Many newcomers look into buying a franchise as a way of starting a business in Canada. Owning a franchise can be a good option if you want to be your own boss, but don’t want to start a business from scratch. But it’s important to understand what you are buying.
Understand what you are buying
“When you buy a franchise you are buying a turnkey operation, not a start-up,” explains chartered accountant Debby Stern, a partner with Soberman LLP in Toronto. “The business has a proven track record. You are also buying training and other support from the franchisor.”
Do your homework
“You need to do a lot of research before you buy a franchise,” says chartered accountant David Sanderson, a partner with McGovern, Hurley, Cunning-ham LLP in Toronto. “In Ontario, the Arthur Wishart Act sets out what must be disclosed by the franchisor. You should also speak to a lawyer, a chartered accountant and other franchisees.”
Be sure to review the franchise agreement in detail
Find out how long the franchise has been in business and whether the actual financial results met the projections. “Also find out where your franchise is located, compared to other existing franchises,” says Stern. “You don’t want to be competing with the same franchise,” he adds.
Know what assistance is available
“The franchisor will usually help you find a location, help you set up, help purchase inventory and provide training and the accounting system. There will likely be an operating manual that sets out how to do everything, and you cannot deviate from that,” says Stern.
Be aware of all fees and other costs
“The fees should be accurately set out in the disclosure document,” explains Sanderson. “It usually includes estimates of the cost of rent, inventory, advertising and royalties.”
Consider the hidden costs associated with operating the franchise
“Most franchise agreements are time-limited,” adds Stern. “This means you may have to pay another fee in 15 to 20 years, or may have to renegotiate your royalty amount.”
Prepare to sell
“When you sell, your obligations are usually spelled out in your contractual agreement with the franchisor,” explains Sanderson. “The franchisor may have first rights of refusal or may indicate that you must sell to an existing franchisee. You may also be able to sell to a third party who is approved by the franchisor.”
Set your price
“The franchisor will usually provide guidelines on how to price your franchise,” says Sanderson. “Be sure to set up your tax situation in a way that returns the most cash to you.”
Put things in order
“Make sure your tax filings and financial statements are up to date,” advises Stern. “Try to sell at the optimum time, when your profits are high.” Adds Sanderson: “Make sure the premises are clean and attractive.”
Help the buyer
“To effect a smoother transition, you should be prepared to offer assistance,” says Sanderson. This is important if you have taken debt back and the new owner owes you money. You want them to succeed. You can include compensation for your assistance in the purchase agreement.