Is an emerging franchisor brand right for you?
By Andrew Carter
It goes without saying that COVID-19 has disrupted much of the business world, and the franchise is no exception. While some networks have put the brakes on development, others have pushed forward, including some entrepreneurs who have spent the last 18 months developing their own franchise network. There has also been an increase in international and American brands entering Canada. Whether it’s an emerging franchise or a new franchise in Canada, businesses will likely face the challenge of finding the right franchisees and determining the appropriate markets to enter. If someone is considering a new emerging franchise network in Canada, how will they know if they have found the right fit?
Where to find opportunities
To begin with, it is important to know how franchisees receive their information. As the country has been in various stages of lockdown since March 2020, reduced or eliminated commuting times have provided many more opportunities for screen time on the internet. As a result, many potential franchisees start the process with their favorite search engine. This leads to franchisees having more choice in how they invest their money, putting pressure on each brand to attract the best and the brightest. Potential franchisees no longer need to have intimate knowledge to consider the brand as a potential business opportunity.
In many cases, the franchisees of the new networks are usually family members or friends. While great for growing units, a brand’s first franchisees can really make an impact and shape its future.
Family and friends can be more forgiving with a franchisor’s on-the-job learning. However, long-term family relationships could become difficult if business does not meet expectations. Thus, the awarding of a franchise should always be based on operational and financial merit. Remember that existing franchisees are part of the brand’s recruiting force, as they will be interviewing candidates considering the network.
As a new franchisor, investing in a website that can easily respond to franchisee requests helps keep the business at the top of the prospect list. Spend time on other franchise network websites and understand where layout and information could be improved. Specifically, for international franchises, having an area of the site dedicated to Canadian recruitment with all the content specified for the specific audience will allow for better comparisons.
Easier access to franchise information can lead to increased inquiries from emerging or new networks across the country or even the world. While this can give franchisors reassurance that there is broad appeal, choices must be made to stay within the planned growth strategy or how to address interest in markets where there is no no immediate intention to develop. Is a Master Franchisor License or Area Development Agreement suitable for both the brand and the franchisee?
Location, location, location
Whichever market you choose, one of the biggest challenges for all brands, but especially new or emerging ones, is finding real estate. At one point during the pandemic, it was thought there would be a glut of space as businesses closed. Although it happened in some areas, the government and relief programs prevented disaster everywhere and now the scarcity of commercial space is pushing rental rates up again. Add to that landlords who prefer to work with established brands, the challenge of finding suitable property is considerable. Brands big and small will compete for real estate in the “hot corner,” but ultimately franchisees will have to factor that into their financial projections.
Rising business prices
Brands have also seen rising construction costs in recent years. With the skyrocketing price of lumber and related building materials and the right workforce, franchises have had to adapt. In most cases, franchisors must build on a large scale and ultimately build to sell. A single unit should provide the necessary cash flow to facilitate ownership of multiple units/territories. A smaller physical footprint will reduce initial investment and lower operating costs. Determine if your footprint matches similar networks and are you ready to accommodate non-traditional locations such as gas stations, schools, and online plazas. Is a drive-in necessary? What operational efficiencies are available to reduce overall size and how has the network adapted during the COVID crisis? How was the technology adopted and is it effective? These are the questions franchisors need to answer to stay relevant. These are also the same questions potential franchisees should ask themselves as they research where to invest and continue to narrow down their options with their wallet on heart.
To become business owners and cover all start-up costs, franchisees increasingly want to use their home equity as their primary source of funds for investment. The residential real estate market continues to grow, as does the level of mortgage lending. An over-indebted owner can become a risky business owner. Franchisors need to know the TDSR (total debt service ratio) of the franchisee’s personal debt. A number above 40% should be a red flag.
The role of the franchise fee
One of the big temptations for new and emerging brands is to charge upfront franchise fees that quickly recoup the costs. Without a success story to build on, a franchisee will recognize more risk with a new or emerging franchise. This can lead to negotiation of upfront franchise fees, royalty structure, or marketing fund, or in some cases, networks can find themselves losing candidates. Additionally, franchisees and franchisors will need to consider the level of support to be provided during the initial growth plan. How will an international brand properly support a single unit in Canada and what is their two to five year plan?
Let’s not forget the basic principle of franchising: be in business for yourself, not by yourself. As the number of franchises has grown in Canada, so has the number of support staff to help franchisors and franchisees. No matter which side of the table a person is on, they need to surround themselves with experts – lawyers, accountants and bankers who specialize in franchising and provide relevant insight into the decision-making process. This is especially important for brands entering Canada. Additionally, Franchise Consultants can assist in the creation of operations manuals, growth plans, communications strategies, and franchisee recruitment, both initially and on an ongoing basis.
Looking back on COVID, the franchise industry will be able to share positive stories of how it adapted, grew, and ultimately got better. Whether it’s a long-standing franchise network, new to the scene, or new to Canada, location will always matter a lot, as will the franchisee themselves. Remember that every franchise started with a unit.
Andrew Carter is a Regional Market Leader for BMO. An expert in franchise operations, Andrew brings insight and perspective on franchise financing. He can be reached at [email protected]