Buy or Lease a Vehicle?
Is A Franchise For You?
You're thinking of buying a franchise, but you don't know where to start. What
should you consider before making the final decision?
"With a franchise, remember that you are entering into a partnership and you
want to make sure that partnership will work," advises Chartered Accountant
Marvin Martenfeld, Partner with DMCT LLP in Toronto.
"A franchise is a marketing technique to distribute products or services, based
on a legal contractual relationship. Theoretically, the franchisor supplies the
products, training, backup support and a system to sell these products, and the
franchisee supplies them to the public."
"A franchise is basically an owner-managed business, not a nine-to-five job, and
takes a certain mindset to be successful," explains Chartered Accountant Douglas
Rankin, Partner with Scott, Rankin and Gardiner LLP in Ottawa.
"Look at the soft issues before you begin to think about the numbers. Is your
experience suitable to a business environment? A franchise requires a hefty
personal commitment of time and money for the first three years. Are you willing
to make this sacrifice?"
How does the financial arrangement work between the parties?
According to Martenfeld, a specific fee structure is typically involved.
"The franchise fee—an upfront, one-time fee that covers legal fees, site
selection costs and training—can run from a nominal amount to a fairly hefty
fee of several hundred thousands, depending on the franchise.
"The franchisee also pays royalties, usually from two to four per cent, which
are based on the top-line sales of the organization, as well as a marketing fee,
which goes into a general marketing pool.
"Each franchise has a franchising contract or department that will send you a
package with an application form, and assess your background, education, income
and assets."
Martenfeld says that training is essential.
"Each franchise is a system that you have to learn, with set routines documented
in operations and training manuals. It may sound easy enough, but franchises do
fail, usually because of bad site selection or a lack of support from the
franchisor. It's a good idea to check with other franchisees to verify the level
of support and the caliber of marketing."
What comes next?
Do your due diligence, says Rankin.
"Investigate the types of franchises available. Attend a franchise trade show to
research the market. Is this a valid franchise with a good reputation? Find out
about the franchise model and operational structure. You must also decide the
ownership structure.
"Check the numbers. As the franchisee, you are bringing an investment to the
table. What is your fall back position, should things go awry and your sales
fail to meet targets? Will you be required to invest more money?"
Rankin adds that your personal financial situation is just as important as your
initial investment.
"What is your access to personal cash flow? Could you afford to service a bank
debt and not take a salary for two months?
"If you decide to incorporate, be aware that other ongoing costs are involved as
well as legal and accounting fees at the time of purchase. Incorporating often
makes sense, especially if potential liability is involved, and lets you take
advantage of lower tax rates and other tax strategies."
Are there any disadvantages to a franchise?
Both Martenfeld and Rankin agree that owning a franchise is not for everyone.
With a franchise, you're committing yourself to a program and, while the
structure can be an advantage, it can also be restrictive, allowing little
flexibility.
They also advise consulting your CA, who will help you assess the opportunities
and point out the risks.
For further information, contact a Chartered Accountant.
Brought to you by the Institute of Chartered Accountants of Ontario.