U.S. franchise expansion into Canada: considerations and risks
By Kirsten McMahon, AdvocateDaily.com Managing Editor
In the final instalment of a three-part series on American chains entering the Canadian market, Toronto franchise lawyer Joseph Adler explores economic and other business-related considerations when seeking to expand a franchise system into this country.
Adler, a partner with Hoffer Adler LLP who frequently helps U.S. companies to expand their franchise systems into Canada, says the bulk of his initial work is assisting the U.S. franchisor to protect its brand and 'Canadianizing' the disclosure document and franchise agreement.
“When it comes to other business-related issues, we will advise franchisors to speak with an accountant or franchise consultant who can help them with the economic modelling to make sure that their systems are workable in Canada,” he says.
Franchisors looking to expand into Canada must recognize that there are additional significant costs associated with cross-border franchising, Adler notes.
“For example, there could be increased costs for supervising and supporting the Canadian franchisees. The franchisor may have to hire extra personnel and fly them to different locations, and cross-border business travel brings immigration issues and additional expenses.”
Adler says U.S. franchisors interested in coming north of the border should determine whether to sell master franchise rights, unit franchises or area development or representative rights.
“Do you want to expand one unit at a time, or sell the rights to develop and own an exclusive region to a master franchisee, who then licenses portions of its territory to its sub-franchisees?” he says. "Or alternatively, perhaps the U.S. franchisor would simply want to grant area development rights, whereby the area developer is required to establish and operate multiple units of the franchise within a certain development schedule?
“One other option that the franchisor could consider is granting area-representative rights, where the area representative is required to find suitable franchisee candidates and introduce them to the franchisor, and then possibly even train and support them once they have signed a franchise agreement directly with the franchisor. By so doing they have somebody on the ground. Or they could consider master franchising, where they grant franchise rights to all or parts of Canada to a ‘master franchisee,’ who then is licensed to sublicense the franchise to its sub-franchisees," Adler says.
However, and particularly in the latter case, these already complex arrangements become even more complicated when it comes to disclosure documents and agreements, Adler notes.
“Not only is there a disclosure obligation between the U.S. franchisor and the master franchisee, the master now has to provide disclosure to its sub-franchisees,” he says.
“The U.S. franchisor should vet those documents, and, as such, there are more layers of complexity,” he says. “You also have to consider if there are enough royalties to go around, which requires a whole other level of financial analysis.”
There are different ways of expansion into Canada and too often, when U.S. franchisors come here, they just prefer to proceed on the basis of how they currently operate at home, Adler says.
That said, if going the master franchisee route, it’s important to find someone with the appropriate skill set, he says, something that is often difficult to find here in Canada.
“Not only do you want to partner with someone who can actually afford to purchase the master rights, but they also need to have the franchising and training skills as well,” Adler says.
Of course, U.S. franchisors should also be made aware of the significant differences in the regulatory framework, as well as in the supply chain, pricing of products and services and in consumer tastes and demands, he says.
“What can be done in the U.S. may not be legally or economically feasible here, so it's important to seek Canadian counsel and carefully consider the multiple issues involved when expanding internationally,” Adler says.
To read part one, click here.
To read part two, click here.