Why tariffs matter for franchise systems
For Canadian franchisors expanding into or already operating in the United States, renewed US‑Canada trade tensions are more than a political headline. Tariffs can affect franchisee economics, supply‑chain reliability, pricing, disclosure obligations and growth strategy. Recent US tariff measures have applied to a broad range of Canadian goods, while Canada has announced retaliatory measures in response to trade‑negotiation breakdowns. The result is a volatile cross‑border environment in which tariff risk can change quickly and unevenly across sectors.
Start with a tariff exposure review
The first step is a product‑level tariff exposure review. Franchisors should identify which items are shipped from Canada to US franchisees or corporate stores, confirm their US tariff classifications, determine whether exemptions or special rules apply, and model the cost impact under several scenarios. This review should cover goods sold to customers, operational supplies, equipment, fixtures, packaging, technology hardware and marketing materials.
Build a more flexible supply chain
Second, franchisors should revisit their supplier strategy. Systems that depend heavily on approved Canadian suppliers may need a US‑specific supply‑chain plan, including alternative US suppliers, US manufacturing, regional distributors, backup vendors and substitution protocols. Substitute products or suppliers should be vetted for quality, brand consistency, food safety, warranty coverage and regulatory compliance. The goal is to reduce single‑source dependency and give US franchisees practical operating alternatives if tariffs, border delays or retaliatory measures disrupt ordinary supply channels.
Review contracts, manuals and pricing rights
Third, franchisors should review their franchise agreements, supply agreements and operations manuals. Existing documents may not clearly state who bears tariff‑related cost increases, whether inventory, equipment and supply prices may be adjusted, whether alternative suppliers may be approved, or whether product specifications may be modified in response to trade‑policy changes. Unless the relevant agreement provides otherwise, the US importer of record will generally be responsible for paying the tariff at the border. That cost may then be passed through by the franchisor, an affiliated supplier, a third‑party supplier or distributor, or borne directly by franchisees if they are the importers. In each case, the economic effect will likely be felt most at the unit level unless supplier arrangements allocate the burden differently.
Franchisors should also consider how tariff‑driven cost increases interact with percentage‑based franchise fees. If a franchisee raises customer prices to offset higher costs, gross revenues may increase even if sales volume declines. Because royalties, brand fund contributions and other fees are usually calculated as a percentage of gross revenues, those fees may also increase. The franchisee may therefore need to raise prices by more than the tariff increase itself to preserve margin after accounting for higher product costs and additional percentage‑based fees. If higher prices also reduce demand, the franchisee may face fewer sales, higher costs, higher fees per sale and lower unit‑level profitability. Tariff planning should therefore include pricing rights, pass‑through provisions, approved supplier terms, royalty structures, temporary relief mechanisms and franchisee communications.
Update disclosure where tariffs are material
Fourth, franchisors should consider any franchise disclosure implications resulting from increases in tariff‑related costs. If tariffs materially affect initial investment costs, required purchases, supplier arrangements, rebates, operating margins or financial performance representations, the US Franchise Disclosure Document (FDD) may need to be updated. This is especially important in registration states, where material changes can trigger amendment or registration obligations. Franchisors should also be careful when discussing expected margins, price increases or cost pass‑throughs with franchise candidates, as those statements may be deemed to be improper earnings claims if not properly substantiated and disclosed in Item 19 of the FDD.
Communicate early with US franchisees
Fifth, franchisors should communicate proactively with US franchisees. Franchisees will want to know whether cost increases are temporary, whether system pricing will change, whether alternative vendors are available, and whether the franchisor has a mitigation plan. Clear communication can reduce speculation and preserve confidence in the brand. Franchisors should also collect unit‑level feedback on cost pressure, customer resistance, supplier delays and margin compression so the system can respond based on operating data rather than assumptions.
Treat tariff planning as part of US expansion strategy
The broader lesson is that US expansion should not be treated as a simple extension of the Canadian franchise model. Tariffs are only one part of a larger cross‑border risk profile that includes franchise disclosure law, state registration requirements, tax structuring, employment issues, customs compliance, supplier logistics and currency exposure. Canadian franchisors that build flexibility into their US documents, supply chains and operating systems will be better positioned to protect franchisee economics and continue growing despite political volatility. For existing US systems, now is the time to audit exposure and update the playbook. For franchisors planning US expansion, tariff planning should be part of the market‑entry analysis from the beginning. In a stable trade environment, supply‑chain details may feel operational. In a trade war, they become strategic.
Victor Turcanu is a partner at Tannenbaum Helpern Syracuse and Hirschtritt LLP, advising franchise brands on cross-border expansion, regulatory compliance and franchise agreement structuring across Canadian and US markets.
