The franchise business model can be an attractive option for newcomers in Canada. Investing in a franchise business allows newcomer entrepreneurs to capitalize on an existing brand and expand a business that already has a proven track record of success in Canada. However, the initial set-up and ongoing costs associated with a franchise may be considerably higher than the cost of starting a business from scratch.
This article will help you understand the pros and cons of investing in a franchise business. We’ll also share valuable tips on choosing the right franchise option and financing your franchise business as a newcomer in Canada.
In this article:
- What it means to open a franchise in Canada
- Pros and cons of the franchise business model
- Five tips for choosing the right franchise option
- Financing your new franchise business
What it means to open a franchise in Canada
A franchise business is one where an organization (a franchiser) licenses their registered brand and trademark to someone else (a franchisee), allowing them to operate as an extension of an existing business. The franchiser typically charges the franchisee royalties or fees for the use of their brand and sets strict standards of operation.
Franchises are a popular business option among entrepreneurs in Canada. According to the Franchise Forecast 2019: Canadian Franchise Industry Economic Outlook, the franchise industry contributes over $100 billion to the Canadian economy and employs over 1.9 million people.
Nearly 40 per cent of all franchises in Canada are in the food industry, including popular chains like Tim Hortons and Subway. However, there’s no shortage of franchise options in other industries like real estate, travel, automotive services, financial services, pet care, retail, cleaning services, and education.
|Evaluating investing in a franchise versus starting your own business? Learn more about setting up your own business in our Newcomer’s guide to starting your own business in Canada.|
Pros and cons of the franchise business model
Investing in a franchise can give you a head start in running a successful business. However, franchising also has its share of drawbacks and may not be the right choice for all entrepreneurs. Here are some pros and cons you should keep in mind before making a decision.
Pros of investing in a franchise business
Existing brand recognition: The biggest advantage of investing in a franchise business is that your customers already know the brand. This means that you don’t have to build your brand or customer base from scratch and can instead capitalize on existing brand value.
Prior demonstration of business success: Typically, only successful, scalable businesses adopt the franchise model. You’ll have access to information about the franchiser’s revenues, profits, locations, etc. to inform your decision. However, it’s always a good idea to speak to other franchisees for a first-hand account of how their business is performing.
Training and equipment provided by franchiser: Since consistency of quality and service is essential in the franchise industry, most franchisers provide their franchisees with equipment and trained staff. In some cases, the franchiser may train the staff hired by the franchisee on standard operating practices, using equipment, and engaging with customers.
Shared marketing resources and expertise: Most franchisers take responsibility for the entire organization’s branding and marketing. They might offer the franchisees shared designing and creative resources for local marketing requirements to ensure consistency in branding.
Cons of investing in a franchise business
Franchise costs: In addition to the upfront investment cost and franchise fee, there are considerable ongoing costs to consider while setting up a franchise. The franchise model typically relies on royalties, which will usually be a fixed percentage of your revenues. Most franchisers also require franchisees to contribute to the organization’s marketing budget. Other costs may include equipment rental cost, and operating costs, including staff salaries.
Lack of flexibility in choosing a location: The franchiser typically has strict criteria for suitable locations and gets to decide where you can set up your franchise, based on distance from other franchises, target market, etc.
Adhering to high standards set by the franchiser: As a newcomer entrepreneur, you may not know much about the Canadian market, cultural differences, customer expectations, or even hiring protocol. However, the franchise license requires you to meet significantly high standards in terms of service quality, quality of product, customer service, and operating procedures right from the start. Failure to meet prescribed standards often carries penalties and can even lead to the termination of your franchise agreement.
Ownership versus license: One of the biggest drawbacks of investing in a franchise is that you don’t really own the business. You only have a license to run a small, local part of the business and your involvement in decision-making, even within your own operation, is limited.
Limited room for innovation: Since the franchise already has an established way of doing business, there might not be any flexibility for innovation. As an entrepreneur, not having the freedom to try new things or apply your creativity can be frustrating. Moreover, you may not always have direct access to the franchiser to share your recommendations.
|Important: Before investing in a franchise, make sure that the proposed franchise is part of a legitimate organization and not a pyramid scheme or scam! A franchise specialist or lawyer can help conduct due diligence before you sign a contract.|
Five tips for choosing the right franchise option
Once you’ve determined that the franchise model is right for you, you’ll have many franchise options to choose from in Canada. Here are some tips to help you select a franchise business that best fits your requirements:
1. Understand your own interest and capabilities
Instead of focusing solely on profitability, find a sector you’re passionate about and understand well. Also, reflect on your capabilities and ensure that they are in alignment with the skills needed to successfully run a franchise in that industry. You should also keep in mind the franchise’s culture and make sure that your personality and business style are a good fit.
2. Assess your finances
The upfront franchise fee and investment you’re required to make will vary depending on the organization’s size, popularity, revenue, and industry. In addition, the royalties you’ll need to pay and the operation costs, including rent, staffing cost, etc. may also vary significantly. Before choosing a franchise to invest in, you should properly assess your financial situation to ensure that you’ll be able to cover both the upfront and ongoing costs. You may also be eligible for a personal loan, business loan, or line of credit to cover the costs of starting and running your franchise. Speak to a financial advisor for advice on funding your business.
3. Do your research
Before making a decision, spend time researching both the industry and the franchises you’ve shortlisted. While some entrepreneurs find it safer to invest in established franchises, others might prefer the flexibility and opportunity that comes with an emerging franchise. Try to get an idea about the popularity of the franchise, the existing franchise network, target consumers, products or services, and pricing.
Carefully review the franchise requirements, including the space you’ll need, location specifics, upfront and ongoing costs. If you have information about the preferred location options, do some research about the local demographics and consumer behaviour in the area. Wherever possible, try to meet other franchisee owners to learn from their experience of running their business and dealing with the franchiser.
4. Review the contract terms before signing
The franchise agreement is legally binding, so be sure to carefully review the terms and conditions before you sign the contract. The contract will typically include considerations for using the brand’s trademark and intellectual property, details about royalty payments, franchise fee, marketing and advertising costs, training or other support the franchiser will provide, location specifics, whether your territory will be exclusive or protected, the contract duration, and criteria and process for agreement termination.
Hire a franchise specialist or a lawyer to ensure that the agreement protects your interests as a franchisee and clearly states the support you’ll receive from the franchiser. A franchise lawyer may also be able to negotiate the terms on your behalf and can draw your attention to potential red flags or terms that might not be favourable for you.
5. Use the RBC Franchise Assessment tool
The RBC Franchise Assessment tool allows you to evaluate a particular franchise system before you make an investment. The tool helps you assess a franchise based on your personality and goals, the franchiser’s business and financial background, and the success of other franchisees of the organization.
Financing your new franchise business
Costs you’ll need to keep in mind
Starting and running a franchise requires significant investment. Depending on the business, franchise fees can range between several thousands and a few million dollars. In addition to the upfront franchise fee, you’ll also need to bear ongoing costs, such as royalty payments, advertising fees, and overhead costs of running the business, including staffing, rent, and utilities. Royalty payments typically range between five and 20 per cent of gross sales, while advertising can take around two to five per cent of your revenues.
There may also be other one-time or periodic costs such as construction, renovation, and technology costs. If you’ve taken a loan to cover some of your franchise’s costs, you’ll also need to account for loan repayment and interest costs.
Creating a business plan
Like with any other business, it’s important to create a business plan before you start a franchise. However, in case of a franchise, you’ll likely have more information about projected revenues and profits based on the experience of other franchisees. Make sure your business plan includes all your upfront and ongoing costs, staffing and resource requirements, funding sources, and an estimate of returns.
Try to make your business plan as detailed as possible and include multiple possible scenarios of business performance, rather than just one estimate of projected revenues. Review your business plan frequently to ensure that your franchise is performing as expected. You’ll also need your business plan if you plan to raise funding from external sources.
Sourcing money to fund your franchise business
While setting up a franchise business, your personal funds may not always be enough, especially if the franchise requires a large upfront investment. Many newcomer entrepreneurs turn to their friends and families for personal loans to help them get started.
Another attractive funding option is a business loan or a personal loan from a bank. If you require long-term financial support to cover your operating costs, a line of credit may also be a good option for you. Some of the other funding options available to newcomer entrepreneurs include financial support from the Canada Small Business Financing Program or the Business Development Bank of Canada (BDC). You can also apply for business grants to launch a franchise.
Always speak to a financial advisor before making funding decisions for your business. A financial advisor can help you evaluate the cost of credit and can advise you on the right financial products based on your business needs.
Investing in a franchise business is a great way to establish yourself as an entrepreneur in Canada. Franchising offers many advantages to newcomers, such as leveraging an established brand rather than building a new business from scratch and relying on the shared knowledge and resources of the franchiser. These tips will help you determine if investing in a franchise is the right move for you and give you insight into everything you’ll need to keep in mind while starting a franchise business.