U.S. franchisors beginning to consider international expansion often think first of Canada. After all, it seems easy: it's right next door to the U.S., the country's legal system looks similar to its southern neighbor, franchising is well-established there, and most Canadians speak English and have high disposable incomes. And indeed, the fact that more than 500 U.S. franchise brands now operate in Canada shows that it certainly can be an excellent first step toward global expansion.
But if Canada is similar to the U.S., it is definitely not identical. What do Target, Kmart, Sam's Club, Sears, and Big Lots have in common? Each are on the long list of U.S. retailers and restaurants that have exited Canada after significant losses. Franchisors and franchisees who want to succeed north of the border will carefully study the differences between the two countries. These include:
THE LEGAL ENVIRONMENT
In six of the 10 Canadian provinces, franchisors must issue disclosure documents to prospective franchisees. On the surface, Canadian disclosure documents are similar to U.S. FDD's, and although there are differences among the regulations of the six provinces it's common to issue one large document that meets every province's requirements. And there are no "registration states" in Canada; franchisors are not required to file their documents for government approval in advance. Thus far, disclosure in Canada may seem simple.
However, Canadian franchisors are required to disclose "all material facts" that might reasonably be expected to have a significant effect on a prospective franchisee's decisions whether to buy a franchise or what price to pay. Edward (Ned) Levitt, a Partner in the law firm Dickinson Wright LLP, notes that this is a positive obligation which extends far beyond merely answering prescribed questions and filling out sections of an FDD. And if a Canadian court finds that a franchisor has failed to fully meet its disclosure obligations, the penalties can include not only damages but even rescission of the franchise agreement. If rescission is granted, the franchisor must reimburse the franchisee's entire investment plus any operating losses.
Franchisees in the U.S. benefit from one of the lowest cost markets in the developed world. To start, the U.S. has 23.5 square feet of retail real estate per capita--far more than any other nation--and this massive inventory holds down the cost of leasing. Canada has only 16.4...