Author :

David Gray

David J. Gray MBA LLB is a Franchise Lawyer at
Sotos LLP and can be contacted at dgray@sotosllp.
com or 416.977.5333 ext 311

If you are looking for a career change, you may wish to join the many business people whom have had success turning to the franchise industry. But behind the enchantment and the "sizzle" is a lot of hard work and thoughtful analysis. Not only does buying a franchise transcend a career change with respect to the required prior due diligence, it also includes a significant financial and emotional commitment. Understanding what franchising is all about and what to expect is critical to a successful transition. The following article briefly covers the first steps in evaluating yourself and the prospective franchisor.


Step 1 - EVALUATE YOURSELF

Skills, Knowledge and Experience

A self-evaluation is the first thing to do, when deciding whether to become a franchisee, and of course which franchise system to join. Though prior experience is not a necessary requirement to being successful, you should compare your interests and skill set with your prospective franchisor's system and business to ensure that they match. This is not to suggest, however, that you must have experience with the specific product or service of the franchise. Not to be trite, if for example you don't see yourself working in a restaurant all day, then you should think twice before considering a restaurant style franchise system.

Interest and Enthusiasm

To be a successful franchisee, you need to be interested in running your own business and enthusiastic about your franchisor's product or service. Though often overlooked, many positive results originate from an enthusiastic outlook, including: (i) a positive attitude will motivate you through the ups and downs an entrepreneur may have to contend with; (ii) it will contribute to a better business relationship with the franchisor; (iii) it will be contagious and inspire your employees and other franchisees; and (iv) it will be noticed by customers making them more likely to patronize your business.

Equity Requirements

Being realistic about your financial position will eliminate those franchise systems whose equity requirement is more than you can comfortably manage. You should speak with your business advisor to make certain you scrutinize not only the franchise fee and the capital investment requirements, but also the cost to operate the business. Once you have a good understanding of your net worth and the extent of what you can afford to invest, make an appointment with your lender to determine the amount of money that you can borrow. Be prepared for the interview because as part of their decision making process, lenders will assess your financial history, business plan, as well as a host of other background checks.


Step 2 - EVALUATE THE FRANCHISOR

As a prospective franchisee, evaluating a franchise system may seem a daunting proposition. It is recommended that, prior to expending resources negotiating with a franchisor, you make sure first that this opportunity is for you, both from a financial and lifestyle perspective. Here are several sources and methods of evaluating the franchise opportunity:

Disclosure Documents

An excellent source of information about a franchise system, and a franchisor, can be harvested from a disclosure document (DD). In general, it will provide written information about the history of the franchise, financial performance and other material information important to a prospective franchisee’s ultimate decision as to whether to buy the franchise. You should strongly consider meeting with your legal and business advisor in order to get their impartial and critical opinion as to the contents of the DD.

Current and Terminated Franchisees of the Franchisor

Information about the franchisor’s support, commitment, integrity, business acumen, etc. should be readily available from the existing and previous franchisees in the system. By speaking to a range of franchisees (from most successful to least successful), a prospective franchisee should obtain a clear perception on the franchisor and the franchise opportunity.

Associations

Associations such as the Canadian Franchise Association (“CFA”) are useful sources of information about franchisors and franchises. For instance, the CFA may have info regarding previous complaints, membership standing with CFA, as well as competitors.

Industry Publications

A number of franchise magazines, including Canadian Opportunities, provide ongoing analysis on the franchise industry and feature articles on specific franchises. The writer cautions that franchise rankings should be used only as an aid in your evaluation and should not be relied upon in your decision-making.

Credit Rating Services

Credit rating services should not be overlooked as an evaluation tool, particularly in respect of a non-public company.

Business References

Though it is always recommended to request a list of references from the franchisor, a prospective franchisee may also want to contact others not listed with whom the franchisor does business.

Competitors

In order to analyse a franchisor’s strengths and weaknesses, it may be very helpful to contact the franchisor’s competitors.

Trade Shows and Expos

Franchise and business opportunity trade shows provide a great opportunity to meet a number of franchisors at the same time.

Franchise Consultants

Numerous franchise consulting companies and independent consultants can provide a wealth of information on either the franchise industry or a specific franchisor.

The Internet

A great number of franchise specific websites can assist you in researching the franchise industry.
In conclusion, there are several sources and methods of evaluating a franchisor's history as well as the franchise system. The prospective franchisee should review all of the information and have it evaluated by professional legal and business advisors.