Franchising in Canada: structuring the finance you offer

Financing part of your first franchisee’s investment can help get the business open, but it also turns you, as the franchisor, into a creditor. Before offering a loan, instalment payments or finance through a related company, define your commitments precisely. For a business looking to develop a franchise network in Canada, the offer must be financially sustainable, clearly documented and compliant with the applicable provincial rules.

1. Define exactly what you are financing

Start by distinguishing between three situations: lending money to the franchisee, deferring payment of an amount they owe you, and referring them to an independent lender. Each involves different commitments. An introduction to a bank is not credit approval, and deferring payment does not remove the expense.

Prepare an internal summary for each option you are considering. It should specify:

• the identity of the lender or creditor;
• eligible expenditure, such as certain equipment or fit-out work;
• the franchisee’s required contribution from their own funds;
• the maximum amount available and the eligibility criteria;
• the conditions to be met before funds are released;
• the person authorised to approve the transaction.

Avoid describing an opportunity as ‘financed’ when only a fraction of the investment is covered. Prospective franchisees must be able to distinguish between financed expenditure, costs they must pay immediately and the working capital they will need after opening.

If a company related to the franchisor is involved, identify it from the outset. A separate legal structure does not automatically place its offer outside the franchise relationship.

2. Test both parties’ capacity to bear the loan

The first question is not simply whether the franchisee can repay. Could your business continue to train, support and supply franchisees if several repayments were late?

Work with your accountant to prepare two cash flow forecasts: one for the outlet receiving finance and one for the franchisor. For the outlet, include repayments alongside other outgoings, notably rent, payroll, royalties and purchases. For the franchisor, distinguish between revenue recognised in the accounts and cash actually received.

Then test adverse scenarios: a delayed opening, additional building work or lower-than-expected initial sales. The aim is not to predict an outcome, but to check that the repayment schedule remains manageable without depriving the outlet of essential cash.

Also set an internal limit on the total amount you are willing to advance across the network. Finance should not be used to disguise inadequate investment or secure signatures more quickly at the expense of your ability to provide support.

3. Disclose the offer in line with provincial requirements

In Canada, franchise-specific obligations are governed at provincial level. A finance offer must therefore be reviewed alongside the other elements of the franchise offer, rather than treated as a separate, confidential arrangement.

In New Brunswick, the Franchises Act requires, subject to applicable exemptions, that the disclosure document be received at least fourteen days before the prospective franchisee signs the franchise agreement or another agreement relating to the franchise, or pays any consideration to the franchisor or an associate. The disclosure document regulation expressly requires the terms of any financing arrangement offered, even indirectly, by the franchisor or an associate to be disclosed.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 also governs pre-contractual disclosure. The documents must include material facts and agreements relating to the franchise. Seek legal advice on how to incorporate the finance offer and its supporting documents into the disclosure package provided to the prospective franchisee.

In Quebec, there is no franchise-specific legislation requiring a comparable provincial disclosure document. The Civil Code of Québec, particularly its rules on contracts and good faith, still applies. The absence of a specific regime does not justify providing incomplete information about the finance offered.

Before any agreement relating to the finance is signed or any payment is made, ask your lawyer to check the requirements and applicable timetable in the province concerned.

4. Draft an agreement that works throughout its term

The agreement should specify the principal, any interest, fees, the repayment schedule, early repayment options and the consequences of late payment. Have any proposed security arrangements reviewed too, including how they interact with security held by a bank lender.

Above all, clarify the link with the franchise agreement: what happens to the debt if the opening falls through, the outlet is sold or the franchise relationship ends? Do not assume that these events automatically remove repayment obligations.

Finally, establish a separate process for administering the finance: statements, accounting reconciliations and a written procedure for considering requests to defer payment. Any amendment should be documented rather than left as a verbal promise.

Key takeaway: before offering finance, prepare an offer summary, two cash flow forecasts and a draft agreement. Have them checked for consistency with your franchise agreement and provincial disclosure requirements.