From coffee and fast food to cleaning services and hair salons — franchises are everywhere. If you want to run your own business, a franchise offers many positive benefits, including brand recognition, training and support.
“However, franchises aren’t guaranteed to succeed and they’re not for everyone,” says Fellow Chartered Professional Accountant Marvin Martenfeld, a partner with MNP LLP in Markham. Here are Martenfeld’s tips on how to determine whether a franchise is right for you.
Understand the difference between a franchise and a non-franchise business – “A franchise is a business already established by someone,” he explains. “That person has developed a brand and a following. Businesses that work best as franchises are ones that can be easily replicated in other locations and maintain their success.”
Be prepared to follow the rules – “The person who established the franchise has developed an operations manual covering every aspect of the business operation,” says Martenfeld. “The franchise agreement spells out that the franchisee must follow the operations manual. So franchises are not a good fit for entrepreneurs who want to do things their way.”
Recognize the pros and cons – “The pros of a franchise are that the business is already out there, is recognized and is a proven success,” says Martenfeld. “As well, because the operations manual is in place, you can get up and running immediately, the learning curve is short and you are likely to make fewer mistakes.” The biggest con, Martenfeld adds, is the lack of opportunity to be creative. “Another possible con is that some franchisors require you to purchase all your products through their company instead of from local suppliers.”
Do your homework – “A good starting point is the disclosure statement from the franchisor, which will include the franchise’s financial position, how many franchises have opened and how many have closed,” advises Martenfeld. “If some have closed, ask why.” In addition to researching the franchise on the Internet, Martenfeld suggests speaking to existing franchisees. “You would be surprised how open they are and how much you can learn by listening to a franchisee, especially an unhappy one.” Many franchises also have franchisee councils. “If there is one, try to connect with it,” adds Martenfeld.
Figure out what you can afford – “A franchisor will expect you to invest some of your own money,” says Martenfeld. “Typically, there are three types of payments involved: the initial franchise fee; a royalty paid to the franchisor, based on revenues; and an allowance paid to the franchisor for local and regional marketing.”
Know yourself – “A franchise does not guarantee success,” says Martenfeld. “You need to be sure you are comfortable following the franchise rules. Be prepared for long hours and hard work.”
© 2015 Chartered Professional Accountants of Ontario