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Validating the viability of a franchise system’s infrastructure

cropped1By Jean-Phillipe Turgeon
Given the amount of time, passion and resources involved in running a franchised business, most prospective franchisees know they must conduct appropriate due diligence investigations before investing in a new opportunity, but to what extent? Among the usual steps are (a) speaking with current and former franchisees, (b) performing comparative research among competitors, (c) evaluating the general performance of the franchise system, (d) estimating and comparing initial costs and profitability and of course (e) carefully reading and understanding the terms of the disclosure document and the franchise agreement. Another important question, however, is often left aside: does the franchise system have a viable infrastructure?

One reason the franchising model is growing in popularity among entrepreneurs is because it allows a business to grow without having to assume significant debt or to sacrifice a large amount of equity. This may sound like a perfectly risk-free business plan, but many franchisors seem to forget that while franchising requires minimal financial resources to sustain expansion, they must ensure, from the very beginning, the appropriate capitalization to support the cost of building the infrastructure of their franchise system. Any shortfall in capitalization could result in significant system deficiencies and an unprofitable business model.

The following are some of the elements needed to form a strong franchise system infrastructure, which prospective franchisees should be sure to ask about and investigate.

Trademark registration
Franchisors should be aware the success of their systems depends on their capacity to sustain and enhance the notoriety of their brand and concept. One of the first steps of this process is to register the brand as a trademark. After all, when the time comes for a prospective franchisee to purchase a franchise, much of what is being bought is the opportunity to operate a business with that trademarked brand and concept.

It is important to speak with both current and former franchisees.

The value of the trademark will grow as the franchisor increases its capacity to maintain a high level of quality standards for its products and/or services with the expansion of the franchise system. On the other hand, failure by the franchisor to obtain valid and adequate trademark registration for its business name and logo, at the very least, could result in a competitor deciding to start operating an identical concept under a similar brand not far away. And if that competitor properly registers its trademarks, then the aforementioned franchisor could find any growth potential restricted.

Canada’s Trade-marks Act grants the option upon registration to acquire (a) trademark exclusivity across the country, even if it is in fact used in a defined territory, (b) a presumption of property and use retroactively to the date of filing (or the date of first use, if earlier) and (c) a legal ‘certificate’ after five years, asserting the incontestability of the registration toward any claim of prior use.

For all of those reasons, a franchisor’s failure to file for proper trademark registration represents a major deficiency for a franchise system, of which any diligent prospective franchisee should be aware prior to making any investment.

Trademarks in Canada are registered with the Canadian Intellectual Property Office (CIPO). As such, a prospective franchisee can verify the existence of a franchisor’s trademarks by searching for them at the CIPO web site, www.cipo.gc.ca.

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