Buying a Franchise

Do your research before buying a franchise.

Many people who want to be self-employed consider buying a franchise. Unfortunately, it is all too easy to get caught up in the excitement of the franchise concept, particularly in light of hugely successful franchises such as Tim Hortons or McDonald’s. It is, however, best to weigh the pros and cons of franchise ownership before you decide whether a franchise is right for you.

Franchise Defined

The foundation of any franchise is the granting of a licence by the franchisor to another individual or company (the franchisee) to operate under the franchisor’s name. Most franchisors have an established business model the franchisee must follow. As well, the franchisor provides assistance for a set length of time. Most franchises include a renewal option.

Advantages of Owning a Franchise

Franchise ownership has many advantages:

• The business model is already established and successful.
• Commonalities, such as floor plan, equipment, supplies and accounting are already in place.
• Advertising and trade names are already recognizable.
• Tested training programs will teach you how to optimize use of space and employees.
• The franchisor may be able to help you obtain financing by providing reliable cash and profit projections based upon years of experience.
• A good franchisor will have researched the geographic and demographic components to know the best operating location (e.g., many fast-food franchises seek locations in business, industrial or school districts to target the lunch-time crowds).
• Franchisors can negotiate volume discounts.
• Customers align with names they know because of the consistency of product and value for dollar spent.
• The franchisee has support from head office and other franchisees.

Control of day-to-day operations is the responsibility of the franchisee. However, the franchisor retains absolute control over quality, service protocol, advertising, and the products or services offered. The franchisee must embrace this arrangement as the tried and proven process that underlies the franchise’s success.

Buying into a franchise is not a one-time expenditure.

Ongoing Costs

Buying into a franchise is not a one-time expenditure. After the initial investment, the franchisee is usually required to pay an ongoing fee based on a percentage of sales or a markup on products that must be purchased from the franchisor. Initial costs of a franchise are usually determined by the success of the franchise. Purchase of a franchise may require a combination of cash and borrowed funds.

The franchisee may also have to finance the cost of equipment, furniture and leasehold improvements preconfigured by the franchisor and a yearly royalty for use of the name. In exchange, the franchisor should provide continuous training, quality control reviews, advertising and marketing, product development and, of course, management guidance.

Many franchisors guarantee they will not sell another franchise within a protected territory. This promise is as important to the franchisor as it is to the franchisee since closing an unsuccessful franchise outlet not only cuts into the franchisor’s revenue but also suggests to the public that perhaps something is amiss with the product, the business model or head office management.

Anyone thinking about purchasing a franchise should not assume that running the franchise will be easier than running any other business just because it is a franchise. Certainly, a lot of the start-up advantages will be provided by the business model of the franchisor. Beyond that, however, it is like any other business: hard work, dedication, consistent management and long hours.

10 Steps to Take before Committing

1. Determine your own areas of interest and expertise.
2. Research the franchises available in your areas of interest and expertise.
3. Research the franchise’s history and operations:
• location of head office
• length of time in business
• number of franchises in your city or province
• any legal problems between franchisees and franchisor.
4. Check for availability of the franchisor’s products or services in your area.
5. Determine whether you can finance the operation. Many franchise websites provide a realistic idea of the cost and conditions of joining the franchise to ensure that only those with serious intentions and sufficient capital try to take the next step.
6. Meet with the franchisor’s representative to find out the upfront cost and to get revenue, cost and profit projections for the area in which you wish to operate. Ask about the support to be provided and, of course, all other costs and conditions attached to the franchise. Review a copy of their standard franchise agreement. Ask for names of franchise operators within the area and arrange face-to-face meetings without the franchisor present to ask them a well-prepared set of questions.
7. Meet with your CPA. Crunch any sales, costs and capital expenditure numbers the franchisor may have provided. Objectively analyze the ability of the proposed location to support the operations. (Lenders will probably ask for income and cash flow projections as well as an estimate of any proposed capital expenditures.) Be realistic. If, for instance, 5,000 hamburgers must be sold each week to break even and there are only 10,000 people in your territory, you can only conclude that any outlet here will not be successful.
8. Review the preliminary contract and highlight areas you do not understand. Then, review the entire contract again in detail with your accountant and lawyer. Leave nothing to chance. Make sure you understand everything.
9. If you are still convinced this venture is right for you, approach a financial institution to determine the criteria for obtaining a business loan.
10. When financing is approved, meet with the franchisor to put the papers in order. Before signing anything, however, review the final documents with your accountant and your lawyer to make sure you fully understand your legal obligations and what ramifications failure to meet the conditions of the contract will have for your business and your personal life.

Choose Your Franchisor Carefully

Sources of information on franchising are almost limitless. A web-based search of the words “franchises in Canada” will provide more than 44 million results. You will soon find a host of franchise opportunities as well as an overabundance of positive sales hype.

Franchises can be wonderful business opportunities for those fortunate enough to align themselves with good franchisors that support their franchisees. On the flip side, committing your personal wealth to franchisors that are only interested in lining their own pockets can be a costly emotional and financial experience.

Do your research and choose wisely.