Have you outgrown your legal risk strategy? How growing franchisors can stay compliant

Introduction: The evolution of legal risks 

As franchisors expand, particularly in their early years, many assume that their initial compliance measures will suffice indefinitely. However, as the franchise system scales, legal risks grow more complex and the outcome of potential disputes becomes more costly. The strategies that franchisors put in place must evolve accordingly as more franchisees come on board. This article explores the key areas where growing franchisors may encounter legal challenges and offers practical tips for staying ahead. 

Understanding the new operational and legal landscape 

When expanding a franchise system, it is critical to understand that the franchisor’s legal obligations and risks are not static. New risks emerge, and existing ones become more complex. When there are legal compliance issues, the more locations a franchisor has, the more likely it is to face a claim (or multiple claims) that could put the future of the franchise system in jeopardy.  

Here are a few areas where growing franchisors need to stay vigilant: 

• System changes: Some growing franchisors add new franchise concepts or business models. This can require significant additions and revisions to the franchise disclosure document (FDD) across many disclosure areas. 

Example: A growing franchisor shifting from a quick-service model to a full-service restaurant format must adjust disclosure compliance strategies to reflect the new business structure, which might include different cost and investment structures, site-selection procedures, franchisee experience requirements, supplier relationships, operational standards, etc. 

• Brand and intellectual property protection: As a franchise system grows, protecting the brand’s intellectual property becomes critical. With more franchisees representing the brand, the risk of misuse or dilution of brand elements increases. Developing a comprehensive brand protection strategy, including trademark registrations and enforcement protocols, is important for maintaining brand integrity. 

Example: A franchisor discovers that a franchisee uses unauthorized marketing materials that conflict with established and clearly communicated brand standards. Having legal protocols in place will allow the franchisor to address the issue effectively. 

• Multi-provincial disclosure compliance and risk: British Columbia, Alberta, (soon Saskatchewan), Manitoba, Ontario, New Brunswick and PEI regulate franchise relationships with mostly similar disclosure requirements but with some regulatory nuances. Failure to comply with each province’s disclosure requirements can result in costly disputes, penalties, and damage to the franchise system’s brand and reputation. There may also be potential personal risk for the officers and directors of the company (e.g., those who sign the franchisor’s certificate in a materially non-compliant franchise disclosure document (FDD) or those who are involved in the sale of franchises). 

Example: A retail franchisor expanding across provinces assumed its Ontario-compliant FDD would suffice nationwide but overlooked regulatory nuances in places like Alberta and New Brunswick. Failing to adjust for province-specific requirements led to multiple rescission claims, as franchisees claimed they had not received materially compliant disclosure documents. This material non-compliance not only resulted in costly legal disputes and refunds but also exposed company officers and directors to personal liability, particularly those who signed the franchisor’s certificate on the flawed FDD.  

•  Franchisee relations and system-wide compliance: A growing system often means more locations to monitor and manage. Ensuring that each franchisee complies with operational standards, training programs, and legal requirements is key to prevent inconsistencies and legal complications. Regular audits and updated training are practical ways to maintain system-wide compliance. 

Example:  A growing restaurant franchise expanded rapidly across multiple provinces, leading to challenges in maintaining consistent operational standards. Some franchisees struggled to meet the brand’s quality benchmarks, while others failed to follow updated health and safety protocols, leading to customer complaints and potential legal risks. To address these issues, the franchisor implemented regular compliance audits and introduced a digital training platform that allowed for continuous updates. These measures ensured that all franchisees adhered to the same high standards, reducing inconsistencies and reinforcing the brand’s reputation across all locations. 

Self-assessment checklist for growing franchisors 

To help you determine if your legal strategy is evolving with your growth, we have developed a quick self-assessment checklist.  

This checklist is designed to give you insight into your current compliance levels and identify areas that may need attention.   

Click here to complete the self-assessment checklist.  

Proactive legal strategies: preparing for expansion 

If the self-assessment reveals areas for improvement, there are several proactive steps that a franchisor can take to stay compliant and protect a growing franchise system: 

1. Conduct regular audits and compliance checks: As the franchise system expands, setting up a regular schedule for audits – such as semi-annual or annual reviews – can help detect and resolve compliance issues before they escalate. These audits can include reviewing franchisee practices, inspecting training program effectiveness, updating operating manuals and notifying franchisees of new or updated procedures, and ensuring marketing materials align with brand standards. 
2. Consult with a franchise lawyer specialized in provincial compliance: Provincial differences in franchise laws require specialized legal expertise. A franchise lawyer can help ensure franchise agreements, franchise disclosure documents, and compliance measures align with the specific regulations in each province of operation.
3. Establish a scalable compliance monitoring system: For franchisors expanding rapidly, creating a scalable monitoring system is necessary. This could involve a dedicated compliance team or using digital platforms that track franchisee performance, compliance, and adherence to operational standards. Some franchisors implement software solutions that centralize compliance data, track regional legal requirements, and automate reminders for necessary updates, helping to streamline the management of multiple locations. 

The cost of ignoring legal evolution 

Recognizing and addressing evolving legal risks is essential for growth. The most successful franchisors continuously adapt their strategies and strengthen their legal frameworks to align with their expansion.  

Failing to adapt legal strategies as a franchise system grows can have devastating consequences. From disputes with franchisees over compliance to rescission penalties for failing to meet disclosure requirements, these challenges can be costly, both financially and to the reputation of the franchise. Multiple claims by franchisees can spell the end for the franchise system. A proactive approach not only mitigates these risks but will also position a franchise system for sustainable growth. 

If you are ready to ensure your franchise is legally prepared for the next phase, contact our franchise law team for a complimentary consultation. Let us help you build a robust legal foundation to support your franchise system’s growth. 

Additional resources for growing franchisors: 

Preparing a franchise system for growth 
Legal considerations when expanding your franchise system 
5 tips to identify disclosure risk for growing franchisors 

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The information contained in this article is provided for informational purposes only and does not constitute legal advice. Readers should not act on this information without seeking professional legal advice from a lawyer experienced in this area. The content in this article may not reflect the most current legal developments, and the application of law can vary in different provinces and territories. As such, the information in this article is not guaranteed to be complete, correct, or up to date. The author and the publisher of this article disclaim all liability for any actions taken or not taken based on any or all of the contents of this site. 

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