Franchising in Canada: checking mandatory sales targets

A sales target presented during discussions can become a binding obligation in a franchise agreement. Before joining a franchise network in Canada, check whether the brand requires a minimum turnover or sets other performance thresholds. The issue is not simply whether you can succeed, but what would happen if your sales fell below the required level.

1. Distinguish a sales target from an obligation

Ask the franchisor to list the performance requirements that apply to your outlet. These may appear in the agreement, a schedule or a manual referred to in the agreement. Do not rely solely on the forecasts provided during the recruitment process.

You need to distinguish between three things: a revenue forecast, a target used to support the franchisee and a minimum requirement with contractual consequences if it is not met. The same figure may appear to be indicative in a presentation but become mandatory in a contract clause.

For each threshold, note:

• the measure used: gross sales, net sales, number of transactions or another metric;
• the assessment period and its start date;
• the outlets or sales channels covered;
• who is authorised to change the target;
• the consequences expressly specified for falling short.

Also ask whether the franchisor regards any targets as optional. Have this response checked against the documents that will bind you.

2. Check the calculation and how targets can be revised

An apparently clear threshold may conceal an unfavourable calculation method. Are sales recorded before or after refunds? Are taxes excluded? Which outlet is credited with online orders, deliveries and sales to national accounts?

The measurement period matters as much as the amount. An annual target does not have the same effects as a monthly minimum, particularly for a seasonal business. Check how the first few weeks of trading, temporary closures and periods when the outlet cannot operate normally are treated.

Next, examine the revision mechanism. Is the threshold fixed, index-linked or set annually by the franchisor? Does the agreement provide for advance notice, an objective method or discussions with the franchisee? Comparisons with the network average deserve particular attention: the outlets being compared may have been trading for different lengths of time or operate under different conditions.

Ask for a written example of the calculation for both a full and a partial period. This will allow your accountant to reproduce the method rather than rely on a general explanation.

3. Test whether the quota is financially achievable

Reaching a minimum sales figure does not necessarily mean making a profit. Heavy discounting can increase volume while reducing the margin available to pay wages, rent and other expenses.

With your accountant, translate the contractual threshold into operational requirements: the number of transactions needed, average transaction value, opening hours and staffing levels. Compare these requirements with the actual capacity of the premises and your planned team. The aim is to test the obligation, not simply repeat the franchisor’s projections.

Prepare three scenarios: meeting the threshold, a temporary shortfall and a persistent shortfall. For each, estimate the additional expenditure needed to try to catch up. In particular, check whether more advertising or longer opening hours would deliver profitable growth.

When speaking to franchisees in comparable circumstances, focus your questions on how the quota is applied: how is it monitored, what shortfalls are tolerated and what action is actually required? Their experiences can shed light on practice, but do not replace the agreement.

4. Clarify the consequences before signing

Identify what is supposed to happen if performance falls short: a warning, a corrective action plan, a period to remedy the shortfall, loss of a contractual benefit or another penalty. Ask your lawyer whether several consequences can apply together and whether an isolated shortfall is treated in the same way as repeated breaches.

The legal framework depends on the province. In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to applicable exceptions, a disclosure document to be provided at least 14 days before signing an agreement relating to the franchise or making a payment. Proposed agreements and material facts must be disclosed. A performance obligation should therefore be examined as part of that disclosure, rather than discovered after you have committed.

Quebec has no specific franchise disclosure legislation: the general rules of the Civil Code of Québec, including those relating to contracts and good faith, apply. Do not assume that Ontario’s waiting period also applies there.

Depending on the proposed business, ask for a gradual increase in targets during the start-up period, a realistic period to remedy a shortfall or a review procedure for specified circumstances. These protections must be agreed and incorporated into the relevant documents.

Key takeaway: before signing, have three things checked: how the minimum is calculated, whether you can reach it profitably and the precise consequences of falling short.