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Are you ready to franchise your business?

Franchisors have access to organizations such as the Canadian Franchise Association for additional resources.

Have you considered your corporate structure? 

In the usual start up arrangement, trademark(s) will be held by a corporation that only holds the trademark(s). You will incorporate a second company to be the franchising company. There will be a license agreement between the two corporations to allow the franchising company to use and sub-license the trademarks. The existing company will continue to carry on the initial business. It may be subject to a franchise agreement with the franchising company. A franchisor may also want to incorporate additional companies to hold leases.

Do you understand a franchisor’s revenue sources? 

Franchisors receive revenues from several potential sources–initial franchise fees (determined based on what a third party will pay to obtain the rights to franchise from you), ongoing royalty fees for use of the system and trademarks, fees to operate a common advertising fund, rebates from suppliers, money from selling specific products needed by your franchisees, potential rent upcharges, training fees, and fees for constructing or helping to construct locations. Franchisors will need to develop a revenue model necessary to offset the expenses incurred to turn a profit.

Can a franchisee turn a profit? 

You will need to assess whether your financial model, applicable to the busines model, will produce a profit when operated by a franchisee. A franchisee will likely be paying an additional 10 to 15 per cent of its revenues as a function of being a franchisee. A franchisee will need to see there is an ability to money and for the investment in the franchise to be worthwhile. You will also have to assess what it takes to be a successful franchisee in your system and look to recruit qualified and corporate candidates.

Are you ready to be compliant with the regulatory environment affecting franchisors?  Franchising is a regulated industry in six of Canada’s provinces–Ontario, Alberta, B.C., Manitoba, New Brunswick, and PEI. These regulations require franchisors to engage things like disclosure when selling franchises.

The legal agreements between a franchisor and a franchisee are long and detailed. Franchisors will need to engage with a lawyer and invest time and money to prepare the initial franchise and related agreements and create the franchise disclosure document which informs a prospective franchisee of everything they are expected to need to know when considering whether to purchase a franchise.

It may take several years to get the first franchise up and running and it may take five to 10 years to grow the system to achieve 15 to 20 franchises.

Are you ready for the growth horizon? 

Franchising as a model for business expansion is often seen as faster and having less risk capital but with a more limited financial return than successfully investing the money personally into building additional units. Depending on the concept, it may take several years to get the first franchise up and running and it may take five to 10 years to grow the system to achieve 15 to 20 franchises. All the while, you will need to keep the brand and underlying business fresh and of interest to your consuming public.

Do you know where to receive the right support and resources? 

Franchisors will firstly need experienced franchise counsel and accountants. You can also access such organizations as the Canadian Franchise Association for additional resources that many other franchisors tap into. The franchising business will expand through a combination of employees and third-party consultants to help select locations and franchisees, promote franchise sales, train franchisees, bill and collect, manage your supply chain, and oversee compliance.

Do you have a vision?

When starting a business, you had a vision for what would make it successful. Franchisors will need to have a vision for how they see the system developing over time.

At Sotos LLP, we help businesses emerge as franchisors in such industries as restaurant, hotel, professional services, homes services, cannabis, and automotive. We invite you to visit our website Sotosllp.com to obtain more information as to how we work with businesses to create franchising businesses and promote their success. You can also contact the Allan D.J. Dick at adjdick@sotos.ca.

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