A franchise is a type of business where a company gives business owners the right to use its brand and sell its products. A franchisee or franchise owner signs a contract and pays a large sum of money to use a franchisor’s brand and business model.
Entrepreneurs opt for franchising due to its established market. Business owners don’t need to have experience in the trade, and they can ride on the brand’s success to make money. Most franchises offer support and training to ensure the quality and consistency of goods and services sold.
Franchises can extend across various products and services. They include brands like McDonalds, Starbucks, ACE Hardware, Shell Oil and Gas and others.
Let’s learn about how a franchise is formed:
What is a franchise?
A strong franchise system needs to be carried by a solid brand that can capture attention and retain customers. When people think of a product, they automatically think of the top three brands that come to mind. A franchise can only go as far as the brand will take it.
The branding of a franchise determines the business’s success because as the business grows in breadth, the brand carries its reputation. Therefore, a franchise’s brand must be consistent, relevant and meaningful.
A brand carries more than a logo, name and font type. It also embodies the language, the emotions, the treatment of customers and the quality of products and services rendered. It is evident in the outlook and labelling of a product and throughout a customer’s experience with the business. As more and more outlets spring up, franchisors must ensure that the product quality and customer experience remain consistent.
With franchising, business owners need to consider what is required to build a strong brand that can withstand the test of time. The business not only needs to attract customers but potential franchisees as well. If the prospect of the business does not look promising, franchising may not happen.
Support for franchisees
As a franchise is not purely cosmetic, franchisors need to ensure that franchisees provide the same quality of products and services to customers across all store locations.
To ensure this, franchisors need to offer administrative support, marketing, training, supply of materials or products, and other processes.
Franchisors also need to set strict regulations for franchisees for customers to have a consistent experience with the brand.
Franchising regulations in Canada
There is no federal franchise legislation in Canada, as franchising is regulated at the provincial level. The provinces of Alberta, Manitoba, British Columbia, Ontario, New Brunswick and Prince Edward Island have enacted independent franchise legislation.
In Canada, the recognized authority for franchising is The Canadian Franchise Association (CFA). The CFA works on behalf of franchisors and franchisees and supports the franchise business model. Additionally, it provides important resources and educates Canadians about franchising.
Legal advice for franchises
Generally, the Franchise Regulation in Canada requires interested franchisors to abide by legal procedures and submit documents before introducing a franchise brand to the market.
Franchisors in Canada must present a Franchise Disclosure Document (FDD) to a buyer disclosing the franchise concept, the terms of the relationship and the legal framework between franchisor and franchisee.
With this being said, it is wise to consult a franchise lawyer who can give detailed advice about the Franchising Code of Conduct, the franchise agreement and FDD.
These documents are mandatory to set up a franchise system to set clear expectations, define ownership of assets and avoid disputes.
Creating a legal structure
The few common legal structures used by franchisors are S-corporations, C-corporations, sole proprietorships, general partnerships and limited liability companies (LLC).
However, C-corps are more popular with franchisors due to their equity distribution for investors. The main benefit of having a C-corp structure is to position a business for future growth by getting additional capital from investors.
Most franchisees opt for LLC since it is a separate legal entity from business owners, limiting personal liability.
There are pros and cons to each legal structure, depending on the nature and structure of the franchise business. Business owners should consult professional legal advice to make the best decision for the franchise’s success.
Kenny Rose, the CEO of a Chicago franchise consultancy, advised prospective franchise owners to have at least $50,000 in liquid assets, a $150,000 total net worth, and a 680 credit score. He added that prospective franchisors should engage a lender that specializes in franchising.
There are many avenues to fund a franchise. One can look into commercial business loans and lines of credit. Having a healthy credit score will give lenders more confidence in the business.