Franchising in Canada: choosing the franchisor entity

Before offering your first franchise, ask a simple question: which legal entity will take on the obligations towards franchisees? The company that runs your current outlet is not necessarily the one that should sign the agreements. However, this choice must reflect how your business actually operates, not just an organisational chart. Building a strong franchise network in Canada requires clear responsibilities, resources and relationships between your companies.

1. Compare using your existing company with setting up a separate one

Two options generally deserve consideration: giving your current operating company the role of franchisor, or setting up a separate company. Neither is automatically preferable, and franchise law does not impose a general requirement to create a separate company.

Your existing company already has a track record, employees, contracts and assets. It may therefore have direct access to the resources needed to meet its obligations. However, it would then combine the operation of your outlet with the development of the franchise network.

A separate company allows you to distinguish these activities for organisational and accounting purposes. But it does not automatically have access to the existing company’s resources. You need to arrange its rights to use those resources, its funding and its access to staff. A separate structure does not provide absolute protection against liability either.

Work with your accountant and lawyer to compare:

• each company’s assets and obligations;
• the tax implications and administrative costs;
• the future franchisor’s funding needs;
• any existing contracts that would restrict a transfer or use by another company.

The right choice is one you can explain and make work, not simply the one that appears to offer the most protection on paper.

2. Match every commitment with real resources

Draw up a table with three columns: commitment to the franchisee, company responsible and resources available. Include access to the brand, initial training, IT tools and operational support.

Suppose your operating company employs the trainers, while a new company signs the franchise agreements. How will the new company secure their services? Who will pay their travel expenses? What happens if the original outlet goes through a particularly busy period?

Formalise the necessary arrangements between the companies. Depending on your structure, this may involve a services agreement, a licence or another suitable agreement. Have their duration, termination provisions and compatibility with the commitments you intend to make to franchisees checked.

The same reasoning applies to the trade mark. If the franchisor does not own it, its right to authorise franchisees to use it must be legally established. Common ownership of the companies does not replace the necessary permissions.

Finally, prepare a dedicated budget for the franchisor. Revenue from the pilot outlet does not automatically become cash available to another legal entity.

3. Align your structure with your disclosure obligations

In Canada, franchise-specific rules are provincial. Choosing a company based elsewhere does not, in itself, allow you to avoid the law applicable to the proposed franchise.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to specified exceptions, that a prospective franchisee receive a disclosure document at least 14 days before signing the franchise agreement or any other agreement relating to the franchise, or paying any consideration covered by the Act, whichever happens first.

This document must include, among other things, all material facts, the required financial statements and copies of the agreements to be signed. The franchisor’s identity and the organisational structure described must therefore match the contractual documents. You must also review the required disclosures about persons connected with the franchisor.

If you set up a new company, do not assume that your established business’s financial statements can simply replace its own. Have the applicable requirements and any available exemptions assessed before issuing your disclosure document.

Requirements vary by province. Quebec has no franchise-specific legislation, but the Civil Code of Québec governs matters including contracts and good faith. General rules applicable to businesses remain relevant throughout Canada.

4. Check the entity’s identity before making any offer

Carry out a final cross-check of the legal names shown on the agreement, disclosure document, invoices and payment details. Clearly distinguish the trading brand from the company entering into the agreement.

For each proposed payment, specify which company will receive it and on what basis. Also check who is authorised to sign on behalf of the franchisor. Avoid changing the contracting entity at the last minute without a fresh legal review of the documentation and disclosure timetable.

Key takeaway: before recruiting franchisees, prepare an organisational chart, a table of responsibilities and a franchisor budget. Have them reviewed together: your legal structure must reflect how your business actually operates.