Are you ready to grow your business, and want to learn more about how franchising can help fuel this growth? The Canadian Franchise Association (CFA) recently aired a series of Franchise Your Business instructional videos, featuring valuable franchising advice from the experts, including Larry Weinberg, Partner, Cassels Brock & Blackwell LLP; Paul daSilva, Retail Brand/Franchise Markets, Royal Bank of Canada; Todd Wylie, Vice President of Development, Panago Pizza Inc.; and Shawn Saraga, Senior Vice President, SRS Canada.
Below, we share some of the top tips from each seasoned veteran to help you learn the ins and outs of franchising your business from the point of view of a lawyer, a banker, a franchisor, and a consultant. Read on to find out how you can take your business to new heights through franchising!
The Legal Perspective
Put simply, franchising is a method of distributing goods and services. Technically, it’s the licence from the franchisor to the franchisee to use certain identifiable things over a period of time. In a typical business format franchise, the use of a name (trademark) and use of a system are licensed. The system refers to the total of all of the unique elements that, once used together, make up the franchised business.
Types of franchising
Traditional franchise system expansion is often done through single-unit operators, or direct franchising. In this model, the franchise agreement is between the franchisor and the individual franchisee.
Multi-unit operators/development agreements is another type of traditional system expansion. The franchisor signs an area development agreement with the area developer, who then signs on unit franchisees with individual franchise agreements.
Master franchising/Sub-franchising is when the franchisor signs on the sub-franchisor/master franchisee, who takes on the responsibility of being the franchisor in that particular area. The sub-franchisor is then in agreement with each individual franchisee through sub-franchise agreements.
Another type of franchising involves area representation, wherein the area representative acts as a broker, and has the right to market and support franchises in their territory. Franchise agreements are still signed between the franchisor and individual franchisees.
Franchising is defined by the contract between the franchisor and the franchisee, and the defining documents of this contract are the franchise agreement, and lease or sublease. The franchise agreements are the key asset of your franchise business, so you need to ensure you get them right.
Some of the fundamental issues that are addressed in the franchise agreement are:
- term and renewal
- ongoing obligations
- franchise fee
- restrictive covenants (i.e. non-competes)
- location/site development
While every franchise agreement will address these things, how they address them will vary from system to system.
Franchise legislation is in now in place in six provinces – British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island. The key features of franchise legislation are the presale disclosure to prospective franchisees, the right to associate, and the duty of fair dealing.
The franchisor must deliver a franchise disclosure document to the franchisee before they can sign the franchise agreement, and the franchisee must wait at least 14 days before signing the agreement or providing any payment.
The disclosure document must contain all “material facts,” which includes any information about the franchisor or franchisor’s associates, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise.
There is significant legal risk if the disclosure process isn’t navigated properly, so you need to work with a franchise lawyer and accountant who have the right experience.
The Banker’s Perspective
Banks like to work with franchises because they have proven business concepts, a desire to continuously grow and improve, are looking to make a financial commitment, have a management support network, provide oversight and expertise and comprehensive training, and encourage collaboration between the franchisor and its franchisees.
What banks look for when working with franchise systems:
- revenue reliance
- site selection/development
- franchisee selection/training
- stable/sustainable financial performance
- reliance on projections
- system standardization/controls
- brand value
- history of performance
As a franchisor, the banks will look at your financials to determine whether you’re financially able to support the brand. They’ll also look at whether sufficient profitability is being generated to support research and development and expansion, along with whether earnings are generally stable and consistent.
Traditionally, the bank will work with the franchise after they’ve already selected the franchisee; the franchise has done its due diligence, and now the bank will do theirs. It’s incredibly important for the franchisor to qualify the franchisee before they go to the bank, and once they start to work with the franchisee, they’ll want to know how you assessed the franchisee – what are your qualifications/what are you looking for?
The bank will also want to have detailed information about the training you provide to franchisees, as this will help in understanding the system’s risk rating. More information helps improve the quality of the risk rating, which helps improve the bank’s appetite for that brand.
Banks prefer to work with systems that have standards in place, including:
- Is your concept easily duplicated?
- Is training consistent and available?
- Have operations manuals been prepared and regularly updated?
- Is there an effective intranet for franchisees?
- Effective site inspections
- New product/site innovation
- Sharing of best practices
- Monitoring of operations/service
There are two types of financing available: operating (overdrafts, lines of credit, credit cards) and term (bank term, CSBFL, cash flow, regular lease, small ticket lease). Term financing tends to be the most used product in franchising. Banks can also provide additional services, including POS/cash management, mobile payment processing, payment integration, direct collection of royalties, direct supplier payments, electronic reporting, and more.
When partnering with emerging brands, banks will typically like to sit down with the franchisor for an initial 45-60 minute conversation regarding franchise financing, which can help the franchisor in deciding how they want to structure their business model.
The Franchisor’s Perspective
When setting out to grow your business, one of the first questions you need to answer is whether you have a sustainable business. If the answer is “yes,” why is it sustainable? Does your business fill a gap or are you trying to bring something to market that’s better than what already exists? You also need to look at why customers love your product or service – your brand needs to be on point with what your customers want.
The benefits of franchising are that it allows franchisees to be part of something bigger, and to share in the system’s success. It also provides franchisees with access to knowledge, experience, and systems and training, along with a network of franchise peers. Franchising also provides access to brand recognition; marketing, promotional, and advertising programs; and proprietary products, services, and pricing.
When starting to franchise your business, you need to have a clear strategy in place. This is why it’s important to come up with a business plan before you get started, which will outline your vision, core values and operating principles, brand promise, core competencies, and key targets.
To succeed as a franchisor, you need to have a profitable business, a strong brand, marketing programs, operations systems in place, to meet legal and governmental requirements, and to protect your trademarks. You also need to think about the support system you’ll have in place, including the application process, the criteria for site selection, how you’ll help franchisees with the construction process, purchasing and distribution, and marketing and promotional programs.
Community involvement is a major component of a successful franchise system, so you need to determine which programs you’ll support, and whether your franchisees will have the option to support the programs that are close to their own hearts and communities.
Once you’ve determined that franchising is the right growth strategy for you, you need to hire the right consultants early in the process, to reach out to others in the industry for help and advice, to build the best possible business plan, and most importantly, to not run out of money. Cash flow can be one of the biggest concerns, so you need to have a banking partner, and you need to be prepared, because it’s going to cost more than you think to build your business.
The Consultant’s Perspective
When do you franchise your business?
- When you can prove that it’s a replicable business model, and when you can look people in the eye and truly believe that they’ll be able to find success with your business.
- When your vision of success aligns with that of your franchisees. When you’re bringing a franchisee into your system, ask: What is your definition of success? You need to read between the lines, listen to franchisees, and ask them what their finish line is supposed to look like.
- When you know that growing with other people’s money is a responsibility that demands respect and consideration, and are willing to let someone else manage your brand and, in turn, its reputation.
Finding the right franchisees
Franchisees are looking to invest in your franchise business, and will have a number of questions to ask you, as the franchisor, to determine whether the franchise is the right fit for them. During this process, you’ll also have the opportunity to ask critical questions that will help you determine whether the franchisee is the right person to take ownership of a franchise in your system.
There are a few key questions you should ask a franchisee candidate:
- How much unencumbered cash do you have to invest? It’s important to know up front whether they’re able to make the right investment in your business. If they don’t have enough to invest, it’s best to cut them loose early in the process.
- How much money do you need to make in a year to make this investment worth your while? This will help you in determining whether they have realistic expectations that you’ll be able to meet when it comes to the success of the business.
- Where do you live? It’s a good idea to keep the franchise owner (especially if it’s their first franchise location) within about a 30-minute drive of where they live. They’re already going to be spending so much time growing your business, and can’t afford the time it would take to make a lengthy daily commute.
An existing franchisee is the absolute best asset that you have in growing a franchise system – the “secret ingredient” to growing a franchise system is happy, profitable franchisees. For those franchising off of spec, or one location, it’s a good idea to engage a business plan writing consultant to help map out the financial model for prospective franchisees.
To access the full Franchise Your Business instructional videos, visit www.cfa.ca/franchise-your-business-videos