The Life Cycle of a Franchise

By Daniel Cargille

 A Franchise is a successful business that has been successful across the bulk of the United States. With a total count of nearly one million units around the world and exceeding $1.5 trillion USD in economic output, it’s easy to see why the franchise is a popular choice to start a business. There are a great number of people that have leapt into the world of business through franchises, often as former employees for the very corporation operating the franchise program.

Mind you while it’s easier to open a franchise, it’s still a business and in some ways operating a franchise can be a bit more restricting than a typical business. Not every person is a good fit for running and owning a chain of franchises and it’s also important that you realize not every business that falls within this category is a good fit for even a franchise-minded individual.

To prepare for this investment there’s a wealth of information that’s available to help you determine if moving forward with this type of business would be lucrative and a good fit. This information can also give you tips and advice on how this type of business is structures, financial expectations, operational infrastructure, legal and more. While the SBA can offer a fair amount of detail it’s often best to work with an agency that specializes in helping entrepreneurs launch a franchise.

Making a Fit to Your Personality

Personality has a lot to do with how well you perform when you operate a franchise and there are some personality types that simply don’t do well in the “mixed bag” environment of corporate franchising. If you’re the type that likes to do it all and run the show then you may have issues within a franchise. Another personality type that may hit barriers is an entrepreneur that can feel held-back when they’re forced to follow the rules and guidance given by others in authority.

A franchise requires a little bit of leadership and the ability to follow since the business is yours but there is still a corporate entity to answer to in order to keep that business running strong. A person who is a strong fit for a franchise will have that perfect mix of acceptance along with leadership.

Choosing the Right Franchise

Statistically speaking, the potential for profit and success is high because a franchise gives a business owner the power of the brand. Instead of trying to win customers over with a new business name they flock to your location because they’re already familiar with the product and the services. With many franchises, there is also a certain level of corporate marketing that’s provided which helps to reinforce the already strong brand you hold.

While this can all sound very appealing, it’s still important to remember that not every franchise is a good investment. The business you choose needs to be as good a fit for you as it is for the area you choose. Market research and location places just as much role in opening a franchise as any other business. Choose the wrong business and you’ll face greater hardship as you work toward success.

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By sprokop

 When we talk to clients about their concerns of getting franchise financing in Canada they also want to focus on whether the cost to finance that franchise is in effect a good ‘ return on investment ‘, in relation to both their own personal investment in the business as well as ongoing returns on that equity based on the ongoing profits of the business and the risk involved in this type of business, i.e. franchising!

The amount of capital you need to raise relative to your franchise loan varies in Canada. Factors that are critical here are the amount of capital that in some cases your franchisor might insist you put into the business. Another key factor is of course the amount of funding you are able to raise based upon your own personal financial situation, one factor of which is your personal credit rating. Clearly the majority of franchises in Canada are regarded as ‘ small business’ so it makes sense that the banks and other firms that participate in franchise financing are focusing on you personally as well as your overall business prospects.

Canadian chartered banks, contrary to popular opinion, do participate in franchise financing in Canada. In fact in our opinion you could call them the major lender to the industry. But what many clients don’t understand when looking for franchise financing in Canada is that the bank lending in the franchising industry is done under the auspices of the Government Small Busines Loan, which is perfect suited to the type of financing you probably need.

So how much do franchises cost. We can safely say that they range in price for very nominal amounts such as 10k or so for a small service based franchise to millions of dollars for such large brand names… think ‘ golden arches’ as an example .

Cost factors of your franchise vary with respect to how well your franchisor is doing in Canada, or perhaps it’s often the case of a franchisor in the U.S. who wishes to expand or introduce their presence in Canada.

We mentioned the government small business loan as a prime source of financing for the cost of your franchising proposal. This loan actually maxis out at $ 350,000.00 but in our experience that amount finances a huge amount of the franchise opportunities in Canada. They are great loans because they offer sensible maturities of 5-7 years, solid interest rates and nominal fees attached to the overall financing. The initial franchise fee itself is not financeable under the program, so typically our clients fund that portion themselves, which of course counts as their overall equity,

It’s important to start sourcing your financing for your new franchise early on in the process. The bottom line, it’s never too late to start looking at your financing options available, including our aforementioned SBL loan.

So where does the capital come from relative to your own investment in the business.

Typically we see these funds coming from a clients own personal savings. That might also come from a severance situation based on the clients exit from ‘ corporate life ‘. In some cases you may choose to collapse savings, registered, or otherwise.

We encourage customers to understand the concept of financial leverage when it comes to R O I, or return on investment. Measure risk against reward; ensure you can withdraw a reasonable amount as a salary from the business, based on your financial projections.

And that ROI! Compute and analyze it just as you would any investment, such as a stock. Let’s say something costs 100% and you earn a 6% dividend. That’s generally a reasonable amount. So if you sell that investment 12 months latter your ROI is 6%. Think of that stock as being your business and the dividend being your business profits. Measure risk and reward and factor in the time and commitment you need to make into the business.

Franchising financing in Canada can be as difficult or easy as you make it. Speak to a trusted, credible and experienced Canadian business financing advisor who is expert in financing the cost of your franchising. And here’s to your great, hopefully, Return on Investment!

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