Franchising in Canada: checking the initial franchise fee

The initial franchise fee is the upfront payment required to join a franchise network. However, the amount alone does not tell you what you will receive or what else you will need to fund. Before buying a franchise in Canada, examine this payment as a separate contractual commitment: what you receive in return, when it is due and what happens to it if the project falls through should all be clear.

1. Establish exactly what the payment covers

Do not assume that the initial franchise fee includes everything you need to open. The disclosure document, franchise agreement and their schedules should distinguish access to the network from goods and services charged for separately.

Ask the franchisor for a written breakdown of what is included. Depending on the offer, your questions might cover:

• initial training for the owner and their team;
• support with finding or assessing a location;
• help with preparations for opening;
• initial access to operational tools, software and documents;
• equipment, stock or launch materials.

Use this list as a set of questions, not as an assumption that these items are included. For every item confirmed as included, clarify the scope of the service: how many people can attend the training? Are travel and accommodation included? Does opening support include someone being on site?

Any service advertised as included must be defined clearly enough for you to assess it. A general phrase such as “comprehensive support” does not let you calculate the expenses you will still have to pay. Ask your lawyer to identify any differences between the sales pitch and the contractual commitments.

2. Compare the actual cost, not just the advertised fee

Two brands may charge different initial franchise fees while leaving the buyer with very different additional start-up costs. Comparing the fee alone could therefore favour an offer that looks cheaper but involves more separate charges.

With your accountant, draw up a table with four columns: service or item, whether it is included in the initial franchise fee, documented additional cost and payment date. Enter “to be confirmed” rather than zero where information is missing.

Also check:

• whether the advertised amount includes applicable taxes;
• which currency it must be paid in;
• whether any amount already paid will be deducted from the initial franchise fee;
• whether the price covers one outlet or the right to open several;
• whether any promotional discount comes with conditions.

Do not confuse this upfront payment with ongoing royalties or the total investment. Premises, fit-out work and the working capital needed to get started may involve separate commitments.

Also ask your accountant how this payment should be treated for accounting and tax purposes. Do not automatically factor an immediate tax deduction into your calculations: the treatment depends on the nature of the rights acquired and the applicable rules.

3. Check when the franchisor can require payment

In Canada, pre-contract disclosure rules vary by province. Just because a franchisor asks for a payment to take your application further does not mean it can legally require that payment at that stage.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to statutory exceptions, a disclosure document to be provided at least 14 days before a franchise-related agreement is signed or a payment is made. Among other things, the document must set out the costs and proposed contracts.

This waiting period is not a formality to rush through to secure a discount. Ask your lawyer to check the applicable rules before you make any payment, including one described as a reservation payment or application fee.

Quebec has no franchise-specific legislation imposing a comparable disclosure regime. The general rules of the Civil Code of Québec apply, including those relating to good faith and consent. You should therefore not assume that Ontario’s waiting period protects a franchise purchase in Quebec.

4. Establish what happens to the fee if the opening falls through

Consider several scenarios before paying: finance is refused, no suitable location can be found, the franchisor rejects the premises or the opening is abandoned. Does the contract provide for a refund, a deduction for services already supplied or no contractual refund at all?

For each scenario, ask for clear details of the conditions, supporting documents required and refund deadlines. If a deduction is provided for, ask how it is calculated. Also check which company will receive the funds and keep proof of payment.

A “non-refundable” clause does not, on its own, override any mandatory legal remedies that may apply. Conversely, changing your mind does not automatically give you a right to a refund. Ask your lawyer to distinguish between your contractual protections and your legal rights.

Key takeaway: before paying the initial franchise fee, obtain three answers in writing: what it covers, when it is due and what happens to the money if the opening does not go ahead.