Buying a franchise is an investment in your future. However, it takes careful planning and some tough questions to ensure your investment is a good one. Remember, buying a franchise is no guarantee of success. The following are some issues that should be carefully considered before taking the plunge.

DO YOUR INTERESTS MATCH WITH OWNING A FRANCHISE?

Often people plan to start a business only to find out that they do not enjoy it. The International Franchise Association suggests that all potential franchisees ask themselves: What do I like to do? What do I know how to do? What do I do well? Which industries involve my interests and use my skills and talents? What products or services could I sell in this industry? It is also vital to recognize whether you will be content to take instructions on many aspects of your business from the franchisor. Will you be happy giving up some of your independence?

DO YOUR ABILITIES MATCH WITH OWNING A FRANCHISE?

Not only should you start a business in an industry you enjoy, but it should be an industry that you know well. Does the particular franchise require technical experience or specific education, and do you have the same? Do you have adequate computer and bookkeeping skills in order to manage the financial and reporting systems?

IS THERE A MARKET FOR THE FRANCHISE?

Remember that all successful businesses must satisfy a need, solve a problem or respond to a trend. Always ensure that there is a market for the products or services your franchise will provide and that you are located in it. Skate sharpening is in greater demand in Toronto than it is in Atlanta. It may be helpful to conduct some market research. Note the number of potential customers in your area as well as the number of competitors. Consider whether the demand for the business is seasonal, for example, lawn and garden care or swimming pool maintenance. Is there likely to be a continuing demand for the products or services in the future or is the demand likely to be temporary, such as selling a fad item. Does the product or service generate repeat business?

WHAT LOCATION WILL PROVIDE YOU WITH THE BEST CHANCE OF SUCCESS?

Has the location been selected or do you have the responsibility to choose the location? Often the grant of a franchise is contingent on the franchisee being able to obtain and maintain a lease for an approved location. It is important to look for a location early on in the process of purchasing a franchise. Is the type of business you are interested in one that is location sensitive? Is there territorial exclusivity included in the franchise contract? Is it critical to the business?

CAN YOU AFFORD TO INVEST IN A FRANCHISE?

The International Franchise Association has found that one of the major causes of business failure is underfunding. Franchisors give you a ballpark amount for start-up costs, but you must keep in mind that this is always an approximation. In addition to start-up fees you will need enough money to run your franchise until it becomes profitable. How long will that be? For some franchises this can take upwards of a year. Until then you will need to cover overhead costs including salaries, insurance, utilities, advertising, rent, and interest on any loans you have taken out. Of course, it is always better to start with more money than you think you will need than to attempt to get by on the bare minimum.

SHOULD YOU PURCHASE A NEW FRANCHISE OR AN EXISTING FRANCHISE?

There are many advantages and disadvantages relating to both options. These include:

CAN YOU AFFORD TO LOSE YOUR INVESTMENT IN THE FRANCHISE?

Although part of the reason you are considering a franchise is that the system has been tested, is successful and there is goodwill attached to the franchise, you must keep in mind that no one can be sure that the venture will be successful. Investigation of all earnings claims made by the franchisor is vital! Always keep in mind that the purchase of a franchise is a significant financial risk.

Please contact Amy M. Delisle of Keyser Mason Ball, LLP at adelisle@kmblaw.com or (905) 276-0422 for more information on franchise law.

The comments in this newsletter are of a general nature and are not designed to replace professional advice in specific situations. If you would like extra copies of this newsletter, or you know of anyone who would be interested in joining our mailing list, please contact Cheryl Woolcott at (905) 276-9111.