Seven Facts and Myths About Franchising in Canada
By CO Staff @canadaone | May 2, 2011
Franchising can be the best of opportunities, or the worst.
If you are considering buying a franchise, it is important for you to do your homework and inform yourself of both the benefits and risks. What's more, you need to prepare yourself to deflect high pressured sales tactics and keep your emotions out of the decision.
Here is a look at some key things to keep in mind if you are thinking of becoming a franchisee.
1. Fact: When you 'buy a franchise' you are buying a distribution system
Franchising differs from a traditional start-up in that you are buying into someone else's product line and system for success. Franchises are a form of distribution, where one party licenses the rights to distribute another party's goods and services, in accordance with their requirements.
In a nutshell, a franchisee negotiates the rights to use someone else's brand name to jump start their business. In most cases this comes along with strict requirements and minimum standards that must be met.
2. Myth: If I become a franchisee my business is guaranteed to succeed
A report on Franchising Law by the Manitoba Law Commission noted that while mature franchises have a much higher likelihood of success, franchise systems that are just starting up fail at the same or greater rates as other small businesses.
The value of a franchise is tied to the establishment of a known system for making money (the franchise system) and the brand name of the products and services being offered, something that takes time to fully establish. Even the best brand name franchise can fail in a particular location, while others thrive.
No business is without risk, so invest your capital as carefully as you can.
3. Fact: Franchises are a long term relationship between two parties, rather like a marriage
By agreeing to distribute the products and services of another company, using their brand name and intellectual property, the franchisor and franchisee become closely entwined in a relationship that lasts as long as the franchise agreement continues.
However in this marriage, control tends to be one-sided to strongly favour the franchisor. This control is important, as it allows that franchisor to maintain standards that in turn preserve the brand being sold.
Before you buy into any franchise you need to carefully review their "disclosure documents", which are the documents that describe how the business is doing financially. Some provinces (Alberta, Ontario, Prince Edward Island and New Brunswick) have legislation that set out what franchisors are required to disclose, while the others rely on contract and case law.
You may not have a lot of choice about the contract you sign, but you can decide whether or not to buy into a particular franchise. It is critical that you get good legal advice from a lawyer with experience in franchise law in your province before you sign a contract. This is an important relationship you will want to continue on an ongoing basis.
4. Myth: Franchisors will exercise too much control and prevent me from being creative
It is true that you will not be able to pursue tangential ideas carte blanche if you buy a franchise. However, that does not mean that you will have no input into future development.
Good franchises will invite comments and collaboration from franchisees, taking into consideration ideas franchisees have for product development and marketing.
Locally, franchisees will often also have opportunities to be creative in the marketing and promotional activities they choose to participate in.
5. Fact: A franchisee operates a distinct business
When you become a franchisee, in most cases you will still create your own business that has financial separate from the main franchise.
Some franchises will provide a complete system, including an accounting system, while others will allow you to manage your own books, sending a detailed profit and loss (P&L) statement to headquarters on a regular basis for the calculation of royalties.
However, while you will own your business that does not mean that you can sell the business, including the franchise agreement, to another party. You will likely own the furniture and equipment — everything within your physical location, but your franchise agreement may stipulate terms for how the franchise license can be transferred to another party. Don't be surprised if those terms strongly favour the franchisor.
6. Myth: I'll have no problem getting bank financing if I buy a franchise
As with all businesses, the success of any individual franchise outlet depends in part on the people who will operate it. A franchise operated by someone with poor management skills and bad credit is a risk, even for a great brand.
Most established franchisors have screening processes in place designed to evaluate potential franchisees. In that case, people who are approved to purchase a franchise outlet will likely meet the criteria for bank financing. Established franchisors will also often have pre-existing relationships with banks that can streamline the financing process.
Regardless, in both applying to purchase a franchise and looking for bank financing, your own experience and financial strength will be important considerations.
It is important to have a good relationship with your banker. Get the conversation started early and also see if your banker can help you find the best franchise opportunities.
7. Fact: Franchise opportunity vary widely, as do the systems and support provided
The benefits in one franchise could be a risk in another.
On one end of the spectrum — one you will want to avoid — are start-up franchises looking to quickly cash in through franchise fees. These franchises may fall short in terms of the systems and support provided to franchisees after the contract is signed.
This doesn't mean that you should not invest in a newer franchise. However, it is important to be particularly careful when doing your research if you are considering this option. Watch out in particular for inaccurate disclosure about financials and the scope of the opportunities, while guarding against any high pressure sales tactics.
At the other end of the spectrum is the large, established franchise with a highly popular brand. While the "fame factor" can have a great appeal and the systems are usually extremely well developed, there are risks here too if the franchisor allows the popularity of the concept to lead to an abundance of franchise outlets in a given geographical area. Watch out here for corporate greed leading to profit gouging at every turn, from the prices of products sold to profit-taking on intangible aspects of the business like lease fees and renovation costs.
An ideal franchise is one that has a proven track record, committed management and a franchisor that is not trying to profit off franchisees at every possible turn. There are plenty of opportunities like this and it is important for a potential franchisee to do his or her research to find them.