How to assess a franchise opportunity

If you’re ready to start a business, a franchise may be the right choice for you. Use these tips to ask the right questions about a franchise opportunity in your area.

According to the Canadian Franchise Association (CFA), there are currently 78,000 franchise units across Canada collectively generating $68 billion of revenue each year and employing over one million people.

Franchises have strong appeal for would-be business owners. You can get up and running with an initial licensing fee as low as $10,000, says the CFA. And, provided a company has a well-established brand, a good track record – and you’re willing to put in the hours – this type of business opportunity can succeed.

Of course, before you pursue any new venture, it’s important to do proper research and conduct due diligence to verify claims made by the franchisor. Here are a few things to watch for when looking into franchises.

Know the true costs

There are a number of costs involved in operating a franchise business that you’ll need to factor in when determining potential profitability.

  • Royalty fees are standard, averaging between 5 and 8 per cent of gross sales.
  • You may be required to buy products and supplies from the franchisor.
  • Your franchise may be obliged to contribute money into a national advertising fund – in addition to any local marketing costs of your own.

A franchisor should be able to provide you with financial records you can use to calculate financial projections for your particular franchise investment.

No matter how great a brand’s reputation, or how successful its franchisees seem to be, it can take time before a new outlet is profitable. Obtaining access to funds can greatly reduce stress and keep you afloat in leaner months.

Assess the competition

Determining your competitive advantage is essential when weighing any business opportunity.  You should assess the strengths and weaknesses of your top three competitors in the marketplace, so you can spot opportunities or positions they’ve missed.

But with a franchise you’ll also need to know whether your proposed location is close to another unit owned by the same brand.

Ask your franchisor about protected territory, and whether a demographic survey will be done to ensure your territory has enough target customers to be profitable.

Other important considerations

With employees and operating systems in place, it’s easy for new franchisees to assume their store will run itself.

While many franchise operations are advertised as turn-key, as a new business owner you’ll need adequate training and support to help the business flourish.

Be sure to inquire about in-person mentoring as well as any available training resources for you and your employees. Some key questions to help you assess franchisor credibility are:

  • How many franchisees does the franchisor have?
  • How does the franchisor choose its franchisees?
  • How many years has the franchisor been operating?
  • Is the franchisor a member of the Canadian Franchise Association?
  • What are the franchisor’s plans for future development?

A final tip: make sure your franchise business is a good fit for your interests. Franchise opportunities exist in many industries, including food and hospitality, travel, senior care, education, health and fitness. The right match for your skills, passions and desired lifestyle can make all the difference to your success.

Talk with Scotiabank franchise experts

At Scotiabank, our advisors understand franchisees.  From start-up to exit strategy, we provide what a franchisee needs for success. Our franchise specialists are ready to help you – just as we’ve helped thousands of franchise owners across Canada.

Get more business advice, access helpful resources and learn about available financing solutions by speaking with a Scotiabank Small Business Advisor today.

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