Buying A Franchise In Canada
The thought of buying an existing franchise can be exciting, but before you rush into buying that franchise, here are more than 5 extremely important things you need to know, and advice I need to provide you that is specific to you buying a franchise in Canada.
Let’s start at the beginning, and briefly discuss a basic franchise structure.
The owner of a franchise is called the franchisor and it is the franchisor who will allow others to replicate their business model for a fee. Each person, or couple, who “buys into” the franchise and who pay ongoing fees to the franchisor based on the revenues they generate, is called a franchisee.
Regardless of the size and type of franchise you are looking at purchasing understanding some of the reasons why a franchisor or franchisee is selling their business, is critical to avoiding costly mistakes and even understanding if buying a franchise is really a good fit for you.
First lets talk about the franchise agreement.
The problem with a lot of Franchise Agreements are that they are written in such a way that leaves the franchisee (you) with very little to no legal recourse should you ever have a dispute with the owner of the franchise.
Think about this for a moment – it is very important you clearly understand this.
A poorly written, clearly biased Franchise Agreement:
- Can be the reason why a Franchisee wants to sell their business.
- Can be the reason a Franchisor wants to sell their franchise – because the franchise is simply not attracting any franchisees.
Let’s now talk about franchise fees.
Aside from franchise application fees and / or franchise agreement transfer fees, there are going to be ongoing fees – royalties. Royalty fees usually consist of two fees – a franchise royalty fee plus a marketing fee.
From the fees I’ve seem, the franchise royalty fee might range between 6% – 12% of the gross revenues you generate.
The marketing fee might range between 1% – 4% even upto 7% of the gross revenues you generate!
Furthermore, the franchise agreement might be written in such a way where the franchise royalty fees increase, the more money you make.
Fees can add up to a significant amount of money being paid to the franchise. Tens of thousands of dollars – but as the saying goes – “but wait, there’s more”…
Some medium-sized franchised locations are paying marketing fees that get applied to a “national marketing” budget. And this is a problem for a lot of franchisee owners because what they really need is local (targeted) marketing to help their business.
So with no other choice, these franchisee owners have to spend money (on top of the marketing fee), to get the local targeted marketing that they need – further depleting the business profits.
Fees are often a reason why a franchisee will be selling their business.
Here’s my advice when it comes to buying an existing Canadian franchise.
1. Review BOTH the Franchise and the Franchisee business that is for sale.
When considering the purchase of a franchisees business, not only should you thoroughly review the franchisee’s business that is for sale, but you MUST review the franchise itself!
- Does the franchise have a good reputation?
- Do the owners of the franchise demonstrate honesty and trustworthiness?
- Does the franchise support each and every franchisee?
- Are all the other franchisee’s happy?
- What is the real reason why the franchisee is selling their business?
These are just a few critical answers you need to have answered – and you need to independently verify each of the these answers yourself!
On the other hand, if you have the opportunity to buy the entire franchise from the franchisor, not only do you need to understand why they are selling but you need to review each and every franchisee and franchisee location. You’ll have your work cut out for you, but do not be tempted to cut any corners!
2. Location Location Location.
Consider this for a moment.
If every franchised location is making the same cup of coffee, if every franchised location is making the same sandwich – in exactly the same way with the same ingredients from the same suppliers – what differentiates one franchised location from another?
Location can make the difference between a franchisee making money and a franchisee not making any money at all.
Don’t make the mistake of thinking this issue is only specific to one type or size of franchise – it is not – even large international franchise corporations have franchisees suffering in crappy locations.
As with any business purchase review and analyze the location of the business. A crappy, expensive location might be the reason a franchisee is selling.
3. Read The Franchise Agreement – YOURSELF!
The franchise agreement is a legally binding document between you and the franchise.
You need to read the entire document and be sure you understand 100% of it, before you sign it!
In fact, the same advice I have given you in my article “Lease Agreements – 3 Things You Must Do BEFORE You Sign It” is the same advice that you should apply to the Franchise Agreement.
4. Mandatory Renovations and Improvements.
The wordage in the Franchise Agreement about renovations and improvements is often deliberately vague. What you need to understand before you buy a franchise is when they will likely happen and what the expect costs will be. Be aware that renovation costs can be huge and are in addition to all other franchise fees you pay the franchise. Renovations can shut a business down for weeks – further impacting revenues.
I draw attention to this because I’ve known franchisees trying and sell their business in order to avoid paying for renovations mandated by the franchise.
5. Run the numbers and understand ALL the fees!
Aside from running all the numbers and understanding all the possible fees, you need to take a step back and do the following.
Think for a moment what you could do with all that money if you did not have to pay the franchise – if you bought a business that was not a franchise!
For the kind of money you would be paying the franchise, you could hire an experienced manager or you could hire your own personal advisor. In most cases, I’d bet you’d event have money left over to invest in marketing activities!
I mention this because if you’re attracted to a franchise because they are promising you support – you need to know that there are many great, experienced advisors out there who can help you build a great business of your own and who will give you more value for your money than most franchises out there can, or will offer you. A business that you would have complete control of, not someone else.
Thank you for taking the time to read my article on Buying A Franchise In Canada! My hope is that this information will help you identify the best Canadian Franchise opportunities for your specific wants and needs.
If you enjoyed reading this article and found it helpful and informative, please do take a moment to Comment & Share! Doing so really will help me get my message out to other people just like you, who are searching for such expert advice.