How to spot franchise fraud

franchise-fraud

Franchising can be a relatively low-risk pathway into entrepreneurship – they get support and direction from the franchisor, and follow the structures laid out by the franchisor. However, sometimes, a franchise opportunity can seem too good to be true. Not all franchises are created equal, and you can’t necessarily buy into any franchise and wait for your riches to roll in.

How to spot a franchise scam

If you spot the following franchise scam warning signs, look elsewhere:

  • Overdressed salesperson trying to pitch a fast sale
  • Pressure for franchisees to sign gag orders
  • Insistence on cash transactions only
  • Exaggerated earnings
  • Promising a proven business model or proprietary technology that doesn’t exist
  • Promising training that never materializes
  • Forcing franchisees to spend money on so-called improvements
  • Failure to provide disclosure

How do you avoid franchise fraud?

To help you avoid franchise scam, you can choose to work only with a franchisor who is a member of the Canadian Franchise Association. Do your research. Be thorough, double-check everything, and get advice from trusted colleagues or professional advisors. And listen to your instincts!

Buying into a franchise can be a proven and relatively secure pathway to entrepreneurship, but it’s an investment in your future that shouldn’t be taken lightly.

Want to learn all the ins and outs of franchising in Canada? Check out our industry-leading small business training video program.

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How much does it cost to open a franchise?

small business restaurant franchise

Franchisors often charge a franchise fee to be paid at the start of the agreement (either in full or as a percentage) as a deposit. You may have to sign a deposit agreement. The deposit may or may not be returned to you if you decide not to go through with 
the franchise.

For example, in Alberta, this deposit can be up to 20% of the initial franchise fee. However, once you’ve made the agreement, the initial franchise fee can vary from $5,000 to $75,000 — possibly more.

In Canada, the average initial franchise fee 
is $23,000, and covers costs like support, training, franchisee recruitment, grand opening, franchise development and site identification. Generally, this fee is higher the more recognized and established your franchisor company is.

Franchise royalties

Royalties are often due on a weekly or monthly basis to give the franchisor a portion of your sales. These can vary from 0–20% of gross sales, depending on the level of support and services you get from the franchisor. Some franchises don’t charge a royalty fee, but in these cases the cost is often built in through rebates or mark-ups on products or services.

Additional franchise costs

You may have to pay other costs, like advertising fees. Some franchisees have to contribute to an advertising fund for the franchise system as 
a whole. This means that fees from all locations can be pooled into a much larger budget.

You’ll also need an equity investment, which helps keep your franchise location going until you’re profitable. On average, this investment amounts to around $160,000 in Canada.

Other costs that you may run into could include research 
and development funds, leasehold improvements, furniture, fixtures, equipment, supplies and costs of employee training. Insurance costs are often included within the franchise agreement, but be sure you’re adequately insured before you open your doors.

How much do I need to pay to open a franchise?

In Canada, estimated overall costs to open a franchise can range anywhere from $50,000 or less for service franchises to as much as $500,000 or more for more sophisticated franchises. For more information, visit the Canadian Franchise Association‘s website.

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What’s the difference between a franchise and a chain?

small business franchise

To many, chains and franchises can seem the same. However, they are quite different from one another. Here’s how to tell the difference between a franchise and a chain:

Characteristics of a franchise

Franchises are one pathway into entrepreneurship. With a franchise, a franchisee (the entrepreneur), buys the right to market and sell certain products and services from a franchisor (the person who owns the overall franchise) through a legal agreement. Fees and a share of the income are then paid to the franchisor over a specific period of time. The franchisee is in charge of operations, finances and HR for their specific location of the business.

There are several types of franchise agreements, all with different responsibilities, purchases, policies, procedures and rights. These terms are often outlined in the agreement and operation manual to make sure the franchise as a whole is consistent – a very important thing in franchising!

Examples of a franchise

Most of us think of fast food when we think of franchise. However, lots of industries that have them, including automotive, real estate, accommodations, business services and retail. Tim Hortons, 7-Eleven, and RE/MAX Canada are all examples of a franchise.

Want to know more? Check out our blog post about the perks and snags of franchising.

Characteristics of a chain

A chain is a business that’s usually under one main corporate ownership, which opens and operates locations itself. This is the vital difference from a franchise. Franchise locations each have different owners, reporting to the main franchisor. But each chain location doesn’t have a different owner – each chain location is owned by the corporate office.

Examples of a chain

Some popular examples of Canadian chain restaurants and stores are Mark’s Work Wearhouse, Swiss Chalet, and Sobeys.

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The seven types of entrepreneurs

types_of_entrepreneursJust like there isn’t one type of business, there isn’t just one type of entrepreneur. Entrepreneurship can be experienced in a range of different ways. Here are seven of the most common types of entrepreneurs.

Home-based entrepreneurs

Home-based entrepreneurs are self-employed, working alone or with just a few employees. As you can probably guess, the business is based out of their own home or in a home office. Flexibility and autonomy are what these business owners crave. Also, the freedom to do things like arrange a child’s dentist appointment or run errands at lunchtime is a must. These businesses typically don’t have a storefront, street advertising signs or customer parking. Examples of home-based businesses include bookkeepers, photographers and graphic designers.

Internet-based entrepreneurs

Internet-based entrepreneurs run their business online and use information and communication technologies to support business activities. The business can provide a service or sell a product through a website. Some internet-based businesses can be home-based businesses too. Examples of internet-based businesses include Amazon.com, eBay and iTunes.

Lifestyle entrepreneurs

Lifestyle entrepreneurs create a business to further their own personal goals instead of make a lot of money. These entrepreneurs may pursue a cash-generating hobby during their spare time or create a business around one of their interests. These businesses usually aren’t intended to be high growth, and usually have few employees. Examples of lifestyle businesses include a secondhand book store, or a small market stall selling homemade baked goods.

High potential entrepreneurs

High potential entrepreneurs usually run large companies employing somewhere between 20 and 500 people. These companies are often very fast-paced and experience high growth rates. They often develop and produce the latest technologies and innovations. Most start-up activity involving high potential entrepreneurs is technology and internet related. Access to funding is often easier for these companies. Examples of high potential businesses include quickly-growing technology companies and large internet technology businesses.

Franchise format entrepreneurs

Franchise format entrepreneurs open a franchise or chain in the local business area, complete with support and direction from the franchisor. These entrepreneurs stay within the lines and structures of their franchise and appreciate the lower risk that follows. They are not concerned with the lack of freedom and autonomy that comes with owning a franchised business. There are a wide variety of franchises ranging from service franchising like Century 21 real estate, product franchising like Goodyear Tire Stores and business format franchising like Tim Hortons.

Venture capital entrepreneurs

Venture capitalists invest in ventures, through managerial and technical expertise as well as with actual money. Venture capitalists are very selective about which companies to invest in, and as much as 98% of firms seeking funds are rejected. Aside from individual angels and venture capitalists, venture capital firms also exist. Examples of venture capitalists can be seen on CBC’s Dragons’ Den, as well as in large companies like those in Silicon Valley.

Social entrepreneurs

A social entrepreneur measures success by the impact that he or she has on society. Highly passionate, the greater good of the community is their primary interest and they create a business to provide solutions to social issues. These entrepreneurs are also called non-profit or philanthropist entrepreneurs. Funding for social entrepreneurs typically comes from non-profit organizations, foundations, governments and non-governmental organizations. Examples include KickStart international and the Grameen Bank.

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Costs of opening a franchise

franchise_costsThis may come as no surprise, but opening a franchise probably isn’t going to be cheap. But forewarned is forearmed, so let’s take a look at some of the common costs associated with opening a franchise.

Franchisors often charge a franchise fee that needs be paid at the start of the agreement – either in full or as a percentage – in the form of a deposit. You’ll likely have to sign a deposit agreement,and the deposit may or may not be returned to you if you decide not to go through with 
the franchise.

In Alberta, for example, this refundable deposit can be up to 20% of the initial franchise fee. Once you’ve made the agreement, however, the initial franchise fee can vary from as little as $5,000 to as much as $75,000 — possibly more.

The average initial franchise fee 
in Canada is $23,000. This fee covers costs like support, training, franchisee recruitment, grand opening launch, franchise development and site identification. In general, the initial fee is higher the more recognized and established your franchisor company is.

Royalties

Aside from initial franchise fees, royalties are often due, either weekly or monthly, to give the franchisor a portion of your sales. These can vary from 0–20% of gross (total) sales, depending on the level of support and services provided to you. Some franchises don’t charge an ongoing royalty fee, but the cost is often built in through rebates or mark-ups on products or services.

Additional costs

Aside from the franchise fee and royalties, you may have to pay other costs, like advertising fees. Depending on your franchise, you 
might have to make contributions to an advertising fund for the franchise system as 
a whole. This means that fees from all locations can be pooled into a much larger budget, allowing for cost sharing of national or regional advertising.

You’ll also need an equity investment – money to help keep your franchise location afloat until you’re profitable. On average, this investment amounts to around $160,000 in Canada. Other costs that you may run into could include research 
and development funds, leasehold improvements, furniture, fixtures, equipment, supplies and costs of employee training. Insurance costs are often included within the franchise agreement, but be sure you’re adequately insured before you open your doors. Like we said, not cheap!

So how much do I need to pay to open a franchise?

Estimated overall costs to opening a franchise can range anywhere from $50,000 or less for service franchises to as much as $500,000 or more for more sophisticated franchises. For more information, visit the Canadian Franchise Association‘s website.

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