Buying a franchise is often considered an easy route to owning
your own business. However, you are about to invest one of the
largest sums of money you will ever invest in your life. You
need to do your homework, and you need to understand exactly what
you and your money are getting into.
The following are a few tips that ought to be considered when
buying a franchised business. This isn’t an exhaustive list, but it
should get you thinking about the kinds of information that it is
important to get at the outset, before you invest your money.
A franchise is the right to use a brand and commercial
system, usually within a particular territory. When you’re
buying a franchise, therefore, ensure you know the strength of the
brand. It is strong? Is it well protected? Are the franchisor’s
trade-marks registered? Is the franchisor’s portfolio of
trade-marks a large one? Is the commercial system that you are
going to use a strong one? Well-run? Will it provide value to you
if you join the system? Check the backgrounds of the operators of
the franchise system. How long have they been operating? Have they
operated in this line of business before, or are they
- Ensure the franchisor is financially healthy. Demand
up-to-date financials. (In fact, you should have gotten these from
the franchisor before you signed or paid for anything. If not, go
to a lawyer immediately.) Ensure you understand them, or take them
to a professional who does. If you have questions, ask. Get answers
- Ask existing franchisees how they like the system. Are
they making money (as a whole)? Are they receiving adequate
support? Are the royalties and fees paid to the franchisor
appropriate to their revenues? Talk to as many franchisees as you
can, so you know your information is accurate. Get a list of
lawsuits the franchisor is involved in. If a lot, it may signify
the franchise system has issues.
- Take all sales numbers with a grain of salt and a healthy
dose of skepticism. Demand hard data, and ask for all
assumptions that underlie any financial projections you are given,
in case those projections are not met down the road. Get all
financial promises in writing.
- Understand what you’re buying, and what you will be required
to do. Remember, your franchise agreement will last many years.
You only get the benefit of what’s in the franchise agreement and
the lease, so check those documents carefully. How long is the
franchise grant for? Do you get an exclusive territory? How big?
Can the franchisor encroach on that area? Can you renew? If so, for
how long, when do you provide notice, and how much does it cost?
How much are the royalties you need to pay? Are there other fees?
Do you need to buy particular supplies from particular people? What
kinds of things will allow the franchisor to kick you out of the
system? In your proposed lease, check its term, renewal rights
(ensure they match the franchise agreement), how rent will increase
in the future, and what violations of your lease allow the landlord
to terminate the lease agreement. Know your obligations in both
agreements. You will have to uphold your end of the franchise
agreement for the full term of the agreement, so make sure you
understand what you are agreeing to for the next five, ten, or even
- Finally, don’t hesitate to get professional help. Make
sure a lawyer reviews the proposed documents you are being asked to
sign, and consider hiring a lawyer to negotiate clauses in your
favour. Also, know what you are entitled to during the purchase
process. Franchise law is complex, and differs in each province and
territory in Canada. For example, in Ontario at least:
A franchisee must receive a disclosure document 14 days
before they sign anything or pay any money to the franchiser. If
not, the franchisee can cancel its agreement within two years. If
the disclosure document is missing information, a franchisee can
cancel its agreement within 60 days:
- Franchisors and franchisees must treat each other in good faith
and with fair dealing
- Misrepresentations (incorrect information) can give rise to
- If these issues arise for you, go immediately to a lawyer to
discuss your situation
Overall, you’re about to spend a lot of hard-earned money on
this investment, and hopefully you will be in the business for many
years. The things you sign now will be your obligations for years
to come. Spend a little time and money now to ensure the best
future for your investment.