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Is an emerging franchisor brand the right fit for you?

A smaller, physical footprint will reduce initial investment and keep operating costs lower.

By Andrew Carter

It goes without saying that COVID-19 has disrupted much of the business world, and franchising is no exception. While some networks put a hold on development, others pushed forward, including some entrepreneurs who took the last 18 months to develop their own franchise network. There has also been an increase of international and U.S.-based brands entering Canada. Whether an emerging franchise or a franchise brand new to Canada, companies will likely be faced with the challenge of finding the right franchisees and determining the appropriate markets to enter. If someone is considering an emerging franchise network new to Canada, how will they know if they have found the right fit?

Where to find the opportunities

To get started, it’s important to know how franchisees are receiving their information. As the country has been in various stages of lockdown since March 2020, reduced or eliminated commute times have provided far more opportunities for internet screen time. As a result, many potential franchisees are starting the process with their favourite search engine. This leads franchisees to have more selection in how they invest their money, putting pressure on each brand to attract the best and brightest. No longer do prospective franchisees need to have intimate knowledge to consider the brand as a potential business opportunity.

In many cases, franchisees of new networks tend to be family members or friends. While this is great for increasing unit counts, the first franchisees of a brand can really impact and shape its future.

One of the biggest challenges for all brands, but particularly for new or emerging ones, is finding real estate.

Family and friends may be more forgiving with a franchisor’s on-the-job learning. However, long term, familial relationships could become difficult if business does not meet expectations. So, awarding a franchise should still be based on operational and financial merit. Keep in mind, existing franchisees are a part of the brand’s recruitment sales force as they will be speaking with candidates considering the network.

As a new franchisor, investing in a website that can easily cater to franchisee inquiries helps keep the company at the top of the prospect list. Spend some time on other franchise networks’ websites and understand where improvement could be made to layout and information. Specifically, for international franchises, having an area of the site directed to Canadian recruitment with all content specified to the specific audience will allow for better comparisons.

Easier access to franchise information may lead to increased inquiries for emerging or new networks across the entire country or even the globe. While this may give franchisors confidence there is broad appeal, choices need to be made to stay within the planned growth strategy or on how to approach interest in markets where there is no immediate intention to expand.  Is a master franchiser license or area development agreement right for both the brand and the franchisee?

Location, location, location

Whichever market is chosen, one of the biggest challenges for all brands, but particularly for new or emerging ones, is finding real estate. At one point during the pandemic, it was thought there would be a glut of space as businesses closed. While this has happened in certain areas, the government and relief programs prevented the calamity everywhere and now the scarcity of commercial space is driving lease rates up again. Couple that with landlords who have a preference to work with established brands, the challenge to find appropriate real estate is substantial. Both large and small brands will be competing for real estate on the ‘hot corner’ but ultimately, franchisees will need to accommodate this in their financial projections.

With the spike in the price of lumber and related building materials and good labour, franchises have had to adjust.

The rising price of business

Brands have also seen a rise in construction costs over recent years. With the spike in the price of lumber and related building materials and good labour, franchises have had to adjust. In most cases, franchisors should build to scale and ultimately, build to sell. A single unit should provide the cash flow to make multiple unit/territory ownership easier. A smaller, physical footprint will reduce initial investment and keep operating costs lower. Consider whether your footprint is in line with similar networks and are you willing to accommodate non-traditional locations like gas stations, schools, and in-line plaza. Is a drive-thru necessary? What operational efficiencies are available to reduce overall size and how has the network adapted during the COVID crisis? How has technology been adopted and is it effective? These are the questions franchisors need to answer to stay relevant. They are also the same questions potential franchisees should be asking as they research where to invest and continue to narrow their options with their wallet over their heart.

To achieve business ownership and accommodate all the start-up costs, franchisees are increasingly wanting to use the equity in their homes as the main source of funds for investment. The residential real estate market continues to grow, as do the mortgage levels. An over-leveraged homeowner can make for a risky business owner. Franchisors should be aware of the TDSR (total debt servicing ratio) of the franchisee’s personal debt. A number more than 40 per cent should be a red flag.

The role of the franchise fee

One of the big temptations for new and emerging brands is to charge an initial franchise fee that recoups costs quickly. Without a history of success to draw from, a franchisee will acknowledge more risk with a new or emerging franchise. This may lead to a negotiation of the initial franchise fee, royalty structure, or marketing fund, or in some cases, networks may find themselves losing candidates. Additionally, both franchisees and franchisors will need to consider the support level to provide during the initial growth plan. How will an international brand properly support a single unit in Canada and what is their two-to-five-year plan?

Let’s not forget the basic tenet of franchising–to be in business for oneself, but not by oneself.  As the number of franchises has grown in Canada, so has the number of support personnel to help both franchisors and franchisees. Regardless of the side of the table a person is on, they should surround themselves with experts—lawyers, accountants, and bankers who specialize in franchising and provide industry relevant insight to the decision-making process. This is particularly significant for those brands entering Canada. Additionally, franchise consultants can help with the creation of operations manuals, growth plans, communication strategies, and franchisee recruitment, both initially and on an on-going basis.

Looking back on COVID, the franchise industry will be able to share some positive stories on how it adapted, grew, and ultimately improved. Whether a long-standing franchise network, new to the scene, or new to Canada, location will still be of huge consequence, as is the franchisee themselves. Remember, every franchise started with one unit.

Andrew Carter is a regional market leader for BMO.  An expert in franchise operations, Andrew provides insight and perspective to franchise financing. He can be reached at andrewm.carter@bmo.com

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