It is really important when buying a franchise to undertake thorough due diligence and I have been writing about the top things franchisees should undertake or consider when purchasing a franchise for over 25 years.
Some of these tips have remained unaltered over time and these are:
What to look for in a Canadian franchise
- Is the franchise something you can see yourself doing for at least the initial term of the franchise? This is typically 5 or 10 years but can in some cases be 3 or 20. Consider your exit plan – best to think of that at the beginning.
- Do you have the support of your family and friends?
- Assess the financial position of the franchisor – are they profitable? Do they have years of losses? Who are the directors and what experience do they have in running this business? Are they of an age where retirement will happen and what is their exit plan?
- How long have they been operating the business/franchise? The longer the better and especially if they traded through a recession or COVID which proves resilience. What are their future plans and do they fit nicely with what you want the business to do for you? They might be introducing new technology or changing the brand and that might involve cost to you if there are premises involved.
- Speak to franchisees and as many as you can in all stages of their business – established, new, performing well, challenging. Ask the killer question. If they were to buy the franchise today, would they still do so and why? The answer should be yes but listen to the reasons from the response.
- Is the franchise a member of the Canadian Franchise Association? Members must undertake an initial assessment and regular reaccreditation. It is not a guarantee of success but it certainly gives some added comfort.
- Are the banks and finance companies supportive of the franchise. If they are prepared to lend that also means they are happy with the performance of their franchisees and the way they conduct their accounts. However, do be aware that their criteria towards the amount they lend can change. For a new franchise system it is likely to be lower than an established one. Obviously if they are not happy to lend – why? This might be a huge warning sign.
- Take your time making a decision. Do not be rushed into deciding because there is currently a discounted price on the franchise. However new franchisors may reduce their fees for the first franchisees as an incentive, which is quite normal.
- Have the legal agreement reviewed by a CFA lawyer, so they can explain what the clauses mean and whether they are normal or not. The unusual ones are those to look out for. DO NOT USE A NON CFA LAWYER – they generally highlight ‘unusual’ clauses to them that are quite normal in franchising.
- Ensure the business provides you and your family with enough income to live off
Stress-testing the numbers in an uncertain economy
- In the current challenging economic and cost of living challenges there are other things you need to consider and could arguably be the norm in an economic position.
- Look at the numbers they provide. It is likely these numbers are based on historical performance, which is often across several years. Examine them closely to understand if they take account of current economic issues. Are the utility costs and fuel costs realistic?
- Is there going to be an impact from tariffs – or what would happen if these were introduced or increased
- Ask the franchisor how they have calculated these numbers – have they considered this too?
- Sensitise the sales by 10 – 20% – does it remain a viable business and does it still provide you with sufficient income for you and your family to live off
- Examine what would happen if costs, such as wages, utilities, fuel, etc. continue to rise
- Look at the future minimum wage increases over the term of your franchise and what you might need to pay staff to retain them, which could be more than the minimum.
- Prepare a 5-year financial plan and include the best-case and worst-case scenarios. If you are borrowing it is highly likely the bank will do the latter.
- Increase the amount of working capital needed to run the business – it is far better to have the funds available, rather than rely on the business performing as planned.
- Consider what might happen if things do not go according to plan – what do you need to do? What will the franchisor do? Will you be able to sell the business? What is the cost of walking away?
- I am sure as you undertake your due diligence there will be many more questions, perhaps personal to you that you need to ask or consider but ultimately whatever you decide should be the right decision, even if it is one that is not to go ahead.
- Finally, as I said earlier take your time making the decision.
Key takeaways
- Check whether the franchise is a member of the Canadian Franchise Association – CFA members are required to follow a code of ethics and adhere to pre-sale disclosure obligations under Canadian franchise legislation.
- Speak to as many existing franchisees as possible across all stages of their journey, not just those recommended by the franchisor – ask specifically whether financial projections matched their real first-year experience.
- The Canadian economic environment adds a layer of complexity: consider the potential impact of tariffs on your cost base and what would happen if they were introduced or increased during your franchise term.
- Sensitise revenue projections by 10-20% and model rising minimum wage costs over the full term of your agreement – if the business remains viable under those conditions, it is a stronger proposition.
- Prepare a five-year financial plan covering best and worst-case scenarios, ensure you have sufficient working capital, and have the franchise agreement reviewed by a CFA-accredited lawyer before committing.
