Ten things to look for in a franchise (Part 2)

In Part 1 of this 2-part blog post, we identified the significance of “fit” and of some key operational aspects in a franchisor that a franchise candidate should consider before investing in the business. In this Part 2, we look at factors to consider in evaluating a franchisor and discuss why those aspects need to fit with a franchise candidate’s long-term goals, both professional and personal.

6. Franchisor’s History

It is imperative to obtain as much information as possible before investing in a franchise. Franchisees in Ontario and other provinces have the benefit of receiving a disclosure document from the franchisor, which contains a wealth of information, including the names and contact information of existing and former franchisees. Existing franchisees are often happy to share their experiences, particularly those with very impactful experiences, whether positive or negative. “Inside” information from existing franchisees can prove to be very valuable. In addition, franchise association websites (www.cfa.ca and www.lookforafranchise.ca) provide basic information, including information about a franchise’s competitors, if those franchises are association members.

Legal, accounting and other business advisors are invaluable when it comes to dissecting the plethora of information contained in a disclosure document, or other very technical materials of the franchisor. Accountants and business advisors should assess the financial health of the franchisor and its earnings projections or cost estimates, if provided. Lawyers are essential to identifying pitfalls, off-market terms, and other red flags, such as previous bankruptcies and litigation, and whether the franchisor complies with local franchise laws. Given typical 5-year or 10-year terms of franchise agreements, investing in good advice up-front is much more prudent than proceeding blindly, and then trying to get out of a bad deal.

7. Technology

Franchised businesses have not been immune to advances in technology, and, in some cases, technology has dramatically improved franchise processes. A franchisee should evaluate and inquire about a franchisor’s online and social media presence, as these platforms become increasingly important for businesses. The quality of a franchisor’s website and social media campaigns should accurately reflect the brand of the franchise, and should portray an image with which the franchisee wants to be associated.

Some franchisors use technology to facilitate communication amongst the franchisor and its franchisees by implementing certain software or hardware systems, such as providing access to operations manuals via web portals, or tracking, analyzing, and mining customer sales data at individual franchise locations. Some service-based franchises have developed systems that allow customers to book appointments online, and that auto-generate communications with customers for feedback. The use of technology to improve the franchise experience is contributing to evolving industry standards. Buying a franchise is a long-term investment: a franchise candidate should ensure that the franchisor is staying current with routine technological advances.

8. Marketing

Business operators can find it difficult to step back from daily operations to plan and carry out marketing and promotional campaigns. A franchise has the advantage of having a franchisor assist with system-wide advertising and marketing campaigns. Many franchises collect advertising funds, which are pooled to develop marketing and promotions for the entire franchise system. This is generally a benefit to franchisees, but a particular marketing campaign may not necessarily benefit a franchisee’s particular location. In addition, the advertising fund is often used to produce “stock” materials, which franchisees use to produce and purchase through a local signage company at their own cost. Understanding the franchisor’s general approach to the use of the advertising fund is important. Franchisees should also bear in mind that they are often still responsible for conducting and funding local marketing campaigns.

9. Terms Offered

When negotiating a franchise deal, franchise candidates are generally told that the franchise agreement is not negotiable. Usually, the only terms requiring negotiation are the location of the franchise and any exclusive territory to be granted. However, special circumstances may warrant negotiation, such as multi-unit franchise agreements. Also, there will often be room for discussion with newer franchisors, or for franchise locations that are the first of its kind in the local market. Legal professionals can help determine what is negotiable and what is not. Even if negotiations do not result in any changes to the franchise agreement, it is insightful to understand what a franchisor’s “hot button” items are, why they are saying “no” to certain requests, and how they respond to a challenge. Knowing this type information can help franchise candidates understand a franchise’s culture.

10. A Long-Term Investment

The designation by a franchisor of the exclusive use of certain suppliers ensures consistency across the system, and can also benefit franchisees in other ways. Certain franchises provide access to a unique and proprietary product, such as a secret recipe for a restaurant, or an exclusive teaching method for a tutoring business. Other franchises harness the power of numbers of its franchisees to negotiate rebates or lower prices with suppliers.  Note that it is not uncommon for these types of volume rebates or discounts are not always passed on to the franchisee.  If the franchisor does not pass on these savings, franchisees should ensure that supplies are being sold to them at competitive market rates. For example, a franchisee that is required to use the franchisor, or a contractor designated by the franchisor, as its general contractor to build out a franchise location should carefully review the competitiveness of the constructions costs, including who is responsible for overruns.  Franchisees may also benefit from relationships that a franchisor establishes with banks to obtain or to fast-track the approval of financing. Finally, large retail property centres often deal primarily or exclusively with franchisors, making it difficult for entrepreneurs to otherwise secure locations at these sites.

While each of the above-listed items should be evaluated independently, it is critical for a franchise candidate to take a holistic approach in the evaluation of a franchise opportunity by considering each of these items in the aggregate. For example, if a franchise concept feels like a good “fit”, but the fee structure is high compared to similar systems, or the franchisor has a complex history of litigation, the perceived benefits may not outweigh the drawbacks. Franchisees should do their homework and seek professional advice before investing significant resources and committing to a brand.