Buying a franchise is a step towards entrepreneurship—with the added confidence of aligning yourself with an established brand and a tested business model. However, this opportunity comes with its own set of legal complexities that are essential to understand before you sign on the dotted line. From franchise agreements and fee structures to regulatory obligations and disclosure requirements, navigating the legal framework is crucial for setting your franchise journey on the right course.
In this blog, we’ll explore the key legal components involved in buying a franchise—including contracts, financial commitments, and regulatory compliance—to help you make well-informed decisions and start your franchise venture with clarity and confidence.
Understanding the Franchise Agreement
A legally binding arrangement between the franchisor and you (the franchisee) is the franchise agreement. This legally binding document outlines the rights, responsibilities, and expectations of both parties. Here are some key elements typically included:
- Grant and Term: This section defines your right to operate under the franchisor’s brand, including the use of trademarks and intellectual property, and specifies the length of the agreement—usually between 5 to 10 years.
- Training and Support: Details the initial training provided, as well as ongoing operational support from the franchisor.
- Fees and Royalties: Specifies the financial obligations, such as the initial franchise fee, ongoing royalties, and advertising expenditures.
- Territory Rights: Clarifies whether you will receive any exclusive rights to a specific geographic area and the conditions under which this exclusivity might change.
- Restrictions and Obligations: Outlines what you can and cannot do as a franchisee, along with performance expectations and compliance standards.
- Renewal and Termination: Defines the terms and conditions under which the franchise can be renewed or terminated by either party.
Tip: Always have a legal professional review the franchise agreement to ensure you fully understand your rights and obligations before signing.
Financial Commitments: Royalties, Fees, and More
Purchasing a franchise offers a structured path to business ownership—but it also comes with a range of financial commitments. These can significantly impact your cash flow and long-term profitability. Understanding each cost component is essential before you sign the franchise agreement, so you can build an accurate financial model and avoid unexpected surprises down the road.
- Initial Franchise Fee: This is a one-time upfront payment you make to the franchisor when you sign the agreement. It typically grants you the right to operate under the franchisor’s brand name, access to the business model and proprietary systems, and initial training and onboarding support.
- Ongoing Royalties: Royalties are regular payments you make—often monthly—to the franchisor for continued use of their brand, systems, and ongoing support. They are usually calculated as a percentage of your gross revenue, commonly ranging from 4% to 10%. These fees cover ongoing operational support, continued access to training, systems, and software, and brand development and network maintenance
- Advertising Fees: Most franchisors operate a pooled advertising fund used to promote the brand at a national or regional level. You’re typically required to contribute a fixed percentage of your sales—usually 1% to 4%—to this fund. In return, the franchisor runs:
o National ad campaigns (TV, radio, digital)
o Social media and influencer promotions
o Website and SEO strategies that benefit all franchisees
- Other Expenses: These may include equipment purchases, inventory, staff training, real estate, and technology costs.
Tip: Carefully analyze all costs during your due diligence phase to avoid surprises and build an accurate business plan.
Regulatory Framework and Disclosure Requirements
Franchising offers a structured business model with many advantages, but it also comes with a legal framework designed to protect the interests of both franchisors and franchisees. In North America, this framework ensures transparency, promotes fair practices, and provides access to critical information before any legal or financial commitment is made.
The Federal Trade Commission (FTC) in the U.S. enforces the Franchise Rule, which requires franchisors to provide a Franchise Disclosure Document (FDD) at least 14 days before signing any agreement or accepting payment.
The FDD includes 23 key sections, such as:
- Franchisor Background: Company history, business experience, and key executives.
- Litigation History: Any legal actions involving the franchisor or its leadership.
- Costs and Fees: A comprehensive breakdown of all expected financial commitments.
- Earnings Claims (Item 19): If provided, this section outlines the potential financial performance of existing franchisees.
While Canada does not have a national franchise law like the FTC rule, several provinces have enacted franchise disclosure legislation, including Ontario, Alberta, British Columbia, Manitoba, New Brunswick, and Prince Edward Island. These provinces require franchisors to deliver a Disclosure Document to prospective franchisees at least 14 days in advance, similar to the U.S. model. Failing to comply can lead to serious legal consequences for the franchisor.
Reviewing the FDD with a franchise attorney will help you better understand your rights and the obligations of the franchisor.
Choose the Right Legal Structure
Investing in a franchise can offer stability and support, but it’s essential to approach it with a clear understanding of the legal landscape. From reviewing the franchise agreement to evaluating financial obligations and regulatory compliance, every detail matters.
How you structure your franchise business also has implications for liability, taxation, and compliance. Common structures include:
- Limited Liability Company (LLC): Offers liability protection with flexible tax treatment—ideal for many small businesses.
- Corporation (C-Corp or S-Corp): Suitable for larger operations, offering formalized structures and clear separation between personal and business assets.
Tip: Consult with legal and financial professionals to choose the structure that best supports your goals and risk tolerance. The more informed you are, the more empowered you’ll be to make decisions that lead to long-term success.
