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Canada is becoming increasingly attractive for brands looking for an English (and French) speaking market. Franchise attorney Andrae Marrocco prepares you for an adventure to the “frozen hockey rink”
Canada, much heralded as a frozen hockey rink, has turned out to be a hot market for franchisors.
Canada has a highly skilled and educated workforce and a similar spending pattern to the United States. It has the second largest franchise industry in the world, behind the U.S., with an estimated 1,300 franchise brands and more than 76,000 franchised business units. It is also a proudly multicultural country, making it a good ‘first expansion’ venue to test your franchise system among a variety of cultural demographics.
However, franchise expansion to the Great White North requires guidance and careful decisionmaking. Here are five things to consider before expanding your franchise system into Canada.
1. Protect your intellectual property
A franchise system’s intellectual property is often the most important asset crossing the border on any international expansion, and the same holds true when venturing into Canada. This includes trademarks, know-how, trade secrets, copyright, and patents, as well as non-traditional types of intellectual property like domain names – both existing and contemplated (e.g. “.ca” domain extensions). Franchisors should take the time to identify the intellectual property that is actually necessary for their international expansion into Canada and robustly protect each category of intellectual property under Canadian law.
Canada’s trademark registration system recently underwent a significant transformation as part of an initiative to modernize the national intellectual property framework. In addition to substantial amendments to the Trademarks Act (Canada), the regulations, and Trademark Office practices, Canada is joining three international trademark treaties. Not only is Canada finally acceding to the Madrid Protocol, the international system for obtaining trademark registrations for multiple jurisdictions through the use of a single application, but Canada is also joining the Nice Agreement, which establishes an international classification system for goods and services in trademark registrations, as well as the Singapore Treaty, which seeks to harmonize administrative procedures pertaining to the trademark registration process.
2. Structure your franchise expansion
Determining the right structure for your franchise expansion into Canada is a critical part of early planning and, unfortunately, too frequently overlooked (particularly at the strategy stage). Franchisors need to address the following two structuring considerations.
The first is selecting one or more strategically advantageous franchise structures for the expansion (e.g., master franchise, area development, and direct franchising) and the particular regions for which those structures will be utilized. More often than not, this involves blending structures and crafting customized terms that fit the specific franchise system and expansion mandate. It also requires conducting research on the demand for your products or services in various regions while also considering other economic, demographic and cultural variables. By way of example, you may determine that direct franchising is the structure of choice for major regions like Toronto or Ontario, but a master arrangement is more suitable for the province of Quebec (which has a civil law system and French language requirements).
Though Canada is the second largest country in the world, the vast majority of its population lives within 300km of its southern border”
The second structuring consideration is selecting the most efficient Canadian corporate/ tax structure to achieve your business objectives. Franchisors need tailored advice to ensure that they identify a structure that satisfies the “line of best fit” test. The analysis is typically based on a number of considerations including capitalization strategies, contemplated on-the-ground operations (employees and physical premises), the intention vis-à-vis repatriation of funds, the interplay between home jurisdiction tax laws and Canadian tax laws, and Canadian laws that may be applicable because of your specific industry.
3. Craft your franchise agreement
Well-crafted franchise agreements underpin effective expansion into Canada. Particularly where you have an existing suite of franchise agreements and where you intend to utilize a number of franchise structures, the preparation of a uniform and “Canadianized” set of franchise agreements is high on the priority list. Canadian courts have provided guidance on many aspects of the franchise arrangement. The form and substance of drafting Canadian agreements has been impacted in a profound manner by the principles espoused by court decisions together with Canadian legal custom which has developed from those principles (and independent of them). Observing those principles and legal customs will go a long way in protecting your franchise system in Canada.
Certain key mechanisms in your franchise agreements such as “protected” or “exclusive” territory should be carefully reviewed for Canada. The manner in which you ultimately define and divide territories here may be significantly different than other countries in which your franchise systems operate. Though Canada is the second-largest country in the world, the vast majority of its population lives within 300km of its southern border. Carving up the 10 provinces and three territories into workable franchise regions requires strategy and consideration. Importantly, franchisors are cautioned not to give away too much territory without protective rights, such as in circumstances of breach or underperformance.
International franchisors should also observe current trends to ensure their brand holds strong appeal among prospective franchisees.
In Canada, there has been an increased trend of franchise systems providing franchisees with limited flexibility on various activities that were historically more stringently controlled. For example, an increasing number of Canadian franchisors are giving franchisees latitude to source local products and services. This benefits international franchisors in a number of ways including saving them time and effort on establishing supply chains, as well as creating supply chain options for other franchisees. From the franchisee’s perspective, it engenders goodwill in the community in which its franchised business operates.
These are but a few illustrations of the importance of “Canadianizing” your franchise agreements (and the underlying business terms) so that your franchise system is relevant for the Canadian business community and complies with Canadian legal principles and customs.
Andrae J. Marrocco is an international franchise lawyer who specializes in franchise & distribution arrangements and corporate M&A transactions. He is a partner in the Business Law Group and Co-Chair of the Franchise and Distribution Law Group in the Toronto office of McMillan LLP
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