franchise is a clone of a successful business. The franchisor has developed
a system for reproducing his business (often right down to the last detail).
As a franchisee, you rent the franchisor's trademark and method of doing
A franchise agreement is a contract which is entered into between the
franchisor, and the franchisee (and any guarantors, or others) in which
the relationship between the franchisor and franchisee (and others) is
described, in detail.
Acts in Canada
Alberta and Ontario
are the only provinces to have specific Franchise Acts. Alberta's
Franchises Act went into effect on November 1, 1995. Ontario modeled
its legislation on the Alberta Franchises Act. It went into effect on
These Acts provide
for full disclosure of relevant facts and offer additional protection
to prospective franchisees.
Buying a Franchise is a Popular Choice
Buying a franchise
is a popular choice for starting a business for the following reasons:
is selling a business that has been successful in other areas;
Often the franchise has
instant name recognition and a known quality of product which is attractive
to potential customers;
Most franchisors offer some
degree of ongoing marketing and operational support;
As a franchisee, you may
benefit from the franchisor's marketing campaigns, or have lower inventory
costs because of the franchisor's suppliers.
Anyone considering buying
a franchise needs to carefully investigate all aspects of the franchisor
- franchisee relationship, as well as the track record of the particular
franchise under consideration.
The Royal Bank of Canada
has identified the following guide
to buying a franchise:
franchise brand long term value that is sustainable and/or is
being enhanced. Why is the product or service better sold by a franchise
in general, and that franchise in particular, rather that by a non-franchised
Examine the 4P's of Marketing for that franchise system's products
and services in light of ongoing demographic changes, economic cycles,
continuing technological advancement and existing and potential competition:
What is being sold to the end user and how does the end user
feel about the quality of that product or service? Is the product
or service unique or differentiated in the market place and
is it protected by copyrights or patents?
is the product/service well priced to value and with respect
to the competition?
Are the products/services sold via the most effective locations
or types of sites?
Is the product monitored effectively and well understood by
Identifying Stronger Franchisors:
What is the reputation of the franchisor? Are they a member
in good standing of relevant industry trade associations - eg.
The Canadian Franchise Association?
Record and Quality of Relationships: Find out how existing
franchisees are doing and how they feel about their franchise
system. Find out if any franchisees have left the system, what
prompted them to leave and whether their terms of departure
were mutually satisfactory.
Strength: How strong is the franchisor financially? Are
you able to view financial information about the franchisor?
Is this information audited or externally prepared?
How strong is management with respect to tenure, expertise,
and experience? Do head office and field management have a proven
ability to deliver?
Does the franchisor provide current disclosure documents that
fully comply with existing legislation?
Franchise System: Key Success Factors That Differentiate Strong
Selection: Does the franchise system have a method of
picking sites and how successfully have these sites performed?
Selection: Does the franchise system have a method of
choosing its franchisees and have those franchisees stayed
with the system or is there an unusually high churning of
its franchisees? Have the franchisees achieved acceptable
returns on their investment and are they happy with their
and Monitoring: Does the franchise system have the necessary
financial and management controls to identify early warning
signals in its business as a whole as well as in the individual
operations of its franchisees? Does it work effectively and
efficiently with franchisees to work through problems or challenges?
Record: Has the franchise system been successful to date?
Have franchisees done well? What has the failure rate been
and what is the failure rate in related franchises and non-franchised
businesses? What is the relationship like with the key service
providers such as suppliers, banks etc.
Evaluating Your Total Investment
the total cost and breakdown of your investment?
incoming equity is required?
the ongoing financial commitments required - including fees and
royalties, refurbishment schedules and amounts, minimum purchase
the break-even point for the business and how long will it take
to reach break-even? What is he profitability potential of the business?
the 5-year business plan look like and are the franchisor's projection
for that site achievable?
franchisor's projections on other sites been achieved?
whether the franchise system has a financial services package for
franchisees with any of the Canadian chartered banks.
Franchise Agreement: This Should Be Reviewed with an
Independent Lawyer Who Specializes in Franchising.
protect both you and the franchisor?
the rights and obligations of both parties
the agreement cover in detail
all the franchisor's verbal commitments?
it has no
on its account