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Is Buying A Franchise Right For You?

April 15, 2016 | Business Exchange 1 Comments

Is Buying A Franchise Right For You?

Pros And Cons Of Owning A Franchise

 

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So you dream of owning your own business, thousands of Canadians open new businesses each and every year and their motivations will vary from person to person. Perhaps you have always wanted to be your own boss. After a period in time in their career, some employees plan to leverage work experience into their own business. Numerous employees have been outplaced at some stage of their work life and are seeking more control of their future. Entrepreneurs enjoy in the financial rewards and the social status that owning their own business brings. For others, owning a business allows family members the opportunity to work together.

One of the questions that you may be faced with is whether buying a franchise is right for you and what are the pros and cons of owning a franchise. The purpose of this book is to shed some light on franchising and to assist you in making one of the most important decisions of your life.

The reality is that fewer and fewer new independent establishments are opening in the marketplace. Opening a new business is a complicated process. Very few first time entrepreneurs having the experience or skills necessary to open a business and succeed in their venture. Moreover, it is very challenging for an independent business owner to compete against the major chains, which are traditionally dominated by franchises.

It is evident that franchising dominates the small business sector. While there is no concrete statistical information available and while there are exceptions, it is widely known that opening a franchise business has a greater likelihood of success and will generally outperform a non-franchised business.

 

thumbs-up-green SOME OF THE BENEFITS OF OWNING A FRANCHISE ARE:

 

  • • You are in business for yourself, but not by yourself.
  • • Real estate expertise in the area of market analysis, site selection and lease negotiations.
  • • Facility design and construction.
  • • Comprehensive initial training and on-going operational support.
  • • Brand-building marketing and promotional campaigns.
  • • Cost-saving purchasing power on goods and supplies.
  • • New product or services development.
  • • Bank financing assistance and guidance.
  • • Stronger equity and business valuation when you want to sell.

 

thumbs-down-red SOME OF THE DOWNSIDES OF OWNING A FRANCHISE ARE:

 

  • • The franchisee is not completely independent and is required to operate the business within the guidelines of the system.
  • • In addition to the initial franchise fee, the franchisee must pay ongoing royalties and advertising contribution.
  • • A damaged, system-wide image can result if other franchisees are performing poorly or the franchisor runs into an unforeseeable problem.

 

THE FRANCHISE INDUSTRY IN CANADA IS THRIVING

 

  • • There are an estimated 1,300 franchise brands operating in Canada.
  • • There are over 78,000 franchise units across Canada.
  • • CFA members represent more than 600 brands and over 40,000 franchised locations in Canada.
  • • Any business that can be exactly replicated can be a franchise.
  • • Franchise opportunities can be found in a wide range of industries – there are nearly 50 categories of franchise brands in CFA membership.
  • • Franchising is more than food – over 60% of franchise brands can be found in non-food sectors and industries.
  • • Franchisees are independent business people and have significant control
    over the success of their businesses.
  • • Franchisees are responsible for the activities of their business and run the day-to-day operations of their business including the hiring and ongoing management of their location’s employees.
  • • The advantage of being a franchisee includes working a business that already has a proven business format, a successful track record, and a recognized brand.
  • • Every time a new franchise opens, it creates new jobs.
  • • Over 1 million Canadians – approximately 1 out of every 14 working Canadians – are directly or indirectly employed by the franchise industry.
  • • The Canadian franchise industry generates approximately $68 billion every year.
  • • Individual investments for a franchise can range from under $10,000 to over $1,000,000.
  • • Franchise fees can range from under $5,000 to over $75,000.
  • • Most prospective franchisees explore franchising as a way to be in business for themselves but not by themselves.

 

SELF EVALUATION

 

I believe that the journey of finding the right franchise opportunity for you begins by looking in the mirror. By conducting a self evaluation, you are in a better position to determine what you are really good at and what transferable skills you can apply to your own business.

 

ASK YOURSELF:

 

  • • Are you a wiz with numbers? If so perhaps an accounting franchise is best for you.
  • • Are you talented with sales and marketing? Then you may be well suited for a business to business franchise.
  • • What are you really passionate about? Love pets? A franchise in the pet industry may be a great fit for you.
  • • Do you enjoy hospitality? A franchise in the food service or accommodations industry may be the answer.

 

My advice would be to seek out a franchise business that compliments your skill sets; in an industry that you are excited about being in; and with a brand that matches your personality. Becoming a franchisee is an important decision, so you want to make sure that it is the right “marriage” or “business partnership”.

So now that you have narrowed down your search criteria that match your abilities and interests, your journey begins. There are many different avenues that you can take to find the perfect franchise for you. A good place to start would be to attend a Franchise Show; attend franchise seminars; read industry publications and directories; pick up a business magazine; or search on-line. Perhaps best of all, is an interest in a business based on an outstanding customer
experience with a particular franchise brand.

 

For Franchise Show Schedules and Free Tickets Visit: http://www.BusinessExchange.ca/franchise-shows/

For Franchise & Business Opportunities Visit: http://www.BusinessExchange.ca

 

WHEN EVALUATING THE NOTION OF OWNING YOUR OWN FRANCHISE, I WOULD ENCOURAGE YOU TO ASK YOURSELF THREE QUESTIONS:

 

1. DO I HAVE WHAT IT TAKES TO START MY OWN BUSINESS/BE AN ENTREPRENEUR?

Running your own business can be an intimidating process, requiring a lot of sacrifice; financially, physically, emotionally and physiologically. Because of all of this, one must ask themselves if they have the right ingredients in place to be successful. For instance, do you have the equity available that is necessary to fund the business? Are you prepared for the hard work, long days and physical demands especially in the start up phase? Do you have the entrepreneurial spirit and drive to succeed? Is your family supportive of this decision?

 

2. ARE YOU PREPARED TO FOLLOW A SYSTEM?

A franchise model is based around systems and operational compliance to ensure consistent execution from franchise to franchise. This is one of the reasons why consumers are comfortable in dealing with franchise brands. With this in mind, are you prepared to follow the franchisors systems and methods of doing business explicitly and not deviate from a proven formula? If you are not prepared to follow the franchise protocol and you want to run the business your own way, I would suggest that a franchise may not be the right fit for you.

 

3. DO I HAVE ALL OF THE ANSWERS I NEED ABOUT THE FRANCHISE THAT I AM CONSIDERING INVESTING IN?

Once you have gone through the process of researching franchise categories; narrowed down franchise concepts; completed your application form; reviewed all of the franchise documentation; met with the franchisor; spoken to franchisees; and concluded your research and your due diligence, then you are in a position to make an informed decision on whether to invest in a particular franchise opportunity.

 

BUDGET ESTIMATION

When choosing a franchise business, you must also consider your budget. It has been said that one of the leading causes of a business failure is under capitalization. While there may be many factors to this, franchisees must be mindful of the total investment and what is affordable to them.

In this regard, it is prudent to determine very early in the process:

  • • How much unencumbered cash do you have available to invest?
  • • Do you have additional funds for working capital?
  • • Do you have a fall-back position?
  • • Do you have a good credit rating?

In order to obtain bank financing, the franchisee will have to demonstrate that they meet all of the financing criteria to both the Franchisor as well as the financial institution.

Once you have established an investment range, bear in mind the following:

  • • Look at businesses that match your skill sets and passion (what are you really good at and enjoy doing?)
  • • Choose a brand that is reflective of your personality (be proud to be the ambassador of your franchise)
  • • Determine market demand (is there consumer acceptance and proof of concept for the business?)
  • • Is the concept a fad, or sustainable? (what is the history and future prospects of the business?)
  • • Competitive landscape of category (is the space already crowded, or is there room to grow?)
  • • How will external forces affect the business long term? (will technology impact the business such as the video business?)
  • • Experience the brand (do you have a favourable impression of the franchise as a consumer?)

 

INVESTIGATE BEFORE YOU INVEST

 

Once you narrowed down your search and you have found some franchise concepts of interest, it is important that you investigate before you invest by conducting thorough due diligence.

Upon submission of your franchise application form, at some point in time, you will receive a copy of the franchisor’s Franchise Disclosure Document (FDD). This document contains some valuable information regarding the franchisor and the franchise system and provides a prospective franchisee information necessary to make an informed decision.

When reviewing the Franchise Disclosure Document, there are number of Positive Key Indicators to look out for.

Has the franchise system experienced stable unit growth? Are same store sales positive, flat, or more concerning, negative? Are there multi-unit operators, as this is an indication of happy and successful franchisees? Does the franchisor have strong experience and a talented management team? Is the franchisor financially solid?

At the same time, when reviewing the Franchise Disclosure Document, there are number of Negative Key Indicators to look out for.

Has there been excessive store closures/system shrinkage and what are the reasons? Are there high number of units for sale in the market? Are there lots of litigation and what are the claims? Is the franchisor management team inexperienced as a franchisor? Is the franchisor financially weak?

Becoming a franchisee is like becoming a business partner, so you want to ensure that the franchisor is strong on all levels.

An excellent source of information is speaking to existing franchisees of the concept that you are interested in. My experience is that franchisees are either brand ambassadors or brand assassins. Clearly, you want to make sure that you are getting involved in a franchise organization where the franchisees are positive about the business and their relationship with the franchisor.

Another way to test the waters is to request an “on the job evaluation.” Some franchisors will arrange for you to work a few days or shifts to get a real life perspective of a day in the life of a franchisee.

During your due diligence, you will want to meet with the franchisor as an opportunity for them to get to know you and for you to get to know them better. This is your opportunity to meet with the executive team and other team members to make sure that you have aligned core values and a shared business philosophy.

As part of the process, you should seek professional help from experts who specialize in the franchise industry. This may include business advisors, accountants and a lawyer. I highly recommend a franchise lawyer who understands the intricacies of franchise law to review the Franchise Disclosure Document and related franchise documents. Franchise lawyers are not retained to recommend changes to the documents, but rather provide legal explanations and opinions on its content.

 

LOOK BEFORE YOU LEAP

 

Investing in a franchise is one of the biggest decisions you can make.

Don’t Make A Move Until You’ve Researched The Franchise

 

FINANCING

Most franchises will require bank financing to fund the business. The Canadian Small Business Financing Program is an ideal financing facility designed for small businesses. Some of the parameters of the loan include:

  • • The loan can cover up to 90% the value of equipment, leaseholds and fixtures, subject to meeting a certain debt to equity ratio.
  • • The loan is to a maximum of $350,000.00.
  • • The loan can be amortized for typically a 7 year term.
  • • The loan can be retired early without penalty.
  • • The loan is limited to a 25% personal guarantee of the original loan amount.
  • • The loan has a 2% registration fee of the total loan amount, which can be added to the loan.

When making a loan application with a bank, be prepared to supply the following information:

  • • A personal statement of affairs, prepared on the bank’s form.
  • • A copy of a fully executed Offer to Franchise showing the allocation of asset value.
  • • A business plan, including a cash flow projection.
  • • A copy of your tax assessments for the previous two years.

When available, the lender will require additional information such as:

  • • Invoice showing the value of the project including equipment and leasehold improvements.
  • • A copy of a fully executed Franchise, Sublease and Lease Agreements.
  • • A copy of a Certificate of Insurance, naming the bank as loss payee.

Once you have obtained bank financing approval and you have satisfied yourself from all of your due diligence, you are finally in a position to make an informed decision on whether buying a franchise is right for you.

 

If You Have Made The Decision To Become A Franchisee, I Congratulate You And Wish You The Best Of Success!

 

Download FREE the Guide on Is Buying a Franchise Right For You?

 

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ABOUT THE AUTHOR

Jeff Young - Business Exchange

JEFF YOUNG

Jeff Young is an accomplished Franchise Expert and Developer that has helped some of Canada’s top Franchise Brands in the fast service restaurants and retail sectors. Jeff has an extensive experience in franchise development; real estate; franchise documentation; bank financing; and franchise relations.

 

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