One thing that all franchise opportunities have in common is the need to plan for success. By establishing a business plan, you indicate that you’ve established and understand the tools you need to succeed. Here’s what you should include in your business plan.
The executive summary
The executive summary should:
- Describe the franchise you intend to purchase;
- Include the background and track record of the franchisor and other existing franchisees;
- Include a background of your products and services, while identifying your core market.
If you’re looking to join an established franchise, you’ll likely want to focus on that. If it’s a newer franchise system, you should focus on the market trends and opportunities available.
Profiles of the management team
For many lenders, this is the most important part of the business plan. The management team profile should:
- Describe your skills and experience;
- Explain why you’re suited to own and operate this franchise;
- Include the same information for any other members of your management team.
This is the place to highlight any attributes that make you particularly suited for this franchise, and to share any details about any previous business success. The more the lender believes in you, the more likely they are to provide the financing you need.
Description of products and services
The description of your products or services should include:
- Featured benefits;
- Explanation of how your product or service differs from those of your competitors;
- Outline how you will deliver these products and services at the ground level.
Here you should provide specific details about your offerings or services (coffee, car repairs, etc.), along with what sets it apart from others in the market.
Core market information
This section should:
- Describe your core market sector;
- Outline your current competitors and future prospects;
- Itemize strengths and how you’ll use them;
- Itemize weaknesses and how you’ll address and improve them;
- Estimate your projected market share;
- Describe your existing customer base.
Banks and lenders will want this information and it’s also important for you to have the answers to the following questions: Who’s your competition? What do they do well? What do they not do well? How are you going to stand out? Is your market trending up or down?
Description of operations
The description of operations should:
- Describe the area and premises where the business will operate;
- Explain how you will produce your products or services;
- Refer to location, property, facilities, leases, employees, insurance, technology, equipment, and suppliers.
These crucial details should be determined before you get started. Location can be a particularly important one. You should provide as many details as you can about your location and the role it will play in your success.
Other supporting documents to include:
- Your resume, and those of the key members of your management team;
- Job descriptions;
- Credit reports;
- Letters of reference;
- Letters of intent;
- Leases/contracts and other legal documents, as they pertain to the franchise you are purchasing.
The bottom line
Ultimately, your business plan should assure investors that:
- There’s a market for your products and services;
- You and your management team are capable;
- You have the necessary physical and financial resources;
- You know where you’re going, and how you’re going to get there;
- You’re able to provide appropriate security; and most importantly,
- That the franchise you’re buying is financially viable and that you can repay any money lent to you.
After completing a business plan, you should be ready to join the myriad Canadians who made their business ownership dreams a reality. But franchising isn’t free.
Franchise fees
After finding a franchise opportunity that works for you, you must pay two types of fees:
- Initial fee: Think of this like a buy-in to the franchise family. An investment shows the franchisor that you’re committed to pursuing this relationship. CFA members’ initial fees range from $10,000 to upwards of $1 million.
- Royalty fee: An ongoing payment that’s usually a percentage of the franchisee’s yearly sales, either on a monthly, quarterly, or annual basis.
The initial fee covers the cost of training and support needed to get a new location up and running. The funds can go toward territory analysis, location scouting, recruiting and training, and more.
The royalty fee, on the other hand, covers the costs of ongoing support and services for franchisees. These can include shipping costs, an advertising fund, technology upgrades and maintenance, or even salaries.
These fees all go toward supporting your success and the success of the brand overall. It’s a symbiotic relationship. But just because you buy in doesn’t mean you’re ready to start your journey of success just yet. There’s also some signing a prospective franchisee must take care of before they officially become an owner, and that’s on the Franchise Agreement and the Franchise Disclosure Document (FDD).
The franchise agreement
The franchise agreement is a special contract that describes the relationship between the franchisor and the franchisee. It grants the franchisee the rights to operate the business and distribute goods and materials associated with the trademark. It also outlines the fees the franchisees must pay in exchange for those rights.
Some key features of franchise agreements include, but are not limited to:
- Location, leases, and protected territory: The franchisor must assign or approve the new franchised location, along with the approved lease for the location. The franchisor will usually provide a protected territory clause—agreeing to not grant another similar franchise in a competing area. The terms of the lease must match those of the franchise agreement.
- Tenure: The agreement contains a fixed and renewal term—often 10 years each. A franchisor may want a shorter term so it may impose renewal conditions (see below) sooner, whereas a franchisee may want the longer term for the opposite reason.
- Renewal conditions: Upon renewal, the franchisee will be required to pay a renewal fee, sign a current franchise agreement, and make renovations to the franchise location so it complies with changing expectations for new franchisees.
The franchise disclosure document (FDD)
The franchisor will give prospective franchisees a disclosure document to help them better understand the franchise concept and make a fully informed business decision. These documents contain a summary of the franchise business and the franchisor. In Ontario, the franchisor must provide the FDD before any sale of a franchise to a prospective owner. The FDD contains financial statements, all proposed agreements, and will help the potential owner determine whether they want to invest in the franchise. The franchisee has 14 days to review the FDD upon receipt.
A typical disclosure document should include:
- Information on the franchisor—history of the company, what it offers and how it is operated, how long it has been in operation, how many units/franchises it has, other brands it operates;
- Background information on the key players within the system, such as its directors and officers, and those one would deal with as a franchisee;
- Any history of litigation, civil actions, convictions, bankruptcies, etc. of the franchisor and/or its directors and officers;
- A summary of the trademarks and other intellectual property that are licensed under the franchise agreement;
- A summary of the costs and fees required to start and run the franchise business;
- An outline of the training and ongoing assistance provided by the franchisor;
- A list of current and former franchisees and their contact details; and
- Financial statements and other fiscal information.
Additional attachments to the FDD can include:
- The franchise agreement;
- The table of contents of the operations manual;
- The franchisor’s certificate signed by an officer of the company stating all material facts have been provided and all information is true; and
- A receipt to be signed and dated by the franchisee acknowledging receipt of the Disclosure Document.
Franchisors are required by law to supply disclosure documents in provinces where franchise legislation is enacted (Alberta, British Columbia, Ontario, Manitoba, New Brunswick, and P.E.I. have franchise legislation in place).
When pursuing a franchise opportunity outside of these provinces, many franchisors will provide these documents to potential owners in good faith to help them learn more about the opportunity.
If a franchisor fails to provide a prospective franchisee with proper disclosure when legally required, the franchise agreement can be rescinded for up to two years from when the franchise was granted. If your agreement is rescinded, you may also be compensated for losses sustained in acquiring, setting up, and operating the franchise business.