Key takeaways
- A franchise is a licence to operate under rules, so the agreement and the disclosure document matter more than the brand.
- Build your own unit economics from existing franchisees, not from the franchisor's projections.
- British Columbia has franchise disclosure law, and your lawyer should review the document and the agreement before you commit anything.
- Buying an existing franchised location and buying a new one are different transactions with different risks.
A franchise offers a buyer a proven model, a brand, training and systems, in exchange for an initial fee, ongoing royalties and a long agreement that governs how you operate. For the right person it is a good way into business ownership. For the wrong person it is an expensive job with a landlord, a lender and a franchisor all senior to you.
This guide is the evaluation we run with buyers in British Columbia, whether they are looking at a new location or an existing franchised business for sale. It is not legal advice. The franchise agreement and the disclosure document are documents for your lawyer, and the economics are for your CPA. Our role is to make sure the questions are asked in the right order.
Understand what you are buying
You are not buying a business, you are buying the right to operate one under rules. The franchisor controls the brand, the products, the suppliers, the pricing in many cases, the look of the location, the marketing, and your ability to sell. In return you receive a system that has worked elsewhere and support in running it. The quality of that support varies enormously between franchisors and is the first thing to investigate.
Read the franchise agreement with your lawyer before you form any attachment to the brand. Note the term, the renewal conditions, the fees, the required purchases, the territory, the performance requirements, the franchisor's rights to approve or refuse a sale, and what happens at the end. These terms will shape every year of your ownership and the price you can get when you leave.
The disclosure document
British Columbia has franchise legislation that requires a franchisor to give a prospective franchisee a disclosure document before an agreement is signed or money is paid, with a waiting period. The document covers the franchisor's background, litigation history, fees, the costs to open, the obligations of each side, and lists of current and former franchisees. Your lawyer will confirm the current requirements and what remedies apply if disclosure was deficient.
Use the document as a research tool. Call current franchisees, and call former ones, because the reasons people left tell you what the disclosure document does not. Ask about actual sales, actual costs, the quality of support, how disputes are handled, and whether they would buy again.
Build your own unit economics
When the model is built, ask what has to be true for it to work: what sales level, what margin, what labour cost. Then ask the franchisees you spoke to whether those numbers are realistic in a location like yours. A franchise that works only at the top of the system's range is a risky purchase.
- Revenue per location from franchisees you spoke to, not from the franchisor's examples
- Cost of goods, including any required purchases from approved suppliers at their prices
- Royalties, marketing fund contributions, technology fees and any other recurring charges
- Rent, including the terms of a head lease if the franchisor holds it
- Labour at the staffing level the system actually requires
- Your own salary, since a return that only works if you work for free is not a return
- Debt service on the initial fee, build-out and equipment
- Capital for required renovations or refreshes during the term
Existing location or new
Buying an existing franchised business for sale adds the normal diligence of any acquisition: verify the earnings from the statements and the bank, review the lease, meet the staff and understand why the owner is selling. It also adds a layer, because the franchisor must approve you as the new franchisee, may charge a transfer fee, may require you to complete training and may require the location to be refreshed to current standards before transfer. Find out all of this before you make an offer, because it affects price and timeline.
A new location means no track record and a build-out, so the risk is higher and the reliance on the franchisor's support is greater. The disclosure document, the franchisee calls and your own economics carry the whole decision.
Financing and exit
Lenders are familiar with franchises and some are comfortable with established systems, which can make financing a franchised business easier than an independent one. The lender will still look at the earnings, your equity and your experience. Government-backed lending may apply to equipment and leasehold improvements, which are a large part of many franchise openings, and your lender will advise on what fits.
Think about exit before you enter. The agreement decides whether you can sell, to whom, with what approval and at what fee, and whether the franchisor has a right of first refusal. A franchise that is hard to resell is worth less from the day you buy it. If you are evaluating a franchise in BC and want a second opinion on the economics, a Business Acquisition session with Ali runs 60 minutes for $399. Call or text (604) 632-4959.