We’re taking you through the steps and terms you need to know before starting your franchise journey
This content is taken from the CFA’s March 6, 2024, Learn & Grow webinar titled “Fundamentals of Franchising,” hosted by Kristen Gale, founder and CEO of THE TEN SPOT.
So, what exactly is franchising?
Franchising is when a company licenses their brand’s intellectual property, products and services, and operational procedures and manuals to location owners, who are called franchisees. Conversely, companies who enter the franchise industry by licensing their brand are called franchisors. Franchisees “buy in” to the franchise system to get access to pre-built procedures.
The concept actually began not with McDonald’s as many people believe, but with a woman from Oakville, Ontario, who in the 1880s launched a salon business and decided to teach her method to other women. Eventually, she grew her company to 500 locations, an amazing achievement in 2024 let alone the 19th century!
How does a company begin franchising?
Deciding whether to get into franchising isn’t a casual decision for businesses. And after investigating their options, some businesses realize that they aren’t yet at a stage where they can successfully franchise, either due to a lack of resources, experience, or other factors.
Once they are ready, however, a company can prepare themselves to enter the franchise industry by:
- Ensuring they have trademarked all their intellectual property (IP) and business concept, including branding, logos, wordmarks, operational programs, etc.
- Soliciting the help of a lawyer who specializes in franchise law to create their franchise agreement.
- Leaning on financial experts to ensure that they are in good fiscal standing.
From there, they can license their business concept to franchisees.
Six provinces currently have franchise legislature that outlines the contractual obligations between a franchisor and its franchisees: British Columbia, Alberta, Manitoba, New Brunswick, Ontario, and Prince Edward Island (while Saskatchewan’s The Franchise Disclosure Act has received royal assent, it has not yet come into full force at the time of publication). Under these laws, franchisors must provide a franchise disclosure document and franchise agreement to their franchisees within a specific time frame (usually 14 days) and containing specific material information.
What are some of the terms I need to know?
Below is a list of definitions that you should familiarize yourself with as you begin your franchise journey. As with any investment, it’s always best to solicit the help of professionals, whether they be franchise law experts or franchise consultants, before making what is likely the biggest decision of your life.
Franchise disclosure document (FDD): The FDD gives you intel about the franchisor you are looking to partner with. It’s a document provided to franchisees that outlines how the franchise system is run and other aspects of the business, including:
- The company’s ownership structure, including the C-suite and their roles
- The trademarks they own
- All costs associated with launching a franchise location
- Ongoing fees charged by the franchisor to the franchisee
- The training and support that a franchisee will receive
- Other non-monetary obligations the franchisee will have to the franchisor
- The non-monetary obligations that the franchisor has to the franchisee
- Some historical revenue (though not always included)
- Contact information for current and former franchisees (included so that you can ask them about their experiences within the system)
- A copy of the franchise agreement (you will want to read this ahead of time, which is why it’s included in the FDD)
Franchise agreement: The franchise agreement outlines the parameters of the relationship and details all the responsibilities that the two parties have to each other. It’s included in the FDD (in provinces where it is a requirement) and serves as the contract between the franchisor and the franchisee—which is why it is important to always get a franchise law specialist to look it over before signing.
Initial fee: Also called the franchise fee, this is a set, one-time fee that helps cover your training and other preparation costs needed to get you fully prepared to own and operate your business. The franchisor doesn’t make a lot of money off this; instead, it’s used to help support you in finding contractors, financing, a proper location, etc. After all, it takes a village (and a ton of work) to go from signing the agreement to being fully open and operational!
Royalty fee: This is an ongoing fee that the franchisee pays to the franchisor based on sales and is applicable as soon as your business is open. It’s often six per cent of topline sales, though it can vary, and it covers your ongoing right to use the franchise’s branding, logos, trademarks, suppliers, and more. It will also help support innovations that the brand will make during the time you own a location. Because it’s a percentage of your revenue, the better a franchisee does, the better the franchisor does in return. And the more locations a franchise system has, the larger their intake.
Marketing fee: Some franchisors also charge a marketing fee, which is also known as an ad fund fee or brand fee, among other terms. It’s a collection of funds that the franchisor gathers from all franchisees and uses to instigate large, often national marketing campaigns. This is of great benefit to every franchisee, as it helps with brand recognition from coast to coast. After all, a single location may not be able to afford a celebrity endorsement, but with a large pool of funds, signing an athlete or movie star is a possibility that the franchisor can explore.
What are the benefits of franchising?
Franchising offers benefits to both the brand and the franchisee. For the franchisor, it helps them grow their company without having to resort to taking out a loan from a friend, loved one, business partner, or financial institution.
For the franchisee, they are able to open their own business under the guidance of a proven system that has already worked out the major kinks in its corporate locations or with previous franchisees. It is often easier to find success when you have the expertise of a franchise system and its strong branding behind you.
Another benefit is that the potential for profit is within the franchisee’s hands. The franchisor-franchisee relationship is a fantastic dynamic, wherein as a franchise’s location owners find success and grow their small businesses, the franchisor benefits through ongoing fees (see “What are the terms …” at left) with the added bonus of increased brand recognition. And the better the franchise does, the more money the franchisor has to invest back into the system—it’s a win-win!
Note that franchisors cannot guarantee a specific revenue or income for a location. If they do try to overpromise or claim untold riches, consider that a huge red flag. While both the franchisee and the franchisor should be aligned in the profit goals for the location, it’s worth bearing in mind that most new businesses take a while to become profitable.
What are the associated costs that are laid out in the FDD?
To best prepare franchisees for the realities of launching their business, an FDD will include a breakdown of all costs associated with launching the franchise location. This initial investment breakdown will include all large and small purchases/necessities that may not be assumed by a new franchisee (you don’t know what you don’t know until you know it!), and can include, but is not limited to:
- For brick-and-mortar businesses: All estimated costs for built-out, drawings, permits, construction, coordination, custom millwork, and anything else that needs to be set up prior to launch, as well as first and last month’s rent. For national brands in several provinces or markets, a breakdown by region may be included.
- For mobile, home-based, or other business types: The cost of trucks, kiosks, websites, etc.
- Legal fees (this includes having the franchise agreement reviewed—not to make any changes, as the agreement is not usually customizable, but because you will want to understand exactly what you are signing)
- Initial local marketing costs
- Wages needed to train staff (as you will need to set them up for success before you throw open the doors)
- Other financial responsibilities of the franchisee, such as software subscription charges or insurance fees specific to the industry
What are some ways I can determine the right franchise system for me?
There are many different types of businesses in the franchise industry—in fact, it encompasses almost every sector. There are more than 60 categories of businesses in the Canadian Franchise Association’s (CFA) membership alone!
Attending tradeshows, such as the Franchise Canada Show, coming to Toronto’s International Centre on February 1 and 2, is a great way to research your options and meet face to face with franchisors who are looking to expand through prospective franchisees like yourself. The CFA’s online directory (LookforaFranchise.ca) is another fantastic resource for whittling down your options. You can search for franchise opportunities by geographic location, investment level, category, and much more, and it allows you to reach out to the franchisor directly for more information and to express your interest.
Again, it’s always best to rely on the advice and opinions of those who have been there before, whether current or former franchisees, franchise law experts, or franchise consultants. There are plenty of ways to enter the franchise industry, and even more benefits—namely, being your own boss!