes (ex. false and/or misleading advertising) are sometimes reported in local and provincial medias. A franchisee could affect the value and goodwill of a franchisors’ trademark and the value of franchises of that network.

The same example applies to labour laws. If a franchisee wants to fire an employee, it should know its obligations, the rights of employees and understand the possible repercussions of the decisions it makes.

When I worked for the Forzani Group Ltd., every year I would get dozens of calls concerning opening hours on legal holidays. I eventually decided to send them an extract (1 pager) of the Act respecting hours and days of admission to commercial establishments. 

Certain laws I have referred to herein are drafted in laymen’s terms and are therefore easy to read and understand, others are not. For those laws that are more difficult to understand, a franchisor may decide to exclude them from the Operations Manual, to include them in the Operations Manual anyways or to have them rewritten in laymen’s terms. The latter makes the legal material in the Operations Manual more user friendly. A franchisor could also give its franchisees a course on the subject to explain the different laws applicable to their industry and activities.

Another consideration is where to incorporate the legal material in the Operations Manual. The legal material can form part of 1) a separate section in the Operations Manual, 2) a separate volume forming the Operations Manual (if there is more than one volume) or 3) the different sections of the Operations Manual that the laws apply too.

With respect to the last option, a franchisor could insert extracts of laws dealing with advertising in the marketing section of the Operations Manual, insert extracts of laws dealing with opening hours in the operations section, insert extracts of laws dealing with labour in the human resources section, etc.

I believe that it is more useful to have the legal material in the respective sections of an Operations Manual for ease of reference and because franchisees will be reminded to check them when reviewing a section.

4.   Summary

Hereafter, please find a list of the potential advantages and disadvantages of incorporating legal material in an Operations Manual.

Potential Disadvantages

- Initial investment in time if a franchisor has an in-house counsel;
- Initial financial investment if the work is done by outside counsel;
- Time and/or money associated with updating the legal material in the Operations Manual; and
- From time to time, providing franchisees with additional information on the laws in the Operations Manual.

Potential Advantages

     -  Time and cost saving for the franchisor in initial and continuous training;
     -    Franchisees become more independent and knowledgeable more quickly;
     - Increases the value of the goodwill of the business of a franchisor;
     -     Increases the purchase price at which a franchise can be sold;
     -     Franchisees become better operators;
     -  Franchisees are more motivated;
     -  Franchisors’ employees (in different departments) save time otherwise spent answering questions from franchisees (and time also means money);
     -  Means by which to better protect the image and reputation of a Trademark; and
     -    In general, decreases financial and other risks associated with operating a  franchise network, especially as concerns franchisees that have more    
           latitude in operating their own businesses.
    
In summary, I believe that the advantages of incorporating legal material into an Operations Manual far outweigh the disadvantages of not incorporating them. Furthermore, the investment required to incorporate legal material into an Operations Manual can be recuperated fairly quickly and in different ways. In general, I estimate the professional fees to add legal material to an Operations Manual at $4,000-$7,000, depending mainly on the industry and activities of a franchisor. This does not include using laymen’s terms to explain certain laws.

Cordially,

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



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