You don’t have to look too far to notice the various American restaurant brands which have made their way to Canada, or are looking for partners and master franchisees to develop their franchise systems here.
As much pride as we take in home grown Canadian products and services (be they franchises, celebrities, natural resources, etc.), we have always tended to be a nation which defers to the U.S. when trying to ascribe credibility. Put another way, once it’s popular in the United States, we want it too. And it can be very exciting to acquire the Canadian rights to an American business, especially one which we all eat at or shop at whenever we are south of the border.
So what can you expect if you want to franchise a U.S. brand domestically? It might go without saying, but the more popular the franchise, the more likely the initial franchise fee will be higher. You should not be surprised if you have to pay a premium for the added benefit of buying into a system with strong recognition and goodwill. And if you’re acquiring a large territory or development rights (like an entire province or even the entire country), your start-up fees will certainly be more than they would be if you were obtaining the rights to a single business unit only.
Many American franchisors may not realize that their US trade-mark is not granted instant protection in Canada, so plan accordingly because it may take the franchisor at least one year to get trade-mark registration. Plenty of Canadian franchisees and American franchisors have been dismayed in the past once they learned that a squatter had snapped up the trade-mark to that US brand in anticipation of this precise moment so they can get their payday once the franchisor ultimately has Canada within its sights.
While issues like franchise fees, territorial rights and trade-marks may seem like obvious priorities when acquiring Canadian franchise rights, what can often be overlooked is the tax implications of cross-border franchising. The fees that are payable by a Canadian franchisee to an American franchisor (including royalties) are subject to a non-resident withholding tax of 10 per cent, so most international franchise agreements will provide for this, usually in favour of the franchisor. If you are the Canadian franchisee, this means that you will have to “gross-up” your payments to the US franchisor by a corresponding amount to cover the taxes payable on those fees so that the franchisor doesn’t have to pay for them.
The acquisition of franchise rights to a US system can be incredibly exciting and present a phenomenal development opportunity. But Canadians should make sure that, in addition to all of the benefits they can look forward to, they are aware of what all of the costs will be.
By Chad Finkelstein, franchise lawyer at Dale & Lessmann LLP
October 1, 2013