If you’re looking to make your business ownership dreams come true, franchising can provide the right path for you to successfully build your business. Before you get started, however, you need to answer some important questions and conduct the proper due diligence so you can make the most informed investment decision.

Is franchising for you?

The franchise business model has many advantages, including the opportunity to be in business for yourself, but not by yourself. Franchising, however, isn’t the perfect fit for every entrepreneur, as it requires the franchisee to strictly follow the franchisor’s operating systems and procedures. While some franchises allow for lots of collaboration with franchisees, you ultimately won’t be coming up with your own unique ideas and testing them out. Your fate is also tied strongly to the franchisor, it can cost more, and the performance of other franchisees in the system can have an impact on your own location. Before you embark on a career in franchising, you need to be comfortable with following a system and working together with the franchise head office and other franchisees in the system.

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.

Seven provinces currently have franchise legislature that outlines the contractual obligations between a franchisor and its franchisees: British Columbia, Alberta, Manitoba, New Brunswick, Ontario, Prince Edward Island, and Saskatchewan. 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.

Finding the right franchise

Finding the right franchise to invest in is a critical first step in the franchise process. As you carry out your research, it’s important to choose an industry that interests you, and to look at the different brands franchising in that industry. You also need to ensure you can afford a franchise in this industry—do you have the capital, including working capital and emergency capital, to not only get started, but also to allow you to continue to earn a living in slower times? You can look to available resources, including publications, websites, and tradeshows, to learn more about specific industries and opportunities.

Not all franchises are the same!

As you hone in on your future franchise, there are many factors to consider. Do you want to partner with a mature system with years of experience, with a strong, established operating system in place? Or do you want to join a new franchise system, where you’ll have an opportunity to have more input and help the brand grow? Remember that there’s no one-size-fits-all approach to franchising— each franchisor is unique, franchise agreements differ between systems and franchisees, and the system procedures and their enforcement are not uniform across all brands.

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.

Investigate, investigate, investigate

It’s critical to carry out proper and thorough due diligence with the help of franchise professionals, including a franchise lawyer, accountant, and banker. It’s also important to speak with other franchisees in the system, along with suppliers, landlords, and customers, to get their impressions of the franchise system before you make your final investment decision.

This content is adapted from a presentation by Ned Levitt of Dickinson Wright LLP during the Franchise Canada Show in Toronto.