A franchise is a contract or arrangement between two or more persons in which a franchisee (buyer) is required to pay a fee for the right to engage in a business which is associated with the franchisor's (seller) trademark, trade name, logo type, advertising or any business symbol designating the franchisor or its associates.
If you are considering purchasing a franchise, take precautions such as
- check out the product
- size up the market
- analyze profit claims
- question large set up fees
- find out all restrictions
- find out how much help you will get
- get the names of investors and customers
- check whether the business or principles have a record of lawsuits or bankruptcies against them
Warning signs to look for
- High pressure sales tactics
- promises of sky-high profits
- claims of minimal risk
- unjustified start up costs
- evasive answers and failure to reveal information
The Franchises Act requires the franchisor to provide, full, plain and true disclosure of all material facts relating to the franchise being offered. This information is supposed to ensure a prospective purchaser has the necessary information to make an informed investment decision.
The Franchises Act also provides a cooling off period of four business days after the franchise purchasers receives the prospectus or statement of material facts. Franchise purchasers may, within that four-day period, withdraw without obligation from deals, if they can contact the franchise sellers.
Compliance with the requirements of the Franchises Act may be very time consuming and costly. Failure to comply with the Act can have very serious consequences. Amoung these are:
- Fines up to 25,000 dollars for a corporation
- Fines of up to 2,000 dollars or imprisonment for up to one year or both for individuals
- The right of the licensee or franchisee to rescind the agreement in certain circumstances.
The previous information was provided by Business Opportunity and Franchise Frauds, Alberta Securities Commission.
The Franchises Act can be viewed online at qp.alberta.ca or a copy can be ordered by calling 1-877-427-4088.