Buying a Franchise from a U.S. Franchisor

from Ned Levitt, senior partner, Dickinson Wright LLP.

In the world of franchising, Canada occupies a unique position.

Geographically, we share a common border with the U.S. franchise behemoth, as does Mexico, but Canadians are more like Americans than any other people on the planet.  This means that American franchise successes are more likely to be repeated in Canada than anywhere else. With that promise of success, for decades many Canadians have sought out and invested in U.S. franchises; some have achieved incredible results (witness the success of McDonalds’s Canada) and some have failed miserably (anyone had a Red Barn burger recently?).

There are so many reasons why one such franchise investment succeeds and another fails that it would take at least a book, if not several, to do justice to the question.  However, what follows is a brief look at some of the most common and arguably obvious factors that spell the difference between success and failure.

Will the Concept Work in Canada?

While we Canadians look, dress and talk (sort of!) like Americans, there are some real differences in our cultures and buying habits. The problem is, however, these differences are not obvious. Which means Canadian franchise investors and, for that matter, U.S. franchisors, often make assumptions about the Canadian market that are not true or not true enough.  So, a very important question to get an answer to is; will the concept work in Canada?

Changes to the Concept

Even if the basic concept is workable in the Canadian market, will the concept need some adaptions to make it more acceptable and/or profitable in Canada?  It would be useful for the prospective Canadian investor to learn what Canadian market studies the franchisor has done and what changes to the concept are contemplated for the Canadian market.

Can the U.S. Franchisor Support the System in Canada?

In most cases, one of the principal reasons for buying a franchise of a U.S. concept, is to acquire the know-how in that business by capitalizing on the franchisor’s experience and knowledge gained over many years and with much investment. Sounds good!  But if the U.S. franchisor does not have a sufficient infrastructure to provide the critical and needed support to the Canadian investor, all of that great knowledge will be of little value. This should lead to an examination of the franchisor’s capabilities to support a Canadian franchisee, at least in the early years.

Is There Enough Capital?

A Canadian expansion of a U.S. franchise system, is, in many ways, a startup.  Of course, with the know-how of the franchisor, it is much further along than a brand new business concept, but the need for working capital will be significant while the business is being established in Canada. The Canadian investor will want to know that the U.S. franchisor has sufficient capital for the extra startup costs in Canada.

Advertising Fund

Will the advertising contributions, if required, be to a U.S. advertising fund or one dedicated to the Canadian Market? Needless to say, in the early years of a Canadian expansion there may not be a lot of advertising dollars to go around, but it is usually better for a Canadian franchisee to pool their resources with other Canadian franchisees and spend those resources within the Canadian market.

Supply Chain

If there are critical products for the success of the Canadian franchisee, will they be supplied by the franchisor, from other suppliers in the U.S. or sourced locally in Canada?  This can be a critical area affecting the Canadian franchisee’s ability to meet any Canadian demand and the franchisee’s bottom line.

Currency

Where there are fees payable to the U.S. franchisor or purchases to made from the U.S. franchisor or other U.S. suppliers and the currency for payment is U.S. dollars, consideration should be given to future currency fluctuations.  An otherwise good deal may transform into a bad one, if exchange rates move too much in the wrong direction.

There is lots more to consider, but this is a good start.

Edward (Ned) Levitt is a senior partner of Dickinson Wright LLP, Toronto, Canada, and Chair of its Franchise Law Group.  He served as General Counsel to Canadian Franchise Association from 2000 to 2007 and, as a member of the Ontario Franchise Sector Working Team, was instrumental in the creation of Ontario’s franchise legislation.  Among his many publications is Canadian Franchise Legislation published by Butterworths/Lexis Nexus.

Website: www.dickinson-wright.com/
Email: [email protected]