Pizza Franchise Opportunities in Ontario: Legal Risks to Review

When you are comparing pizza franchise opportunities, the marketing tends to look alike: strong brand, proven system, support. The legal terms can differ a great deal, and they decide who carries the risk if sales are slower than expected.

This article gives you a way to compare franchisors on the points that matter legally, using what Ontario's franchise law requires them to disclose. It is general information, and a lawyer can review the actual documents.

Start with what every franchisor must disclose

Ontario requires a franchisor to give you a disclosure document at least 14 days before you sign or pay. It covers the franchisor's business background, litigation history, bankruptcy or insolvency information and financial statements. It also covers deposits and fees, copies of the proposed agreements, any exclusive territory, restrictions such as required suppliers, the volume rebate policy, and the conditions for termination, renewal and transfer.

Ask each brand you are considering for its document early. If a franchisor is slow to provide it, or wants a payment first, that tells you something about how the relationship may go.

A side-by-side comparison table

Build a simple table for each brand you are comparing. These are the headings that map to the disclosure requirements.

Franchisor background, litigation and finances

Check the franchisor's litigation history and any bankruptcy or insolvency information, which the document must cover. Not every lawsuit matters equally. In one Court of Appeal case, an undisclosed protective lawsuit that posed no liability to the system was held not to be material, although O. Reg. 581/00 s. 2 requires disclosure of certain civil actions found or pending against listed persons. If you see litigation, ask what it is about and whether it could affect the system.

On finances, financial statements are part of the document. Some large, established franchisors may be exempt from providing them if they meet the criteria in Part III of O. Reg. 581/00. An exemption does not mean the government endorses the franchisor or its finances, so ask your accountant how to assess a brand that does not provide statements.

Also look at who is selling to you. An individual who makes representations on the franchisor's behalf to grant or market the franchise can be a franchisor's associate if directly involved in granting the franchise or exercising significant operational control over the franchisee. Keep a record of what any salesperson tells you.

Contract terms that shape your risk

• Required suppliers: restrictions on where you buy and the volume rebate policy are part of the offer.
• Territory: confirm whether any exclusive territory exists and how it is defined.
• Transfer: check the conditions for transfer, since they affect your ability to sell later.
• Transfer fees: in one case, an exemption from disclosure was unavailable because the agreement required a $10,000 transfer fee.
• Advertising funds and training: confirm what you pay and what you receive.

Every party to a franchise agreement owes a duty of fair dealing, meaning good faith and compliance with reasonable commercial standards. A party that breaches it can be sued by the other. That duty does not replace careful negotiation, but it is part of the legal background.

Franchisees also have a statutory right to associate with other franchisees, for example by forming or joining an organization, even if the contract prohibits it. A franchisee can sue for damages if the franchisor or its associate interferes.

Red flags and next steps

A missing certificate in the disclosure package has been held to be a fatal flaw. Missing or vague items are worth raising before you pick a brand. If disclosure turns out to be late or deficient, you can cancel without penalty up to 60 days after receiving it. With no disclosure at all, the period is two years from entering the agreement. A franchisee who suffers a loss from an incomplete or misleading document may sue for damages.

• Request the disclosure document from every brand on your shortlist
• Note the date you receive each one
• Confirm certificates are signed and dated
• Call several current and former franchisees
• Have an accountant review the financial statements or the reason they are missing
• Have a lawyer review the agreement before you sign or pay

The Ontario government does not review or approve franchisors, and disputes are resolved through the courts, so the choice of brand rests with you. Ontario.ca recommends getting advice from a lawyer or financial advisor.

Frequently asked questions