As appeared in Franchise Canada Magazine March/ April 2008 as a tutorial.
Disclosure Documents are a summary of information on the franchisor, its executive and the franchise agreements. The document is provided to the prospective franchisee in order that they may make a more fully informed business decision. In Canada franchisors are required by law to provide a Disclosure Document to prospective franchisees in Alberta, New Brunswick, Ontario and PEI. At the time of writing this article other provinces.
Within your franchise business, typically one of the major expenses is the inventory. Inventory is defined as all the goods and materials that are held in stock and used by a business for the day to day operations. It may be the products you sell, as in a retail store. It may be the raw food products that you use to create meals, such as in a restaurant. Or it may be parts or materials you use to provide a service, such as in an automotive repair business.
Appeared in Franchise Canada Magazine November/ December 2010 Issue
Reviewing franchise opportunities can take a lot of time and you may be exposed to things that you are not familiar with, such as reviewing and understanding documents and putting together business plans or arranging financing. Then there is the overwhelming task of deciding which opportunity to pursue when you have thousands of options. For some it paralyses one to do nothing. A franchise consultant can assist you from several perspectives.
Supply chains, or approved suppliers, are those suppliers that a franchisor has identified, investigated and accepted to provide their product or service to the systems franchisees. The franchisee is typically required, under the terms of the franchise agreement, to purchase only from approved suppliers. The franchisee can order with peace of mind and confidence knowing that the products, equipment and services meet the franchisors specific qualifications and that they are getting a good price and level of service.
Appeared in franchise Canada Magazine March/ April 2008 As a Tutorial
Deposits are often collected by franchisors prior to entering into a full franchise agreement. They are typically a percentage of the initial franchise fee or the full initial franchise fee amount. In the event a franchise agreement is entered into the deposit is credited towards amounts owing. Should the potential franchisee choose not to move forward with the franchise, the deposit may or may not be refunded. There will usually be a Deposit Agreement that is entered into at the time the deposit is made which defines how and if the deposit will be returned, provides timelines and typically addresses the issue of confidentiality.
When opening a business as a franchisee you will want to ensure that you are adequately insured. Proper insurance allows you to recover from a financial loss during the occurrence of a specific event. Such event might consist of an employee or customer being injured at the business premises, business interruption due to fire or flood, theft or employee fraud. Each of these events can cause the franchisee to have a loss of income as well as the franchisor incur a loss of royalties.
Appeared in Franchise Canada Magazine May/ June 2008 as a Tutorial
In most franchise systems the franchisee is required to contribute a certain amount of money, called the advertising fee, for regional and/ or national advertising. It is the pooling of advertising dollars so that the franchisees can create a greater impact spending collectively on promoting and advertising the brand, versus if each franchisee were spending the same money independently. Advertising creates name recognition so that all franchisees may benefit.
One of the roles that as a franchisee you will spend a lot of time is the area of recruiting staff. Unless you are operating a one man operation, this will be an important part of your business. Recruiting staff is an ongoing function of management and can make the difference in the success of the business. Experience has proven repeatedly that well-selected employees will dramatically improve your success.
Appeared in Franchise Canada Magazine May/ June 2008 as a Tutorial
Most franchises require the franchisee to pay a royalty for the right to use the franchisor’s trade-marks and operating system. It is the franchisor’s portion or share of the revenues for allowing you to use the system. The franchisee benefits from using the trade-marks and operating system to increase the value of their business assets and future income by being connected to an established brand. Customers are more receptive to products that are associated with a known brand and this in turn will generate revenue. Once you have found a new customer, the operating systems are in place to assist you in keeping them as repeat customers.
All franchise agreements have a fixed term. They come to an end. That is the nature of a licensing relationship. A license has a beginning and an end. You are not buying the right to use the brand but instead leasing it, like the lease of a commercial space. At the end of the term you have the ability to renew the agreement for a further term, or you can end the relationship.
Appeared in Franchise Canada Magazine, Jan/Feb 2008
Definition of a Franchise
Franchising is a business relationship where a franchisor (a company or individual who owns the franchise system) grants a license to a franchisee (a company or person who contracts to use the franchise system) the right to use the franchisors brand and operating system for an initial fee (initial franchise fee). In return the franchisee provides a share of the income back to the franchisor (a royalty). The license is contractual and is usually for a fixed period of time. The franchisor selects candidates to become strategic-partners in implementing the business plan and selling products and services to the franchisor’s customers using the proven franchisors business model and/or their proprietary products. A franchise model has in place policies and procedures so as to create consistency from one franchise location to the other.
When it comes time to renew your franchise agreement there will typically be some costs- in the form of renewal fee and redesign or remodeling costs. You will want to plan for these costs and be prepared financially when it comes time to renew your franchise agreement for a new term.
Appeared in Franchise Canada Magazine July/ August 2008 As a Tutorial
Once you have been granted a franchise one of the first things that will happen is initial training. This training provides you with the knowledge and skills to duplicate the franchisor’s proven business model and replicate the customer experience.
Franchise agreements will typically address the issue of territories and/ or protected areas. Protected areas may be defined by a kilometer radius, postal codes, municipalities, cities or simply within the four walls of the franchised location. The territorial boundaries are defined and the franchise agreement will often state that no other franchisee shall be licensed or a corporate store opened to operate under the same brand within the territory, provided that your franchise license is in good standing and you are living up to all the terms of the franchise agreement.
As appeared in Franchise Canada Magazine as a tutorial.
Franchise fees are typically paid for the use of the brand and the operating system. There is usually a one time initial franchise fee as well as an ongoing fee, called a royalty. The ongoing royalty may be a flat monthly or weekly fee or, more often is a percentage of the gross sales from the business. In addition, most franchise companies charge a fee for an advertising fund where the advertising dollars of the franchisees are pooled together to allow for franchisees to share the costs of national or regional advertising. By pooling the ad dollars together they are able to afford advertising that would not have been affordable otherwise.
Single Unit / Multi-Unit / Area Development? Master Franchisee
Within franchising there are a variety of different growth formats used by franchisors. It provides different opportunities for a prospective franchisee. Beyond the single unit franchise where a franchisee has a single location there may be the following potential growth opportunities within a franchise brand. Check with the franchisor to determine if these opportunities may exist with the particular brand you are looking at.
At some point during the franchise relationship there may come a time where a decision will be made to bring the franchise business to an end. The franchise license term may simply come to an end and you may decide not to renew, or there could be other reasons why an end of the franchise agreement would take place
All franchise agreements make reference to defaults. This is where you are in breach of the franchise agreement. The franchise agreement has obligation that you must meet and to fail to meet these obligations will cause financial loss to the franchisor or cause damage to the franchise brand.
Most franchises will require that you operate out of a retail, office or commercial location. In these circumstances, you would enter into a head lease or sublease agreement. It is important that you understand the agreement and contractual relationship that you are entering into.
Great franchisors don’t stop at providing initial training. They provide on-going training and support that is designed to continue to develop the skills of the franchisee and franchisee staff for the duration of the franchise agreement. As with initial training, the details and extent of the on-going training varies widely between franchise companies and requires you to ask a lot of questions to have a strong understanding. Not all franchisors provide on-going training so be sure not to assume that they do.
Leasehold improvements are fixtures or improvements that are attached to the retail or commercial space and installed by the franchisee when setting up a new location. Upon expiration of the lease these improvements remain with the space and become the property of the landlord. Examples of such improvements might be walls, doors, cabinets, light fixtures, floor coverings and even machinery and equipment if it is bolted down to the floor. These improvements are required to make the space work for the needs of the business.
The operation manuals of a franchise system are the written documents that provide the franchisee with all the details to duplicate the business model. It is the proven operating system defined. Critical success factors are identified and communicated so that franchisees can consistently duplicate success.
Depending upon the maturity of the franchise, there may be just one general manual but more typically the document extends over a series of different manuals. A manual for management may be separated from a manual for employees. A pre-opening manual will often outline how to find the right location and build out the physical store with typical licensing requirements and build-out processes. An advertising or marketing manual will provide all details regarding the use of the trademarks and provide standardized advertising formats.
Despite all best efforts there will come time during the relationship where the franchisee and franchisor may not agree or see eye to eye on issues. This is a reality in any relationship.
A Franchisee Advisory Council (FAC) is a group of established franchisees who meet with company executives to discuss business issues that are of relevance to the majority of the franchisees. It is a structured vehicle for constructive two-way communication between the franchisee and franchisor.
The FAC may operate under different names or formats, but is typically organized by the franchisor. A slight variation is a Franchisee Association. The Franchisee Association is formed by the franchisees and is independent of the franchisor. They may function similar to a FAC, but the franchisees set their own structure, policies and agenda. They typically are formed when there is a system wide crisis, major change or event and franchisees feel they are not being listened to. In some franchise systems there may even be a FAC and Franchisee Association both functioning at the same time.