Many ambitious entrepreneurs purchase a franchise operation for various reasons. They may love and admire a particular brand, see an opportunity to open in an underserved market, or want to run a business that leverages the success and reputation of a respected name. Whichever reason applies to you, opening an established franchise is often much easier than building a brand from scratch.
However, before you consider buying a franchise, there are several steps you should take to protect yourself and your investment.
1. Understand what franchising means
This might seem like a no-brainer, but there might be some aspects of franchising that you are not aware of that can impact you down the road.
The relationship between the franchisee (you) and the franchisor (the established business) is based on a Franchise Agreement. It’s important to understand that both parties remain legally and financially independent of one another but still bound by the agreement.
The franchisor grants you the right to operate a business using the franchisor’s trademarks and branding based on their model, and the franchisor will often assist you in implementing the requirements of their franchise system. There is usually a strict set of guidelines and policies that must be followed by the franchisee when running the business. As a franchisee, you may be required to pay the franchisor an initial franchise fee, ongoing royalties, service fees, and technology fees.
There are many other nuances you need to be aware of before entering an agreement. An experienced franchise lawyer can help you understand both the big picture and the little details of franchising.
2. Examine the pros and cons of being a franchisee
Franchising allows entrepreneurs to make money running a business based on a proven concept and existing trademarks. Customers tend to buy from brands they are already familiar with and trust, making this model attractive to business owners. Still, franchising might not be the best fit for everyone.
The below samples of the pros and cons can help you decide if franchising would work for you.
Pros of franchising
- In many cases, there is instant brand awareness and faster sales
- Your business is built on an established concept that is usually proven to make many franchisees money
- You get access to a strong built-in network of experts
- You can advertise your business using proven marketing tools
- The franchisor may carry out significant advertising campaigns that will lead to more customers for the franchisees
- There is often less risk involved than starting an unknown brand from scratch
Cons of franchising
- You have less freedom and less room for creativity in any aspect of the business
- You might have little to no input on where you can operate your franchise
- You must fulfill your financial obligations to the franchisor
- You must follow the rules and policies of the franchisor without exception
- Franchise Agreements are usually many years in length, which will restrict your future business options for a significant period of time
Some entrepreneurs might find that running a franchise will stifle their need to run their business their way, and need to be independent of any external entity making decisions for them. If you do not see yourself as one to acquiesce to the expectations of a franchisor, it might be prudent to think twice before entering a franchise agreement.
3. Talk to other franchisees
Many franchises are well-known brands that generally do quite well when managed and marketed correctly. However, what does the actual franchisee experience look like? The best way to find out is to do your homework, which starts by visiting existing franchises.
Pay regular visits to a franchise, study the customer experience, have a look “behind the scenes”, and talk to the franchisee. Ask them lots of questions about their overall franchisee experience, including how easy it is to work with the franchisor, staffing costs, lease agreements, cash flow, marketing support, and anything else that concerns you.
Doing your homework beforehand will help you determine whether the franchisor would be a good fit for your work style and revenue expectations.
4. Secure your financing
Many financial institutions are more willing to finance a franchise operation than an independent one as they are considered less risky. It is important to note, however, that banks generally do not fund the initial franchise start-up fee. You must also personally be a reasonable credit risk to potentially qualify for funding.
You will need to present financial documents such as a franchise financial plan, budgeted financial statements, and a cash flow plan to your financial institution. Include all expected costs, such as equipment purchases, staffing, and marketing fees. Also, ensure you have enough capital to cover your forecasted business and personal living expenses for at least the first year.
5. Read the Financial Disclosure Document (FDD)
Most provinces in Canada require that franchisors provide an FDD to potential franchisees. Under the Arthur Wishart (Franchise Disclosure) Act, franchisors in Ontario must provide an FDD to franchisees at least 14 days before the franchisee signs an agreement. With the exception of a deposit toward the initial franchise fee, the franchisee cannot make franchise-related payments to the franchisor during the 14 days.
FDDs generally include details about the history of the business, fees, rules and restrictions, training provided by the franchisor, turnover rates, renewal terms, bankruptcy filings by the franchisor, litigation involving the company or its executives, and more. These documents can be quite lengthy, but be sure to absorb every detail to ensure you can make an informed decision before proceeding.
6. Hire the right team of specialists
Launching any business, including a franchise, can be a daunting proposition, whether youare new to entrepreneurship or have owned multiple operations in the past. To help protect your investment and get you off to a strong start, it is best to have a team of professionals on your side, such as accountants, tax specialists, business advisors, and lawyers specializing in franchise law.
The franchise lawyers at Shnier Mackenzie Law and Policy Consulting, PC, have a well-established track record of helping franchisees in a variety of industries achieve business success with sound, efficient, and creative law solutions. We will help you identify and mitigate risks, explain your rights and responsibilities as a franchise owner, and assist you in navigating the complex regulatory, policy, and legal issues involved in buying a franchise.
Call Jonathan Mackenzie, B.A., J.D at Shnier Mackenzie Law & Policy Consulting, PC, at 416-781-0800 ext. 102 for a free consultation early in the process to help protect your investment.