This idea comes down to – whether you should purchase a new franchise or an already established one. This is an easy question to get wrong if you do not entirely know what you’re looking for. Choosing a franchise isn’t about choosing the objectively “better” option, it is about identifying what it is that aligns with your goals, lifestyle, and interests.
Before you can decide between the two, it is important to understand what each of these are and their legal considerations.
Established franchises: Stability, structure, and proven success
Existing franchises – like Subway or Taco Bell – are typically perceived to be the safer choice for franchisees who are not as comfortable with risk-taking. These franchises have a long-standing history of several years alongside an extensive track record, performance data, and brand recognition supported by their large network of successful franchise owners. Another big plus is their well-oiled marketing and advertising strategy which speaks for itself (think McDonald’s). This means that the market would already know your brand and your offerings; your task is simply to uphold the standard and reputation within your market.
New franchises: Innovation, flexibility, and potential
On the other hand, though a new and emerging franchise does not have a long track record of performance data or recognition, these emerging franchises brand themselves on their focus on innovation, opportunity, and catering to their customers. These franchises are usually bringing a new spin to old ways in the market. They also provide an opportunity for your voices to be heard as you become the franchisor’s eyes and ears within the field of franchising. New franchises not only allow their franchisees to grow their brand but also grow with their brand.
Legal considerations: What to expect?
Whether you are thinking of purchasing a new franchise or an established franchise, a franchisor is required to provide you with a franchise disclosure document (“FDD”). In Canada, seven provinces, including Ontario, Alberta, British Columbia, Manitoba, New Brunswick, Prince Edward Island, and most recently, Saskatchewan, require the FDD under their specific franchise legislation. In Ontario, a franchisor is required to provide a franchisee with the FDD at least 14 days before a franchisee signs an agreement or makes any payment to a franchise.
Typically, an FDD discloses all material facts under Section 5 of the Arthur Wishart Act (“AWA”) and includes information about the business background, litigation history, bankruptcy or insolvency information, costs, financial statements, and other contractual obligations.
In some cases, the franchisor may also choose to include financial performance representations. In comparison with an established franchise, for a new franchise, it is likely that a franchisor will have fewer performance metrics to make reasonable assumptions supported by factual data. This can limit a franchisee of a new franchise from investigating the franchisor’s expertise and business model due to a lack of existing franchise owners who can speak to the franchisor’s approach in carrying on business and attending to franchisees’ needs.
Concurrently, the investment cost for an established franchise would likely be higher than a new franchise. McDonald’s requires a franchising fee of $45,000 and a minimum $1,000,000 of non-borrowed funds. Whereas, Mad Radish, a new and upcoming franchise, offers a lower franchising fee of $35,000 and liquid capital of $150,000–$200,000.
Now, faced with this situation, if you decide to buy a new franchise, what steps can you take to limit the risk of your investment in a new franchise? Negotiation. The FDD is an extremely important document that must be reviewed carefully and in its entirety. There may be some aspects of the FDD which are open to negotiation and seeking legal support to negotiate those terms and conditions is paramount to addressing concerns and limiting your risks as a franchisee.
How do I know what’s best for me?
The first step is to understand the key differences, associated risks, costs, and risk aversion, which can help you get a clear idea of what suits your goals and make an informed decision. Ultimately, the choice will depend on a franchisee’s preferred approach, tolerance for risk, and investment capacity, to name a few.
Additional credit:
Thanks to Farai Munyurwa and Javeria Baig for their contributions to the content and for helping bring this article together with me.
