Should You Open a Franchise Business?

Franchises are everywhere. Across Canada, franchises such as Tim Hortons and Subway exist in even the smallest hamlets. Many of these businesses do quite well for one simple reason: residents and tourists recognize the brands and choose them based on price and a consistent product; they know what to expect every time they visit a franchised business.

However, there is more to a franchise business than standardized products and services. Long-term success of a franchise ultimately lies with the franchisee’s (owner of a franchise location) ability to make a customer’s experience memorable.

Deciding to open a franchise business is a very personal decision. You are licensing a successful business model, and for it, you are trading the right to make some of the important decisions about your business. You are not an employee but you are also not the top boss; you must follow the franchisor’s rules. You must decide if having the odds tipped in your favor for success is worth having to give up some of the authority when it comes to decision making.

There is a lot to consider when thinking of opening a franchise business. It is not the same as opening a new business without the support of a franchise. Here are some general pros to opening a franchise business:

  • Security: The business model of your chosen franchise has proven to be a successful one (providing you’ve done your research and chosen a franchise with a good track record). This increases your odds of long-term financial success.
  • Training: In order to ensure that new stores run efficiently, most franchisors offer training sessions for new franchisees. The training will help you avoid making the common mistakes new business owners often do.
  • Built-in initial customers: People will recognize the brand on your store signs and will come in because they like the product or service. Note that it is up to you and your employees to build customer loyalty at your specific location!
  • No marketing required: In most cases, the franchise head office takes care of advertisements and promotions for the company (of course, payments for national advertising campaigns tend to come out of franchise fees or royalty payments charged to all the franchises).

There are also some negative aspects that you should consider before even choosing a franchise to research. Here are some general cons:

  • Predetermined operating rules: You have less control over how to run your business, and in some cases, even where the business is located. You may be required to order from certain suppliers, keep specific hours of operation, wear uniforms, and/or do your bookkeeping the way the franchisor requires.
  • Initial franchise fee and royalty payments: The initial franchise fee which is used to open your business can range from $10,000 to well over $100,000. Royalty payments are charged for the right to use the franchise’s license, and they continue for as long as your business exists. Even if your business does not have a profitable month, it is likely that you must continue to pay these fees. The cost of the fee greatly varies from less than 1 percent to more than 20 percent of gross sales.
  • Advertising fees: These are required to help the franchisor advertise the entire business and they do not always support your particular outlet.
  • Risk of termination: A franchisor can terminate your right to operate for several reasons. This is a risk because of the investment you may put into your franchise over years of operation.

Seriously consider these points

If the pros outweigh the cons, then your next step may be choosing a franchise. What kind of business do you want to run? Choose a franchise that offers products or services you genuinely love.

Also important is to choose an ethically-run franchise. The way to do this is to perform franchise validation – meet with other franchisees and discuss their experiences operating their businesses. You should ask questions about the training process, level of continued support, products and services offered by the franchisor, and of course, if the franchisee is satisfied with how they are treated by the franchisor. The answers you receive should help you decide whether or not you want to proceed with approaching your prospective franchisor.

You may also want to check with your national franchise association for information on the company in which you are interested. In Canada, the Canadian Franchise Association and in the United States the International Franchise Association have information for prospective franchisees.

To be listed as a member of a national franchise association, companies must be verified as followers of the association’s code of ethics; this should provide some assurance to you. The association websites also provide checklists of questions to ask the franchisor as well as information about initial franchise fees and where franchises are available to be opened in your area.

In the end, whichever company you choose, seek advice from a lawyer before signing any franchise agreements; they are legally binding agreements that are written with the franchisor’s interests in mind. For example, if you are opening your business in Canada, you should watch for companies that do not create Canadian agreements. Signing a US agreement may require you to follow the laws of a US state rather than the city or province in which you live or operate the business. This may mean trouble for you in the future if Canadian and American laws conflict on a certain topic.

As with any legal agreement, read it carefully and ask questions. If you are unhappy with any non-negotiable elements, consider a different franchise.

Aboutbuying-a-franchise-in-canada-large In his book Buying a Franchise in Canada, lawyer Tony Wilson discusses the need for careful scrutiny of franchise agreements (for Canadian franchisees). Now in its second edition, the book has become the must read resource for people interested in franchises as a business.

You can learn more about the book and read the table of contents and initial chapters in our online shop.

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