Canadian franchising continues to grow at an incredible rate. Virtually every industry within the Canadian retail landscape is available as a franchise, from grocery stores and hotels to auto repair and maid services. Investment levels vary widely, as well—from a few thousand dollars to several hundred thousand.
Why is franchising so popular? Why do prospective business owners become franchisees, paying initial and ongoing fees to follow rules and standards set by somebody else? With franchise sales comprising approximately 40 per cent of all retail sales in Canada, there is clearly an enormous number of people who have chosen to invest in a franchise system rather than risk it on their own. This article examines what you are investing in when you become a franchisee, and what you can expect to receive in return.
The franchise system
By investing in a franchise system, you are investing not only in the franchisor's products and/or services, but also in its reputation. If your franchisor's national reputation is strong (perhaps enhanced by new and aggressive advertising and marketing programs), sales at your own location may grow. Of course, if the franchisor's reputation is damaged by bad publicity, you can expect a decrease in customer traffic.
A good franchisor has invested substantial time and money to develop, register and protect its intellectual property (IP) portfolio relating to its franchise system, including its trademarks and operational system. The franchisor then licenses this intellectual property to franchisees, who run their businesses in strict compliance with standards set by the franchisor. The key to any franchise system is uniformity; without it, the system would be nothing more than a collection of independent businesses with a common name. A franchise's customers expect consistency, regardless of where in the country (or even the world) they visit one of its locations.
In a sense, then, you will also be investing in your fellow franchisees. The way they represent the franchise system to the public will impact how customers view your business, as well. If you are considering investing in a franchise system, especially a relatively new one, you should visit a number of franchised locations to see how they are operated. Would you shop there? If so, what particular aspects of the business appeal to you? If not, why?
Franchise terms and conditions
In exchange for initial franchise fees and ongoing royalty fees, the franchisor is licensing you to use its IP to establish and operate a franchised business for a specified term. Before entering into a franchise agreement, check the duration of the term and the conditions you must satisfy to exercise any renewal option. It is critical to understand that, upon the expiry of the term (including any renewals), you no longer have any right to operate the business. Accordingly, when discussing the prospective franchised business with your financial advisor, consider whether the term is long enough to (a) recoup your initial investment, including the franchise fees and cost of establishing the franchised business, and (b) earn a suitable profit (considering payment of ongoing fees and other costs of running a business). Your franchisor may offer you a new agreement at the expiry of the last renewal term, but it is not obliged to do so. A new agreement may also include another set of initial franchise fees, which you must include in your financial planning.
Turn key operations
Some franchisors offer 'turnkey' operations. This means the franchisor will be responsible for constructing and outfitting your premises (usually at your cost) so you can simply unlock the front door and begin operating the franchised business. This approach allows you to concentrate on running the franchised business from day one, as you will not have to worry about site construction, dealing with suppliers, negotiating with landlords and contractors, obtaining permits or other such matters.
Site selection and development
If your franchise is not a turnkey operation, the franchisor may simply assist you in selecting and developing your business premises. This allows you to take advantage of the franchisor's years of experience relating to traffic flow, proximity to competitors, local population density and proximity to target markets. Some franchisors use specialized software programs or retain external consultants to best analyze prospective locations. The franchisor may locate and suggest a site to you, or simply review sites you propose.
Many of these franchisors will provide mandatory standards and specifications for the construction and development of your premises. Some may prepare site-specific drawings and schematics, or provide a list of approved contractors. Others prefer to give general guidelines and provide you with greater latitude in the design of your franchised business.
FranchiseTrademarks
When you invest in a franchise system, you will be granted a license to display the franchisor's trademarks at your premises. Trademarks may appear on your exterior signage or directly on the products themselves. Either way, consumers will expect your franchised business to meet the standards they associate with the trademarks.
It can take years of extensive advertising and promotion before customers begin to recognize these trademarks and associate them with a particular level of quality and service; fortunately, that hard work has already been completed by your new franchisor.
By displaying the franchisor's trademarks, you are representing to the public that your business is part of the franchise system, and you will benefit from the brand-name recognition connected with the marks. Your own business skill, in turn, will generate more goodwill for the trademark, no matter where it is found.
Nevertheless, you have no right to continue using these trademarks once the term of your agreement has ended. Should you sell your business (which usually requires the franchisor's permission), you cannot keep selling the trademarks or the goodwill associated with them.
