Franchising in Canada: A path to entrepreneurship
Purchasing a franchise is a great way to own a business with brand recognition, proven systems, and ongoing support, while having the flexibility to run your own operation and reduce the common risks of launching an independent business.
What is franchising?
Franchising is a business model that offers an established framework in which an individual or group (the franchisee) is granted the right to operate using the branding, products and operational methods of an established company (the franchisor) in exchange for initial fees, ongoing royalties and other fees (lease admin fee, monthly advertising fee, software or POS, etc.).
“Owning a franchise allows entrepreneurs to be in business for themselves but not by themselves—because they have the support of the parent company,” says Sherry McNeil, President and CEO of the Canadian Franchise Association (CFA).
She adds that the franchisor or head office provide the franchisee with many of the tools they need to operate the business, such as the following:
- brand elements
- operations manuals
- uniforms
- proprietary items
- set systems
- routines
- training and support
McNeil, whose organization represents more than 40,000 franchisees, adds that franchising is more than simply a business model—it’s an innovative and proven model for growth, expansion and scaling a concept or brand.
“It’s a community builder, a job creator and contributes to the economy. Local franchise business owners work, contribute to and live in the community they serve. They hire local people, contribute to the tax base and they also give back to the community,” says McNeil.
A franchisee is an independent small business owner, and handles all aspects of the business, such as hiring employees, setting pay rates, training and creating a staffing schedule.
Owning a franchise allows entrepreneurs to be in business for themselves but not by themselves—because they have the support of the parent company.
Sherry McNeil
President and CEO, Canadian Franchise Association
What franchise opportunities exist in Canada?
McNeil says the franchise industry in Canada is very diverse and offers a wide range of investment and business opportunities. Within the Canadian Franchise Association, there are over 60 different industry segments, with the following list representing but a few:
- retail
- fitness
- restaurants
- senior care
- health and beauty
- mobile pet grooming
- transportation services
- cleaning services
- home inspection
Not all franchises belong to mega-parent companies; many are small or medium-sized, and some are even home-based. For example, within the CFA’s membership, initial investment fees can range from under $50,000 to more than $500,000.
When searching for a franchise opportunity, potential entrepreneurs should look for the CFA member logo, which indicates that the brand has signed on to the CFA’s Code of Ethics.
The pros and cons of owning a franchise
As with any big business investment or decision, there are advantages and disadvantages. Consider the following points to help you decide if buying a franchise is right for you.
Pros
Owning a franchise comes with several benefits, including:
- Ownership – You run your own independent business, but with a proven track record, allowing faster market entry and discretion over employee hiring and compensation.
- Franchisor support – Benefit from successful existing business systems and routines established by the brand’s head office.
- Volume-power purchasing – Gain access to an established supply chain, inventory management systems and distribution center storage.
- Marketing – Utilize marketing plans, materials and promotions for the entire brand.
- Brand recognition – Take advantage of established goodwill and brand promise to the consumer.
- Peer support – Connect with a network of other franchisees who share ideas and common business challenges.
To help you assess whether owning a franchise business is a good fit for you, McNeil recommends looking inward and doing your research. She suggests asking yourself “What do I enjoy doing?” You may want to invest in an industry you’re passionate about, a brand you love, or you might discover an unexpected opportunity that leverages your experiences and skills.
Cons
Depending on your circumstances and personality, the following conditions of franchise ownership may or may not bother you:
- Initial investment – Setup costs, franchise fees, equipment and inventory expenditures, and upfront capital require careful financial planning to avoid undercapitalization.
- Less creative control – Most franchises have strict brand guidelines that must be adhered to, leaving less room for personal creativity.
- Operational requirements – Franchisees must respect the operating manuals, staffing requirements, business hours and quality levels.
- Franchisor reliance – Brand success is linked to the franchisor’s decisions and franchisor-franchisee collaboration.
- the franchisor / franchisee working together for success.
- Limited supplier choice – Franchise agreements usually stipulate that purchases be made from approved vendors.
As part of your research, McNeil suggests talking to other franchisees and asking them questions, such as:
- How many hours do they work?
- What’s the best part about their business?
- What aspects of the business do they dislike?
- Would they do it again?
Tips for franchise success
- Maintain high operational standards: “The power of the brand and brand recognition can only do so much. Successful execution to the customer by the franchisee and staff at store level is key. They have to work and nurture that business every day,” says McNeil.
For instance, if you run a coffee shop, but the facilities are dirty and the service is poor, no matter how strong the brand is, customers will not return to this location. - Community engagement: “Franchise owners have to remove themselves from working in the business to working on the business—which means they need to be involved with the community,” says McNeil.
Local community organizations could include: the chamber of commerce, hospital, or a children’s hockey team. They support whatever is important to that community.
If the franchisee owns a restaurant, they can create a school lunch program where they serve pizza every Friday, as an example.
“This is what I mean by working on the business—to grow that business and grow the relationships,” says McNeil.
It’s important to understand whether the franchise you’re considering can support the lifestyle you want for you and your family.
Managing expectations around income generation is crucial: if you plan to leave a salaried job to own a franchise, it’s important to understand the financial implications of that decision, cautions McNeil.
“Don’t go in undercapitalized—that’s where BDC expertise can come in,” says McNeil, “helping potential franchisees determine how much capital is needed to get through the first year or the first 24 months. Your BDC advisor can help interpret the business for you.”
Discuss the franchise opportunity with your circle of experts: franchise lawyer, accountant, financial institution and business consultant.
The franchise industry is very diverse. There’s a franchise for everyone.
Sherry McNeil
President and CEO, Canadian Franchise Association
Six steps to buying a franchise in Canada
1. Evaluate your readiness
Before buying a franchise, begin with self-analysis: evaluate your financial goals, interests, strengths and weaknesses so they align with the industry you’re considering. McNeil suggests exploring various types of businesses—perhaps your skills are better suited to a home inspection company rather than a retail store. The CFA’s directory, LookforaFranchise.ca, and publication Franchise Canada magazine both offer a host of franchise opportunities.
2. Research the franchise opportunity
After finding an appealing business or brand, thoroughly research its products, services and investment requirements. Talk to existing franchisees to understand what it’s like to work in the prospective business. Work with business experts: an accountant, a business advisor, and a franchise lawyer for professional analysis, risk assessment, contract review and specialist support.
3. Contact the franchisor
The franchisor will provide preliminary information and will use your responses as an initial evaluation of whether you meet basic prerequisites such as commitment level, financial capacity and experience.
4. Start the qualification process
Once you’ve selected a brand or business, McNeil says the next stage is the brand qualification process to ensure a mutual fit between you and the franchisor.
From there, you’ll receive a variety of documentation including a Franchise Disclosure Document (FDD), which contains comprehensive information about the brand. An FDD is legally required in seven provinces in Canada. The qualification process could include multiple meetings and steps, such as meeting with the parent company or founder, and hands-on experience working at a location to understand operations and the brand.
5. Conduct your due diligence
Any business purchase requires due diligence. Review the contracts and financial requirements with your team of business experts.
6. Secure financing
Regarding cash outlay, McNeil says it depends on the brand. “Often the cash requirement is based on the total investment—it’s a percentage of the total investment.” As an example, she cites opening a location of a brand might be $1M, the brand and bank’s requirement might be 30%. Financing the amount can be achieved via small business loans, BDC, term loans, etc. There are, of course, franchise businesses with considerably less investment amounts than $1M.
Typical cost considerations when purchasing a franchise
When looking at costs related to setting up a franchise business, the nature of the business will determine the associated costs. A brick-and-mortar building will likely have equipment, leaseholds and building permits; however, a home-based business will not have these types of costs, but will have different ones.
Franchise fee is usually a one-time fee paid to the franchisor, and then again upon renewal of the franchise agreement.
Royalty fees can be a flat rate or based on a percentage of sales and are payable monthly or quarterly to the franchisor.
Marketing fees are ongoing, usually from the day the business location opens. These can be national, regional and local marketing fees which can either be a flat rate or a portion of sales which contribute to national marketing campaigns such as television advertising, or local marketing expenses which are spent within the local community.
“Brands rely on franchisees for feedback,” says McNeil. Brands grow and evolve, and feedback structures vary across different brands and sizes of systems. If you join a franchise system that has thousands of locations across the globe, then you are a voice among many; however, if you join a system that’s small, your feedback could be used to impact the brand’s direction as it grows.
When it comes to franchising, it’s all about the fit. “The franchise industry is very diverse. There’s a franchise for everyone,” says McNeil.
Next step
Understand the four types of business loan products and how to shop for the right bank by downloading BDC’s free guide, How to Get a Business Loan.