Unlock eSignature Licitness for Franchise Contract in Canada

How to eSign a document: eSignature licitness for Franchise Contract in Canada

licensing versus franchising is licensing an alternative to franchising your business well if you're a successful business owner you're looking to expand you're looking to recruit other individuals to invest capital open new locations service new territories use your brand and follow your training then licensing is not an alternative to franchising [Music] so the question comes up often which is you want to expand your business um you've been told maybe that franchise regulation is extensive or it may be expensive to franchise your business maybe even a local lawyer suggested hey instead of franchising why don't you just license right the theory is um let's have a simple agreement where we just license a trademark maybe they follow some of our systems and pay us a fee and let's avoid franchise regulation the unfortunate answer is it doesn't work and the reason why it doesn't work is because the way the franchise laws are structured at the federal level and at the state level the purpose of the franchise laws are to protect investors uh individuals who are taking their money and going to invest in a business concept so the federal uh franchise laws and state laws say before you can offer a seller franchise you need to provide a prospective franchisee a franchise disclosure document now the government is aware of business opportunities and license opportunities and so what they've done is they've broadly defined what types of relationships create a franchise relationship it doesn't matter what your agreement says just matters if there's three elements involved in your relationship and these are the license of a trademark the payment of an upfront fee and a degree of control right so for example if you're going to give someone uh the ability to use your brand name and your logo that's a license of a trademark if you as a result of giving them that license they're required to pay you an upfront fee whether you call it a license fee a franchise fee training fee there's an upfront fee and if there's a degree of control over how they operate now these are people can be using your brand right so you don't want them doing just anything so your agreement may say hey you can only sell these types of products or services that's a degree of control and if you have all three license of a trademark payment of an upfront fee degree of control what happens next is the franchise laws say that's a franchise relationship no matter what you call your agreement you could have a license agreement and a training agreement you could just call it a limited license agreement doesn't matter what the titles are it matters as to the substance of the relationship we'll typically see some clients um that come to us they've licensed um they've sold maybe 20 licenses and things are going well and what happens next is either a state regulator contacts them and says they're violating the franchise laws or they try to enforce their agreement against the licensee they find out it's unenforceable why because they violated the franchise laws but there's some good news here right um what happens is why people try to avoid uh franchising and gravitate toward licensing um is because they think that it's cheaper and better for them but it's not and i'll explain if you're looking to grow your business right and you're looking to add new outlets right new franchisees or whatever if you call them licensees they're going to open up new locations service new territories you're focused on the future value of your company right and the future value of your company is going to be based on uh the cash flow that your franchisees generate for you so let's assume uh we start today you start selling franchises one two three five years from now you're 50 or 100 franchisees if you speak to private equity or you're looking to sell your business the value of your business is going to be um determined by the cash flow from your franchisees if you're looking to take private equity or sell in that due diligence process the most important thing they're going to do is they're going to check your agreements and make sure they're enforceable and unfortunately license agreements are not enforceable so you could be hurting yourself long term in terms of the enterprise value of the business you're building the other good news is is that franchising is not as difficult as many um claim it to be and it shouldn't be as expensive as others claim if it's done correctly it's a smooth process should take about 90 days should be cost effective and the really good news is that once you franchise and comply with franchise laws this hurdle now serves as a shield to help protect your business your agreements are enforceable you're building for long-term enterprise value in a future cell you'll have everything in order and you'll have enforceable agreements so the better avenue is franchising and unfortunately the way the laws are designed they're designed so licensing is not an alternative and in fact if you go down the licensing path you could be falling into a trap and hurting yourself long term