Everywhere you shop, you have seen a franchise. In fact, most businesses are franchises and are a popular way to start a business. However, before buying a franchise, you should know some things before buying a franchise.
- A franchise is a license to operate a franchisor’s business and name for a nominal fee and time. Typically, franchises cost anywhere from $10,000 to $100,000+. The term for a franchise is between 5 and 10 years. On top of that, the franchisor requires monthly royalties between 5 and 8% of gross sales. In addition, as a franchisee, you must pay into a national advertising fund between 1 and 4%. Above all else, remember, you are only renting the business not owning it. I work with many small businesses in Toronto that operate successful franchises.
- Right ‘fit’ for your personality. Sometimes, entrepreneurs are buying a franchise for the wrong reasons. If you have no job and buy a franchise, that is an extra level of stress you don’t need. Franchises are not rocket science, and the work may not be mentally stimulating with someone with an MBA. They are meant to be replicated with simplicity. Some franchises require hands-on owners, which means you, are required to work evenings, weekends and holidays. Many small businesses in Toronto are owner operators. Small business like restaurants to donut shops to gas stations and convenience stores.
- Track Record of success. This type of information is available from the franchisor but you have to ask for it. Keep in mind, though, that this information is heavily biased in favour of the company. Certainly, do a lot of investigating and verify that the claims the company are making. In my practice, I have seen some owners of small businesses in Toronto that did not verify this information and now are broke.
- Get the advice of a franchise lawyer or accountant and pay the fees that are asked. The lawyer and accountant have a stake in helping you because they may gain a new client. I frequently encounter potential owners of small businesses in Toronto that afterward are glad they took my advice. These potential owners frequently either have been downsized or are looking for new opportunities after a corporate career. After I point out a few clauses in the franchise disclosure agreement, clients are very surprised by what is required of them.
Check out this information before buying a franchise. It is available online from various websites including the Canadian Franchise Association, or American Franchise Association. Franchisees have a strong brand advantage to entrepreneurs building on a known business to the public.
Look for training programs that are available from the company. The training program helps franchisees get up and running the business of the franchisor.
- Talk to existing franchisees. The more franchisees you talk to, the better. If the majority of franchisees say good things about the company then start a formal dialogue. Some small business owners in Toronto, whom I met many years ago, did not talk to the existing franchisees wound up losing a lot of money. The company was sued by its franchisees for failure to live up to the promises in the franchise disclosure agreement. I mention this story to everyone who even considers buying a franchise.
Buying a franchise does not mean risk avoidance, but risk minimization. Owning a franchise still, means getting the word out in your local market. The good news about buying a franchise is that the marketing message has already been done for you. It never hurts to get the opinion of a franchise lawyer or accountant before signing the contract.