Everything You Need To Know About Franchising Your Business In Canada

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Everything You Need To Know About Franchising Your Business In Canada

Franchising Your Business

Among the different types of business models, the franchise model is the most popular one in Canada. Be it Booster Juice, Extreme Pita or Tim Hortons, Canada has its fair share of successful franchise businesses. According to the Canadian Franchise Association, there are an estimated 1300 franchise brands working across Canada. And, approximately one out of every 14 working Canadians are either directly or indirectly employed by the franchise industry.

Franchising is a great business model for those who are looking forward to expanding their business for themselves but not by themselves. If you are thinking that this business model is limited to only eatables, then you are wrong. In Canada, nearly 60 percent of the franchisees are from the non-food sectors and industrial verticals.

Franchising is a win-win for both the franchisor and the franchisee. The franchisor makes profits by taking a franchise fee and royalties from the franchisee. And, the franchisees get to work and invest in an already established business that has a successful track record and a distinctive brand value. From a macroeconomic perspective, franchising is a good way to create more jobs in the market. Every time a new franchise is set up, new jobs are created. With over 78,000 franchise units established across Canada, this business model is also a major contributor to the overall economy of the nation.

Whether you are an aspiring franchisee or a successful entrepreneur looking forward to expanding your business, this guide will briefly cover everything you need to know about franchising in Canada:

What is Franchising?

Let’s get down to the basics and understand what is franchising. Franchising is a business model, through which a business owner (the franchisor) grants a license to use his trademark/trade name and operation model for a fee to another enterprise or individual. The person who buys the license (the franchisee) will run the business independently, using the operating system of the franchisor. The licensee or the franchisee will have to pay royalties from their profits. The franchisee will handle the day-to-day operations as per the franchise agreement drafted by the franchisor.

Key Responsibilities of a Franchisor

  • Franchisors will have to actively support their franchisees by providing them with operating systems and support services to help their businesses grow.

  • They will also have to be involved in research and development of their products and services to enable the franchisees to grow in an efficient, effective and profitable manner.

  • Franchisors will have to manage all brand advertising and assist franchisees in their local marketing and advertising activities.

  • Lastly, they will have to take responsibility for training the staff of their franchisees.

Key Responsibilities of the Franchisee

  • The primary responsibility of a franchisee is to stick to the standard methods, procedures, techniques, and specifications to ensure synergy in practices across the brand chain.

  • Franchisees are supposed to pay a fee or royalty to the franchisor.

  • They have to take care of accounting, local marketing, staffing and other administrative aspects of the business

  • Franchisees have to invest their resources, time and effort in the start-up phase of their franchise.

  • Lastly, they have to ensure that they have a mutually beneficial relationship with their franchisor.

Steps to Franchise your Business

Franchising your business involves certain steps. Let’s take a look at how to go about it:

  1. Evaluate if your business is ready to be franchised: If your business is at its nascent stage, then franchising may not be a prudent choice to make. For your business to be franchised, it needs to have an established fan base and good brand value. So, you need to evaluate if your business is ready to be franchised.
  2. Understand the legal requirements involved: Franchising involves a lot of legal paperwork. It is, therefore, advisable to consult with a lawyer to understand the legal requirements involved while applying the franchise model for your business.
  3. Hire an accountant: As mentioned above, franchising has a distinct financial model and it requires a great deal of accounting and financial assessments. It is for this reason, that you should hire an accountant before planning to franchise your business.
  4. Make the necessary hires: Once you set up the franchising framework for your business, you will need a coordinator or a manager to handle queries and proposals of prospective franchisees.
  5. Build your franchisee network: Once you hire the necessary staff to look into the matters pertaining to franchisees, you can set up a franchisee network with their help.
  6. Support franchisees: Lastly, you have to support your franchisees with the necessary resources and training and help them replicate your operations for their franchise.

Advantages of Owning a Franchise

As discussed above, there are many benefits of owning a franchise for both the franchisor and the franchisee. Some of them are:

  • You don’t have to come up with an idea for a new business.
  • You get the required help from the franchising company.
  • You can buy your supplies in bulk.
  • Your business benefits from existing brand name recognition.
  • An established supply chain and customers are already in place.
  • Buying into a successful franchise can be a profitable venture.

Disadvantages of Owning a Franchise

  • All franchises are run in the exact, same way as the original business. So, you have less flexibility to run your business the way you want. This can sometimes be frustrating if you have your own ideas on how the business should operate.
  • If the franchise has been immensely successful, then it will be expensive to buy the license.
  • The franchisee will have to bear the expenses of ongoing costs, advertising, and royalties.
  • Some franchisors might be reluctant to provide the required level of support.
  • In most cases, the franchisee contract tends to favor the franchisor.
  • The location of the franchise is at the discretion of the franchisor.
  • There is not a lot of legal protection available for the franchisee.

Franchising Regulations in Canada

As of now, there only 5 provinces in Canada that have introduced laws pertaining to franchising one’s business. These provinces include Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island. British Columbia is likely to be the sixth province to apply laws for franchising a business.

At a provincial level, the major laws of concern for franchising are consumer protection legislation, sales taxes, liquor licensing, and class action.

The main governing law for franchising in Alberta is the Alberta Franchises Act. As per the Act, franchisors are supposed to deliver a disclosure document to the franchisees at least 14 days before the prospective franchisee signs an agreement or pays any consideration relating to the franchise. The only exception to this disclosure is provided if the payment is fully refundable. The disclosure document must contain the following:

  • Financial statements
  • Information about the franchisor
  • The responsibilities of the franchisee
  • The royalty fee and the investment level
  • Franchisor’s financial statements
  • Franchisor’s proximity policy
  • Restrictions on products and supplies
  • Rebates and discounts accruing to the franchisor
  • List of franchisees currently operating in Alberta.

If under any circumstance, the franchise fails to deliver the disclosure document within the prescribed time, then the legislation provides for a right of cancellation. Apart from that, the franchisor will also have to compensate for the net losses within 30 days of receiving the cancellation notice.

The Act also prevents a franchisor from acting against a franchisee if the latter forms an organization of franchisees or associates with other franchisees. It imposes a duty of fair dealing for both the parties that obligates them to act in good faith and in accordance with the reasonable commercial standards.

The Role of an Accountant while Franchising a Business

While you plan on expanding your business using the franchising model, it is imperative to hire a professional accounting firm. The financial experts will help you in developing a business model that is inclusive of the cash flow and the royalty structure. These professionals will also be able to assess the funds required to execute the entire business model. Accounting experts are practiced in their field and hence, are the most reliable professionals to ask for any business expansion advice of the monetary nature.

If you are looking for a suitable accounting expert for franchising, then reach out to us at the earliest convenience. Our representatives will be more than happy to help you.