By Peter Snell
When working with franchisors and restaurant franchisees, new prospects are often surprised or under-prepared by the “secret ingredients” the industry adds to franchise agreements and briefing materials. It is imperative that the franchisee take the time to review the documents given to them before entering into an agreement.
This article presents a non-exhaustive list of topics future franchisees should consider when purchasing a restaurant franchise. A clear understanding of these elements at the start of a franchise relationship is essential to ensure the success of a business. While the following information serves as a general overview, as always, potential buyers should consult legal counsel when reviewing any franchise information material, or franchise agreement, related to their particular situation.
An often overlooked, but critically important, aspect of establishing a restaurant franchise is securing the proper real estate to operate the franchise restaurant – it’s not always straightforward. Disclosure related to real estate can usually be found in the franchise disclosure document under items relating to franchisee restrictions, opening fees, upfront investments, and location specific disclosure. If a potential franchisee has additional questions, he may consider asking them ahead of time as they affect start-up time and profitability. Here are some questions a potential franchisee should ask:
- Does the franchisor provide the turnkey restaurant?
- Does the franchise agreement limit the establishment of a franchise restaurant?
- Can the space be leased directly from the franchisor or affiliate (and is there a prescribed form of lease)?
- Does the franchisee need the consent of the franchisor before finalizing a location?
- Does the franchise agreement impose a specific provision or a minimum area for the restaurant?
- Does the franchisor offer help finding a suitable location or negotiating with the owners?
- Does the desired location allow the operation of a franchised restaurant business?
- Will a building permit be required if a new structure or renovation of an existing space is required?
With regard to the above real estate issues, new buyers of a franchise should take into account the proximity policy of their franchisor and the level of exclusivity or protection of the territory that will be provided to them.
Unlike some product-based franchise systems, restaurant franchises do not grant owners exclusivity over customers (who can come from anywhere), and often offer limited or no exclusivity of franchises. identical establishing a business nearby.
Disclosure related to proximity and territorial exclusivity can be found in the Franchise Disclosure Document under the Territory and Proximity section. These aspects of a franchise system can be critical to profitability and should be taken into account by the franchise buyer when making their own market and revenue estimates.
In addition to the general restrictions and obligations of most franchises, there are many restaurant-specific elements addressed in the franchise agreement and the backgrounder that a prospective franchisee should consider. For example:
- Do I need a liquor license?
- Who is responsible for obtaining food preparation licenses, food handler certificate programs, or health department authorizations?
- If music is played, is a license from the Society of Composers, Authors and Music Publishers of Canada (SOCAN) required?
- Who approves waste disposal?
- Are the menu labeling requirements (for example the list of calories) managed by the franchisor?
- What are the provincial obligations imposed on an employer regarding uniforms if they are provided to restaurant staff?
- Who is responsible for obtaining permits related to building codes, heating, ventilation and air conditioning (HVAC), signage, electrical, mechanical and plumbing?
- What are the obligations regarding participation in food delivery services (those operated in-house or in cooperation with third-party food delivery companies, such as Uber Eats, Foodora, DoorDash, etc.).
Information on these can be found in several sections of the Franchise Information Document, although most of it can be found in the section on Disclosure Permits, Licensing, and Regulatory Compliance.
Deadlines for opening a franchise
The investment of time related to the above considerations is particularly important in the context of a franchised restaurant. Most franchise agreements state that the franchisee begins operations after a certain period. In fact, it is typical to see an obligation to find a suitable location and be operational within a year of signing the agreement. However, franchisees should keep in mind that in some urban centers it can be difficult to find the appropriate location, which can delay the ability to open the franchise within the required time frame.
Before a potential franchisee signs the agreement, they should consult professional advisers and determine if the deadlines set by the franchisor are realistic for the specific location, municipality and province.
Opening a restaurant franchise comes with its own “secret ingredients”. Finding a suitable location, understanding the proximity and exclusivity policies of a franchise system, and obtaining the approvals necessary to establish the restaurant franchise can require a significant investment of time and resources. Therefore, it is important that a franchisee clearly understands their obligations so that they do not inadvertently find themselves in breach of the contract before they can even open their doors.
Peter Snell is a partner and franchise lawyer in the Vancouver offices of Gowling WLG (Canada) LLP. For more information, please contact him by email at email@example.com.