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Buying a Franchise

Buying a Franchise

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MANAGEMENT

franchise

Do your research before buying a franchise.

Many people who want to be self-employed consider
buying a franchise. Unfortunately, it is all too easy
to get caught up in the excitement of the franchise
concept, particularly in light of hugely successful
franchises such as Tim Hortons or McDonald’s. It is,
however, best to weigh the pros and cons of franchise
ownership before you decide whether a franchise is
right for you.

Franchise Defined

The foundation of any franchise is the granting of a
licence by the franchisor to another individual or company
(the franchisee) to operate under the franchisor’s
name. Most franchisors have an established business model the franchisee must follow. As well, the franchisor
provides assistance for a set length of time. Most
franchises include a renewal option.

Advantages of Owning a Franchise

Franchise ownership has many advantages:

  • The business model is already established and
    successful.
  • Commonalities, such as floor plan, equipment,
    supplies and accounting are already in place.
  • Advertising and trade names are already
    recognizable.
  • Tested training programs will teach you how to
    optimize use of space and employees.
  • The franchisor may be able to help you obtain
    financing by providing reliable cash and profit
    projections based upon years of experience.
  • A good franchisor will have researched the geographic
    and demographic components to know
    the best operating location (e.g., many fast-food
    franchises seek locations in business, industrial or
    school districts to target the lunch-time crowds).
  • Franchisors can negotiate volume discounts.
  • Customers align with names they know because
    of the consistency of product and value for dollar
    spent.
  • The franchisee has support from head office and
    other franchisees.

Control of day-to-day operations is the responsibility of
the franchisee. However, the franchisor retains absolute
control over quality, service protocol, advertising, and
the products or services offered. The franchisee must
embrace this arrangement as the tried and proven
process that underlies the franchise’s success.

Buying into a franchise is not
a one-time expenditure.

Ongoing Costs

Buying into a franchise is not a one-time expenditure.
After the initial investment, the franchisee is
usually required to pay an ongoing fee based on a
percentage of sales or a markup on products that must be purchased from the franchisor. Initial costs of a
franchise are usually determined by the success of
the franchise. Purchase of a franchise may require a
combination of cash and borrowed funds.

The franchisee may also have to finance the cost of
equipment, furniture and leasehold improvements
preconfigured by the franchisor and a yearly royalty
for use of the name. In exchange, the franchisor should
provide continuous training, quality control reviews,
advertising and marketing, product development and,
of course, management guidance.

Many franchisors guarantee they will not sell another
franchise within a protected territory. This promise
is as important to the franchisor as it is to the franchisee
since closing an unsuccessful franchise outlet
not only cuts into the franchisor’s revenue but also
suggests to the public that perhaps something is amiss
with the product, the business model or head office
management.

Anyone thinking about purchasing a franchise should
not assume that running the franchise will be easier
than running any other business just because it is a
franchise. Certainly, a lot of the start-up advantages
will be provided by the business model of the franchisor.
Beyond that, however, it is like any other business:
hard work, dedication, consistent management and
long hours.

10 Steps to Take before Committing

  1. Determine your own areas of interest and
    expertise.
  2. Research the franchises available in your areas of
    interest and expertise.
  3. Research the franchise’s history and operations:
    • location of head office
    • length of time in business
    • number of franchises in your city or province
    • any legal problems between franchisees and
      franchisor.
  4. Check for availability of the franchisor’s products
    or services in your area.
  5. Determine whether you can finance the operation.
    Many franchise websites provide a realistic idea of
    the cost and conditions of joining the franchise to
    ensure that only those with serious intentions and
    sufficient capital try to take the next step.
  6. Meet with the franchisor’s representative to find
    out the upfront cost and to get revenue, cost and
    profit projections for the area in which you wish to
    operate. Ask about the support to be provided and,
    of course, all other costs and conditions attached
    to the franchise. Review a copy of their standard
    franchise agreement. Ask for names of franchise
    operators within the area and arrange face-to-face
    meetings without the franchisor present to ask
    them a well-prepared set of questions.
  7. Meet with your CPA. Crunch any sales, costs and
    capital expenditure numbers the franchisor may
    have provided. Objectively analyze the ability of
    the proposed location to support the operations.
    (Lenders will probably ask for income and cash
    flow projections as well as an estimate of any
    proposed capital expenditures.) Be realistic. If,
    for instance, 5,000 hamburgers must be sold each
    week to break even and there are only 10,000 people
    in your territory, you can only conclude that
    any outlet here will not be successful.
  8. Review the preliminary contract and highlight
    areas you do not understand. Then, review
    the entire contract again in detail with your accountant and lawyer. Leave nothing to chance.
    Make sure you understand everything.
  9. If you are still convinced this venture is right for
    you, approach a financial institution to determine
    the criteria for obtaining a business loan.
  10. When financing is approved, meet with the franchisor
    to put the papers in order. Before signing
    anything, however, review the final documents
    with your accountant and your lawyer to make
    sure you fully understand your legal obligations
    and what ramifications failure to meet the conditions
    of the contract will have for your business
    and your personal life.

Choose Your Franchisor Carefully

Sources of information on franchising are almost
limitless. A web-based search of the words “franchises
in Canada” will provide more than 44 million results.
You will soon find a host of franchise opportunities as
well as an overabundance of positive sales hype.

Franchises can be wonderful business opportunities for
those fortunate enough to align themselves with good
franchisors that support their franchisees. On the flip
side, committing your personal wealth to franchisors
that are only interested in lining their own pockets can
be a costly emotional and financial experience.

Do your research and choose wisely.

 

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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