Franchisee Due Diligence
Jeff Elgin wrote an article about how to select a franchise attorney, entitled Choosing a Franchise Attorney. How good is his advice? Well consider his three suggestions:
"There are three basic rules you should follow:1. Make sure you are using an attorney who is familiar with franchise agreements. You wouldn't use a foot doctor for brain surgery, right? Keep in mind that lawyers specialize as well.
2. Find out if the franchisor is willing to make changes to the franchise agreement before going to the lawyer. If not, don't pay to have your attorney rewrite the franchise agreement. It will just waste the attorney's time and your money.
3. Ask for a fixed rate or an estimate to review the document. With many attorneys charging hundreds of dollars per hour, this is not a good relationship to enter into without some understanding of what the costs may be." (my emphasis)
Two out of three ain't bad.
But, in Ontario, it is simply a mistake to think that your attorney needs to re-negotiate the franchise agreement to be of value. Indeed, I believe that the most effective advice that a lawyer can provide is a thorough review of the disclosure agreement, looking at certain key areas in the disclosure document from a standpoint of future litigation. For example, if the disclosure document says that there franchisor retains the benefits of the any supplier rebates, but fails to disclose the amount, this should be a hot button. The franchise may wish to go ahead with the purchase, but he or she should be advised to carefully monitor their purchases from suppliers for the first year, in order to obtain necessary evidence for a section 7 action under the Arthur Wishart (Franchise Disclosure Act). Section 7 allows franchisees to sue for damages if the misleading disclosure document resulted in damages, without having to prove reliance. If a franchisee is carefully monitoring his or purchasers, and has losses or damages are less than $50,000, then using the Simplified Rules, a very simple and relatively in expensive lawsuit can be undertaken. But if the franchisee was never warned about this possibility by qualified counsel, the franchisee might be in position to retain counsel for a much more expensive lawsuit.