Tag: starting a franchise in canada

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How can you identify a franchise scam?

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?

An entrepreneur recently asked one of our GoForth Expert section of our website how to identify the warning signs of franchise fraud. 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.

Additionally, you can look out for these warning signs of a franchise scam:

  • 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!

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How to spot franchise fraud

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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?

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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?

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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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