By David Gray and Matthew Zuk
The franchising model has become entrenched in recent years as a way of doing business across Canada. It has been applied to many types of businesses and industries with great success, including hotels, fitness centres, gas stations, cleaning services, coffee shops and a wide variety of retail stores. Indeed, one of the strengths of the franchise model is it can be applied to such a wide variety of businesses, so long as their operations can be replicated across different units and territories.
The statistics for franchising growth are impressive, to say the least, and projections show no sign of this trend slowing. There are currently more than 78,000 franchise units across Canada. Franchised businesses account for 40 per cent of all retail sales and for 10 per cent of Canada’s gross domestic product (GDP). Franchising reportedly even accounts for one out of every five consumer dollars spent in Canada on goods and services.
With this success, it’s no wonder so many entrepreneurs today are considering purchasing a franchise. And an increasing number of flourishing franchises have been homegrown within the Canadian market.
Buying a franchise can be a complicated affair, however, and not only because it is one of the biggest investment decisions you will ever make, in terms of both time and money. While your choice of franchise will vary according to your personal goals and preferences, there are some significant issues any prospective franchisee should consider when approaching the selection and purchasing stages.
What is franchising?
Essentially, franchising is a model that allows an existing business—i.e. the franchisor—to license the use of its brand and internal processes to outside entities—i.e. franchisees—for semi-autonomous operation. The franchisees may also gain access to cost savings from group purchasing and assistance from the franchisor with respect to running the business.
In return for these licensed rights, the franchisor typically receives a franchise fee and continuing royalties from each of its franchisees.
The allure of the franchise model is it allows the new owner to immediately enjoy the benefits of an established business, including reputable products and services, a broad customer base and proven systems for supply and distribution. In short, buying the right franchise reduces the risks associated with starting a new business.
Franchises can be costly, however, both initially and on an ongoing basis, through the payment of franchise fees, royalties and contributions to common funds for advertising and marketing. Would-be franchisees must also be prepared for the restrictions that can come hand in hand with licensing an established system.
Perhaps most importantly, franchisees must ensure their expectations are in line with the realities of the business, if they are to avoid disappointment and risk to their investment.