What is a franchise?
A franchise is a method of marketing products or services based on a collaboration agreement (the franchise agreement) between an established business – the franchisor – and one or more other businesses – the franchisees, which remain legally and financially independent.
The franchisor:
- Grants the franchisee the right to operate a business based on the concept developed by the franchisor
- Helps the franchisee implement the concept
In return:
- The franchisee undertakes to respect the rules of the franchise network
- Pays a start-up fee (initial franchise fee) and royalties to the franchisor
What are the pros and cons?
A franchise is a bit like a GPS – it’s very useful for getting where you want to go more easily and quickly. But a GPS can also be less practical than an old-fashioned paper map in some situations.
Pros
Whether the franchise you start is a restaurant or store or provides a service, you can expect to benefit from:
- A strong network and extensive expertise
- Greater brand awareness
- A proven business model
- Powerful marketing tools
That’s why owning a franchise is considered less risky than creating your own brand.
What’s more with franchises, the concept is usually already a proven winner. For example, you’ll probably generate sales faster. Franchises are also a great way to start fresh in a new line of work.
Cons
Franchisees have less freedom. They have to comply with certain requirements and follow established rules and protocols. Each franchisee must honour their financial obligations to the franchisor.
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How to start a franchise
Not all franchises are created equal. While they do come with a detailed business model, they are no guarantee of success. Doing due diligence will help you determine which formula is right for you.
Start by considering your own experience and goals. What are hoping to achieve? Do you have the right personality and required knowledge and skills? Is this the right time to start a business? Are the banner and its customers in line with your values and aspirations? This is a really important question because you’re going to have to work long and hard to make things a success.
Then look at trends and the competition and ask yourself which sector you want to work in. Will the service or product still be relevant in 5, 10 or even 15 years? How many years do you intend to spend on this?
Fortunately, there are many resources available to help you get started.
Do your homework
Experts recommend paying regular visits to the franchise network you’re interested in, studying the customer experience and products and services, and asking questions. It’s also a good idea to look into whether the franchisor has ever been sued and, if so, why.
Before making a decision, it is also recommended that you:
- Consult with specialists (lawyers, accountants, account managers, tax specialists)
- Analyze the terms, agreements, approach and advantages of the franchise network.
When you join a business team, you need to go in with your eyes wide open. Once you’ve made your choice, carefully read the franchisor’s contract. You should have this contract checked by a franchise lawyer who has no ties to the franchisor.
Assess the market and draw up a financial plan
In some cases, the franchisor will undertake a market study and refine the financial plan for you. In other situations, it’s up to you as the franchisee to do that. You’ll also need to do market research to determine the ideal location for the franchise, then draft certain financial documents, including the:
- Franchise financing plan (a realistic assessment of your needs and resources)
- Budgeted financial statements
- Cash flow plan
If you do not have specific skills in accounting and financial analysis, seek the assistance of a public accountant, preferably one specializing in franchise accounting.
Obtain the necessary financing
Generally speaking, financial institutions consider a franchise to be less risky than an independent business. Well-established banners are more likely to be successful, making banks more willing to finance a franchise. It is important to note that banks will generally not fund the initial franchise fees.
The borrower must still offer certain guarantees, be credible and have a good credit record. A financial consultant can assist with short-term financing strategies to help you get your project off the ground.
What are the legal obligations?
The legal framework between franchisors and franchisees is not the same in all provinces. Some Canadian provinces regulate franchising. This is not the case in Quebec, where the general provisions of the Civil Code of Quebec apply. It can however be worthwhile to look at the issues other provinces do regulate, just to be on the safe side.
Your franchise starter kit
Does starting a franchise appeal to you? Some online solutions are available to help you identify business opportunities through quantitative criteria such as your budget and qualitative criteria such as your job expectations, experience, personal affinity, entrepreneur profile, community and even way of life.
Franchise trade shows, held annually in major Canadian cities, draw on a number of good resources. Among others, the Canadian Franchise Association and, in Quebec, Conseil québécois de la franchise, share numerous resources to help educate franchisees. These associations also offer training and publications you should consider before embarking on a franchise project.
Look for a franchisor who is a member of Conseil québécois de la franchise or the Canadian Franchise Association.
Becoming a franchisee requires preparation, consultation and reflection. The numerous benefits of this business model appeal to many entrepreneurs. Choosing the franchise model to start a business is certainly an option to consider to maximize your chances of success.
We’re there to help you start up your franchise business.
