Tag: opening a canadian franchise

franchise-fraud

What are the warning signs of a franchise scam?

In the Ask a GoForth Expert section of our website, an entrepreneur wisely wanted to know about the warning signs of franchise fraud. There are all kinds of franchise opportunities available, and some seem to promise instant wealth with almost zero effort. Franchises do have a high rate of success compared to other types of small businesses, but that doesn’t mean they’re a direct path to riches.

How do you spot a franchise scam?

Our GoForth Expert Samir Dandekar had these tips to avoid franchise scams:

Firstly, you can choose to work only with a franchisor who is a member of the Canadian Franchise Association.

Secondly, you can be wary of the following franchise scam warning signs:

  • Slick 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

As always, do your research. Be thorough, double-check everything, and seek the advice of trusted colleagues or professional advisors. And listen to your instincts!

For more Ask a GoForth Expert questions and answers about franchising, visit us here.

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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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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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