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Franchising

Franchising is essentially a system of distribution under which an individually owned business is operated as though it were part of a large chain, complete with trademarks, uniform symbols, design, equipment, and standardized products or services.

Seeking a Franchise

A good place to start looking for franchise opportunities is the business section of your local newspaper. Also, franchisors frequently run ads regarding opportunities available in trade magazines and the national press.

Another good Canadian reference is the Franchise Annual, published by Info Press Inc. This publication lists both Canadian and American available franchises, their fees, and is updated regularly. Opportunities Canada, which is published twice yearly, is another useful publication for anyone trying to find a franchise.

Franchising offers novice entrepreneurs a chance to own their own business and helps to minimize the chance of failure. Failure rates in franchising are estimated to be 80% lower than the independent small business according the Starting a Successful Business in Canada Guide. The main reason to consider buying a franchise is that it allows you to take advantage of the franchisor’s business experience and to capitalize on a proven business system.

The initial cost of a franchise normally includes the franchise fee and the cost to set up the operation. Ongoing costs include royalties and advertising

Pros and Cons

Pro: The principal advantage of franchising is that it enables you to capitalize on experience that you might otherwise have to obtain through trial and error. Therefore results are predictable due to tested marketing systems.

Con: By franchising you will lose your personal identity to that of the parent company. If you enjoy having your business known by your name, a franchise business may not be for you.

Pro: Assistance in financing. A franchisor will often make arrangements with a lending institution to lend a franchisee funds. Also, operating expenses can be lowered due to group buying power.

Con: Franchisees must abide by the restrictions placed on them in operating the business by the franchise. There is not as much control, and contrary to the many “be your own boss” lures in franchise advertisement, you may not truly “be your own boss”.

Pro: The parent company uses its experience when deciding business locations, management, advertisements, publicity, and other product research and development to enable franchisees to start and operate its outlets with efficiency and profitability.

Con: A problem may arise after the contract has expired. If an individual’s store does very well (for example due to a good location) then the franchisor may want to buy the next contract so that they will receive all the profits and not just a percentage of the monthly gross.

After some preliminary enquiries have been made, and you have tentatively expressed interest in one or more companies, the next step is to research the franchisor’s reputation.

1. One of the best techniques for checking is to ask the company to provide you with a list of its existing franchisees in the area you are considering. From this list, you should select several names and visit their offices during your business hours. Ask for their views on the franchisor.
2. Ask when the company was started and how long it was in business before it started franchising. The answer to this question will tell you whether the product or franchising came first; if the company was successful with its product before franchising, it is likely to be successful franchising.
3. Try to obtain the financial statements of the franchisor. Have an accountant check them to see if the major income of the franchisor is from initial franchise fees rather than ongoing royalties. If so, this may indicate the franchisor is in business to sell franchises rather than to develop a franchising system.
4. Determine what the total initial franchise fee is and what you receive for it. Does the price cover only the right to use a name or trademark, or are you also buying initial training, start-up inventory and equipment? Is the franchise fee worth the bundle of goods you receive?
5. Ask about the territory offered. How is your territory defined, is it exclusive, is it large enough for you to make money, and what are your expansion possibilities?
6. What royalties must be paid to the franchisor? Are they reasonable?
7. How does the franchise compare to others in the same industry?

Franchise Agreement

The license of franchise contract is your key to franchising success. A franchise contract is an investment agreement between the franchisor, known as the parent company, and the franchisee, the investor.

Contracts may range from a simple memorandum of agreement to highly complex documents in which every detail in the operation of the business is highlighted. It should be noted that there is no standard franchise agreement any more than there is a code of business practice.

Factors to look for in a contract:

• Does the contract cover in detail all the franchisor’s verbal promises?
• Are the franchise, the location and the territory clearly described in the contract?
• Does the contract clearly describe the duration, type and cost of the training provided by the franchisor?
• What type of records and reports are you required to provide to the franchisor?
• In all cases, you should never sign a franchise contract without consulting a lawyer.