Franchising represents a major component of Canada’s economic health, and we expect the number of franchised businesses across the country to grow.
If you want to start your own business, a franchise can be a great way to increase your chances for success. As a franchisee in a major network, you can expect to benefit from a well-known brand with a proven business concept. This, along with the network’s professional marketing, national advertising, specialized training, and centralized purchasing, will – statistically – make you more likely to succeed with a well-established franchise than with a non-franchised independent business.
But before you get started, it’s important to remember that you may not be able to rely on the business for income in the first few years of operation, and the business may even end up being a burden. In my experience, here are the top things that should be considered to determine if franchising is right for you.
Franchise track record
One of the first things to consider is the franchise brand. When choosing a franchise, it’s common for prospective franchisees to consider growth potential. Look for a franchise that’s a good fit for you, and do your research. See what the media is writing about the franchise, speak with customers, and visit existing locations. This will help provide a full picture of the franchise brand, as well as ensure that you’re committing to a model that you can support.
The (franchise) network
When choosing a franchise, most franchisees focus only on the business model they are looking to operate. But all too often, franchisees neglect to look at the franchise network itself. The network – how the franchisor is going to support the franchise – is a vital component of long-term success.
For franchisees, data can be a powerful tool and provide insight into the strategies that help fellow franchisees at a store level. The franchise brands that leverage data (and analyze that data) can tailor systems for various regions or cities. As a franchisee researching a brand, understanding how that brand deploys data and analytic capabilities to help create successful franchises will be the most important item to consider.
Longevity represents another vital trait to consider for a franchise. Some franchises pop up based on the latest consumer trends; they may well have excellent business models, but they won’t succeed without a sustained consumer appetite. Market research will help ensure that you are becoming a franchisee in a business with a long-term future.
The initial franchisee fee is a one-time, up-front fee that allows you to use the franchisor’s business system or products and is due upon signing the franchise agreement. In most cases, the franchise fee is non-refundable but your franchisee agreement will outline these terms. The franchise fee itself varies from franchise to franchise and could be used to help support the costs of site development, product development, training, marketing, and access to suppliers.
You will also want to know the regular, recurring fees – royalties and advertising fees are often paid as a percentage of sales to the franchisor on a weekly or monthly basis. Make sure you understand how royalties and advertising fees affect your projected financials and potential income.
Expansion and growth
Some franchise networks will allow you to work within a protected territory. This can prevent other franchisees within your same brand opening up near your business and competing against you. Your franchise agreement will outline if and how the territory is protected, utilizing population size, drive time map, geographic area, or some other form indicated. This can sometimes be negotiated within the franchise agreement. Not every network will provide territory rights, so it’s a good question to ask a prospective franchise brand. If they don’t have territory rights, it’s not necessarily a negative; each franchise is set up differently and it could simply mean more competition.
Franchising is on the rise in Canada, and it is here to stay. For those that are looking to start a business on their own, and with the right preparation, franchising is an exciting model with a lot of opportunities.
Joseph Pisani is the Director North American Industry Sectors, Franchise Finance for BMO Bank of Montreal (BMO). Visit bmo.com/franchising for more information.