Spring 2020 Edition
Frank Robinson, Partner, Franchise Law, Cassels Brock & Blackwell LLP
A slice for all: Franchising has more to offer than you might expect

There is a certain look of surprise and bewilderment that I have come to expect when I tell people that I am a franchise lawyer.

For the uninitiated, franchise law may sound like an obscure backwater of the legal landscape inhabited by pizza lawyers that couldn’t make a career in corporate, M&A or other popular areas of practice. But, underneath the thin layer of cheese and pepperoni, franchising proves to be a fascinating, complex and growing space that provides meaningful and stimulating work for lawyers, as well as a broad spectrum of complementary professional disciplines, including accountants, tax practitioners, insurance brokers and advisors, leasing experts, and others. If you know nothing about franchising as an area in which to apply your skills, take a moment and explore it here with me.

Franchising is more than just fast food and coffee. In my practice, I act for franchisors across a vast array of business segments, including all manner of food, hospitality and hotel brands, motor vehicle dealerships, big-box stores, consumer goods, commercial and residential services, cannabis production and retail, medical and educational services, real estate brokerages, fitness and health clubs, and much more. Many of these are global or international brands for which I – and a dozen or so other franchise lawyers at Cassels Brock & Blackwell – am fortunate enough to assist on their Canadian entrance and ongoing growth. Others are Canadian icons, or regional start-ups, or something in between. This broad and varied client base brings me into contact with transactions and professionals from around the globe and exposes me to diverse backgrounds and professional skillsets. It makes me a better lawyer and provides professional and personal lessons daily.

In six of the 10 provinces of Canada, franchising is a regulated practice. This means that, pursuant to law, pre-sale disclosure is required before a franchisee can sign a franchise agreement or make a payment in respect of the franchise. In the nature of consumer protection legislation, and similar to the regime applicable to the sale of securities, the disclosure obligation is robust, strictly enforced by courts, and requires substantial and ongoing care and attention by counsel and client to ensure the obligation is sufficiently fulfilled in each case. Much of the practice concerns this important regulatory function, although any franchise enterprise requires, at any given time, legal service related to intellectual property, real estate, marketing and advertising, competition, employment, dispute resolution, and others. Clients are often best served by a firm that can service all of those needs, but on occasion, there is a need or desire for legal work to be done by committee, and there is plenty of room for cooperation amongst different law firms. As the number of reputable franchise lawyers in Canada is not extensive, conflicts do arise, and referral relationships between firms is common.

Part of the disclosure obligation is for a franchisor to make available its financial statements. So, every franchisor requires the services of an accountant, at least annually, to prepare appropriate documentation. For international franchisors in Canada – and there are many of them – a reconciliation of foreign financial statements against local standards may be required. As a result, there is a significant amount of symbiosis, and opportunity for collaboration, between legal counsel and a clients’ accountants and auditors on franchise compliance and transactional matters. I am in the habit of connecting clients to accountants frequently.

While not every franchised business requires retail space to operate, and a growing number operate online or in a mobile format, the traditional franchisee requires commercial real estate to offer its products and services to the public. As is common in Canada, franchisors often elect or are required to lease and then sublet to franchisees. As a result, franchisors that are in growth mode are in constant need of new sites, either for their own use, or for subletting or assigning to franchisees. Brokers and real estate advisors who have figured out the nuances of the franchise relationship have managed to help brands build extensive and valuable real estate portfolios.

Due to the long-term and ingrained nature of the franchise relationship, it is inevitable that some relationships will, at some point, result in conflict. Our franchise litigation practice is active and has set precedent in Ontario and Canada. However, those results are not achieved without assistance of others, such as subject matter experts who provide reports for evidence, valuation specialists, mediators, arbitrators, and others. There is an ongoing need for these sorts of professionals to assist parties involved in franchise litigation.

Every franchise agreement includes a requirement for the franchisee to obtain and maintain comprehensive insurance coverage. Often, those coverages are set by a franchisor, and sometimes, the franchisor will organize and administer group policies on behalf of the network. Insurance is also advisable for principals of the franchisor in respect of professional liabilities, including, in particular, franchise law risks. Currently, there is a dearth of policies that address the latter, such that there may be an opportunity for underwriters and brokers to expand products into the space. Group benefits and programs are also easily sold into franchise networks where franchisees and their employees operate on similar frameworks with common needs and expectations.

Whereas franchising might have historically been viewed as a business space occupied by ‘mom and pop’ operators, the last decade or so has seen the model become the desire of more sophisticated and well-capitalized business interests. While this has created consolidation at that top in some cases, it has also contributed to growth from the bottom, where new brands and systems are encouraged to develop, expand, and become the next target. Private equity groups and public companies, both attracted to royalty-generating and asset-light balance sheets of well-run franchise enterprises, have been snapping up franchise systems at a significant pace, often paying staggering multiples for ownership of superior brands. Strategic buyers, who are often consolidators of complementary systems, are always looking to add accretive brands to existing franchising infrastructures. Securitizations and creative lending arrangements, using intellectual property and royalty streams as collateral, provide other opportunities for investment and financing plays. This relatively new fascination with franchising by those who had never paid it much attention has made franchising, and franchise systems, a valuable asset class and the subject of complex and important work.

As you can see, there is much more to this than a slice of pizza, and my plate is full everyday. If you’re looking for the same, there’s plenty to go around, and no doubt a good, local joint on a corner near you.

About the Author

Frank Robinson is a Partner in the Franchise Law and Business Law Groups at Cassels and serves as Co-Chair of the firms Hospitality Group. Frank is listed as a leading practitioner in franchise law by Chambers Canada, Lexpert, Who’s Who Legal, and Best Lawyers in Canada. In 2017, he received a Lexpert “Rising Star” award honoring Canada‘s leading lawyers under 40.