A franchise usually comes with a persuasive story: a known name, a tested system, training, and help finding a location. For a family in Brampton putting savings, a home line of credit, or a relative’s loan into a coffee shop, a tutoring centre, or a cleaning business, that story can be very attractive. It may even be accurate. Still, the franchise agreement is written by the franchisor, usually with the franchisor’s interests firmly in mind, and most of the protections you will depend on later are either in that document or missing from it.
Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 gives prospective franchisees significant rights. It requires disclosure before you commit, gives a right to cancel in some situations, and imposes a duty of fair dealing. It does not guarantee a profitable business, and it does not turn unfavourable terms into favourable ones. Your best chance of changing or walking away from a poor deal comes before you sign.
Please treat this article as general information rather than legal advice. Franchise systems differ widely, and only a review of your actual documents can tell you where you stand.
Do You Actually Have a Franchise?
The Act’s definition is broad, and it looks at the substance of the arrangement instead of the label. A “licence,” “dealership,” or “business opportunity” may still be a franchise. In general terms, the Act can apply where you make payments to operate a business and the other side grants you the right to sell goods or services connected with its trademark, while exercising significant control over or giving significant assistance with your method of operation. A second branch can capture certain distribution or representational rights where the franchisor or a designated person supplies location assistance.
If someone is selling you a business model with a logo, an operations manual, and a monthly fee, but says that no disclosure document is required because “it’s not a franchise,” pause and get advice. There are exemptions under the Act, including for some small or short-term arrangements and some sales by existing franchisees, but those should be checked rather than assumed.
The 14-Day Rule
The central requirement is simple. You must receive a disclosure document at least 14 days before the earlier of two events: signing the franchise agreement or any other agreement relating to the franchise, or paying any consideration relating to the franchise.
There are narrow exceptions. A confidentiality agreement, or an agreement that only designates a site or territory, can generally be signed earlier if it meets the conditions in the Act. A deposit may be taken if it stays within the prescribed limit, is fully refundable with no deductions, and is given under an agreement that does not bind you to enter into the franchise agreement.
Be wary if you hear any of the following: “Sign this to hold the location, then we’ll send the documents,” or “Everyone pays a non-refundable reservation fee.” Those may be signs of a problem, and they certainly call for careful reading first.
The Act also requires that the disclosure be one document, delivered at one time, and that it be accurate, clear, and concise. A set of emailed attachments spread over several weeks may not qualify. If a material change occurs after you receive it, such as a significant change in the franchisor’s finances or control that would reasonably affect the value of the franchise or your decision to buy, you are entitled to a written statement of that change before you sign or pay.
Reading the Disclosure Document Like a Skeptic
Disclosure documents can run to hundreds of pages. Do not leave them for the last night of the 14 days. Here is where a careful reader usually spends the most time.
The financial statements. Ontario’s disclosure regulation requires financial statements of the franchisor, subject to limited exceptions. Have your accountant read them. Is the franchisor profitable? Does it depend on opening fees from new outlets to stay afloat, or on ongoing royalties from existing ones?
Litigation and bankruptcy history. The document must disclose certain past proceedings involving the franchisor and its people. Ask what lies behind any entries you find.
Lists of current and former franchisees. This may be the most useful section in the entire package. Call people, including those who left. Ask whether the actual costs matched what they were told, how long it took to break even, how much support they get, and whether they would do it again. Ask a Mississauga or Brampton operator about local rent and labour, since costs vary considerably by market.
Earnings claims. If the franchisor gives any sales or profit figures, check what they are based on. Do they reflect outlets like yours, in markets like Peel? Are they gross sales or profit? Do they take the owner’s own unpaid labour into account? If you have been shown numbers verbally that do not appear in the document, ask to see them in writing.
Costs. Compare the estimated start-up costs with quotes you obtain independently, particularly for leasehold improvements. Budget for delays and a period of operating losses.
The certificate. A disclosure document must include a certificate signed as the regulation requires. Courts in Ontario have treated missing or improperly signed certificates very seriously.
The Agreement Itself
Once you have digested the disclosure, turn to the contract. These are the areas most likely to affect your daily life and your eventual exit.
Fees That Keep Coming
Royalties are usually a percentage of gross sales, which means you owe them even in months you lose money. Add advertising fund contributions, technology charges, renewal fees, transfer fees, training charges, and required supplier purchases. Build all of this into a monthly cash-flow projection. Then ask how the advertising fund is spent, whether you have any right to see its accounts, and whether the franchisor or its affiliates receive rebates from the suppliers you are required to use.
Territory
Ask what, if anything, stops another outlet from opening down the road. Some agreements give no protected territory at all. Others protect only a small radius or apply only to outlets of the same format, leaving the franchisor free to sell through delivery apps, grocery stores, or its website. In a fast-growing area such as Brampton, a territory defined by a short distance or by outdated boundaries may provide much less protection than it first appears to.
Term, Renewal, and the End of the Road
Compare the length of the franchise term with the length of your lease and your loan. A five-year term with a ten-year loan is a mismatch that should give you pause. Check the renewal conditions closely: renewal is rarely automatic and often requires a fee, a signed form of the franchisor’s then-current agreement (which may have higher royalties), a release, and renovations to current standards.
Transfer and Resale
A franchise is partly an investment, so you need to know how you can get out. Most agreements require the franchisor’s consent to a sale, along with a transfer fee, training for the buyer, and sometimes a right of first refusal in the franchisor’s favour. See whether the same restrictions apply on death or disability, because your family may need to sell quickly at a difficult time.
Default and Termination
List every event that lets the franchisor terminate, and note which can be cured and how quickly. A cross-default clause could mean a dispute over one matter, such as a supplier invoice, puts the whole agreement and your lease at risk. Also look at what happens to your investment on termination, including whether the franchisor can buy your equipment at a low price or take over your location.
Restrictive Covenants
Most agreements bar you from running a competing business during the term and for a period afterwards in a defined area. Ontario’s statutory ban on non-compete clauses is in the employment standards legislation and is directed at employers and employees, so do not assume it helps a franchisee. Courts assess these covenants on their own principles, including whether they are reasonable. Think about what the clause means for your ability to earn a living if the franchise ends.
The Lease and the Personal Guarantee
For many retail franchises, the location matters as much as the franchise agreement. Sometimes the franchisor or an affiliate holds the head lease and sublets to you. Sometimes you sign directly with the landlord and must give the franchisor rights to take over. Read the lease alongside the franchise agreement, and have someone check that their terms, default provisions, and end dates fit together.
Then look for guarantees. Forming a corporation to sign the agreement may be a sensible step, and our page on franchise law services touches on how that structure can be organized. However, franchisors and landlords very often require the owners, and sometimes their spouses, to give personal guarantees. A guarantee can reach your savings and your home. Ask whether it can be capped, limited in time, or reduced as the debt comes down. Spouses who are asked to sign should be told to get their own advice.
If Something Was Not Done Properly
The Act provides remedies, and they can be powerful:
- If the franchisor gave the disclosure document or a statement of material change late, or the contents did not meet the requirements, the franchisee may rescind within 60 days after receiving the disclosure document.
- If the franchisor never provided the disclosure document, the franchisee may rescind within two years after entering into the agreement.
On a valid rescission, the franchisor or its associate must, within 60 days, refund money received, buy back inventory, supplies, and equipment at the price you paid, and compensate you for losses in acquiring, setting up, and operating the franchise, less those amounts. Notice of rescission must be in writing and delivered in the way the Act requires.
Serious defects can sometimes amount to no disclosure at all, opening the longer window, but that is a question of fact and law for each case. These deadlines are strict, so take advice quickly if you suspect a problem.
There are other rights as well. A franchisee who suffers a loss because of a misrepresentation in the disclosure or a failure to comply with the disclosure rules has a right of action for damages against the franchisor and certain others, including the people who signed the document. Every franchise agreement carries a duty of fair dealing in its performance and enforcement, which includes acting in good faith and according to reasonable commercial standards. Franchisees have the right to associate with one another, and contract terms that try to stop this are void. Any waiver or release of your rights under the Act is void, and a clause that sends an Ontario claim to another province’s law or courts is void for a claim otherwise enforceable under the Act.
Practical Steps Before You Commit
Set out a process, and do not allow a sales deadline to rush it.
- Date-stamp the delivery of the disclosure document and keep the envelope or courier record.
- Sign nothing and pay nothing beyond a properly structured deposit until the 14 days have run and your advisors have finished.
- Have an accountant review the financials and test your projections.
- Call current and former franchisees, including some the sales team did not suggest.
- Visit outlets at different times of day and, if allowed, work a shift.
- Have a lawyer review the agreement, lease, guarantees, and related contracts together, and identify what is worth negotiating.
Franchisors sometimes say their agreements are non-negotiable, and in established systems changes may indeed be hard to obtain. Even so, targeted requests sometimes succeed, particularly on guarantees, opening timelines, and territory. Even where nothing changes, knowing the risk helps you decide with your eyes open.
If you are at this stage, you can contact Sawan Law House LLP to discuss a review, or read more about the firm’s general corporate law services. A franchise can be a sound way to start a business, as long as you understand what you are buying and what you could lose if the plan changes.