The pros and cons of beginning your business venture as a franchisee
Building a small business from nothing can be a daunting prospect. Getting financed, setting up a smooth operating model and perfecting people management are all big tasks in themselves, and that’s before you even start on sales and marketing. Around 75,700 businesses in Canada have taken an alternative approach by setting up as franchises. But is it the right model for you?
Lyn Little, co-leader of the national franchising group at business advisory and outsourcing firm BDO, explains that there’s a big difference between operating a franchise and running your own business. “Under a franchise you’re operating under someone else’s predetermined manual. You’re coming into a fully formed business and operating that rather than developing your own business from the ground up,” she says.
That business-in-a-box approach brings some benefits over starting from nothing, says Gary Prenevost, operator of franchising broker FranNet and board member for the Canadian Franchising Association.
“In a traditional business, you have to create your own systems and that’s done by trial and error,” he says. Someone starting a new business — especially someone inexperienced — may find themselves grappling with back-office tasks ranging from staff management to payroll and sourcing supplies. A business owner working with the right franchisor already has those processes in place, and they’ve been tested and honed across many other branches.
Businesses can also expect logistical help from franchisors to varying degrees, say experts. In many cases, they will help find an appropriate place to open a franchise and may even provide demographic research to help with that process.
“It’s usually easier to get finances with franchising versus financing a location on your own,” says Little, adding that working with the right franchisor can also give you more purchasing power. “There are often preferred or predetermined vendors for products and services that you’ll get discounted rates for.”
Finally, running a franchise can also help you to start generating revenue more quickly, Little says. You’re capitalizing on an established brand, which means that you don’t have to build awareness and trust in your business from the ground up. “Once you open up, usually there’s a line of waiting out the door,” she adds.
Those benefits are hard to ignore, but they come with caveats, and one of the biggest is the cost. There are up-front and ongoing costs that can take a significant chunk of a franchisee’s income. One of the first is the franchising fee.
The up-front fee for franchisees can range widely depending on the franchise, says Prenevost, citing anything from $10,000 to $75,000. Little says this fee buys you the right to run the franchise for a set period. There will be additional fees when the original fee expires, she says, which often happens after 10 years.
These aren’t the only payments. Franchisors will typically demand a royalty payment, which is often based on revenue, explains Muhammad Saqib, manager of BDC’s Hamilton business centre, putting these at between four per cent and eight per cent. The brand awareness that helps get customers through the door doesn’t come cheap either. Expect to pay advertising fees into a central fund, which the franchisor will use to promote the brand. These range up to four per cent.
Franchisees also lose autonomy. There are obvious restrictions on the products you can sell, and on pricing, but there may also be marketing restrictions. You’ll be told when to renovate and where to buy your products. Expect to have franchise managers looking over your shoulder.
(Franchise) benefits are hard to ignore, but they come with caveats, and one of the biggest is the cost
It can be galling for franchisees when franchisors change the rules. In 2017, some Tim Hortons franchisees clubbed together to form the Great White North Franchisee Association in response to the chain’s acquisition by Restaurant Brands International, a subsidiary of Brazilian investment company 3G International. GWNFA has criticized the owner for raking back wealth from the franchisees, reducing Timmy’s quality through cost-cutting measures and a general lack of transparency and accountability, among other things.
Still, thousands of franchisees succeed every day across Canada in businesses that go beyond the traditional food and retail sectors into areas ranging from hair care to tutoring. If you want a turnkey solution and strong guidance, Saqib has some things to watch out for.
Consider the cost, he warns. The franchise fee may be $35,000, but the total investment required could be 10 times that. “Most people forget about the working capital attached,” he says, adding that that line of customers outside the door isn’t guaranteed. Allow for what-if scenarios where customer numbers fall, he advises.
Make sure you review the contract carefully. Who will own the lease? How much money does the franchisor make on that lease? Does it provide location exclusivity or will you find an unwelcome competitor opening up nearby? Some leases will also require you to renovate the business before selling, he warns.
Perhaps most important, ensure that you know the franchisor inside out. Franchising relationships are like marriages, Little points out: you’re hitched to each other and must work together, so ensure you understand each other before signing up.
If you’re in Ontario, check into the Wishart Act, which is legislation that compels franchisors to disclose information about themselves, and can be helpful here. Franchisees have used this legislation to revoke their franchise purchases based on inadequate disclosure. So after you talk to your would-be franchisor, and your banker, talk to your lawyer.