What Are the Risks and Costs of Buying a Franchise?
This is the first in our ongoing new series of short articles about the "basics" of franchising. In this series, we briefly offer practical information addressing some of the fundamental issues concerning franchising. This series is intended to answer and de-mistify some common questions frequently posed to us by prospective franchisees and franchisors.
Like any investment, buying a franchise involves risk and cost. Below, we list some of the biggest considerations when reviewing a franchise brand to see if it is right for you.
- Funds for the initial franchise fee – This initial amount can vary widely depending on the franchise brand. You may wish consider speaking to your bank regarding the Canada Small Business Financing Program.
- Sufficient capital to start your business – Many franchise agreements require a full-time commitment to the business or you may want to leave your existing employment. It is important to have sufficient capital to not only set up your business but to also cover your living expenses. It may take longer than you think to reach the “break even” stage.
- Existing Assets – Even if you will be using a corporation, you will often be required to personally guarantee the financial and other obligations in a franchise agreement. Your personal assets may therefore be exposed.
- Shop around – Look into a number of brands that offer what you are interested in to find a franchise brand that suits your interests, strengths and your financial goals and aspirations.
- Confidence in the brand – In a franchise agreement, you are paying to use the brand’s trademarks and its business systems. You should ensure that you are confident in the strength of the brand and its reputation.
- Due diligence – Take a deeper look into the brand and its history. By reviewing the brand’s disclosure document and doing some research, you will gain a deeper appreciation of the strengths and weaknesses of the brand.
- Canadian Franchise Association – Many brands are members of the Canadian Franchise Association (CFA), making them subject to CFA’s Code of Ethics. You can search for member companies on the CFA website.
- Information from the brand – Brands often have marketing teams who can meet with you to provide you with additional information or answer questions.
- Information from franchisees – If you are interested in a concept, reach out to owners of franchised locations. Their experiences with the brand may provide another perspective to your research.
- Consult with financial institutions – Banks and other lenders often have a franchise department that can provide you with advice on their experience funding a variety of franchised businesses.
- Consult with a franchise lawyer – Six provinces across Canada, including Ontario, have enacted franchise legislation. Such legislation is intended to protect investors. A franchise lawyer can explain your rights and obligations under such legislation, as well as advise on what information a brand must provide you before you sign any franchise agreement.