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Franchising 101 July/August 2020 Resource Articles Ultimate Guide to Buying a Franchise

Checklist for Franchisees

Investing in a franchise is a major investment decision, and not every franchise will be the right fit for you. That’s why it’s important to ask the following questions if you’re considering the purchase of a franchise. You may need to ask many more questions to properly conduct your due diligence, and it’s also very critical that you retain franchise professionals to assist you through the process of determining whether to purchase the franchise.

This workbook has been prepared with the assistance of the following franchise experts:
Franchise Lawyer: Joseph Adler, Hoffer Adler LLP
Franchise Consultant: Gary Prenevost, FranNet
Franchise Accountant: Lyn Little, BDO Canada LLP

*Note: The Franchisee Checklist is a public resource of general information which is intended, but not promised or guaranteed to be correct, complete, or up to date. It is not intended to be a source of legal advice. Readers should seek the advice of competent legal, accounting, and business counsel.

Section 1: THE FRANCHISOR – IDENTITY & EXPERIENCE

Questions to ask the franchisor:

  1. Who are the officers, directors, and shareholders of the franchisor?
    2. What is the business experience of the franchisor’s shareholders, directors, and officers? For how many years have they been in the current business category? How many years in the franchise industry?
    3. Is the franchisor a subsidiary of another company (i.e. private equity company purchasing the franchisor system)?
    • If so, who is the parent company? Who are the shareholders of the parent company?
    • Has that franchisor or any of its affiliates ever franchised other concepts?
    • If so, which concept(s), and how successful are they?
    4. What other companies are related to the franchisor? What role do these companies have in relation to the franchised business?
    • Will any of the franchisor’s affiliates be your suppliers under the franchise agreement?
    5. Are the units franchised under a master franchise agreement? What are the terms/timelines of the master franchise agreement? How are you impacted if the master franchise agreement is terminated? Does the master franchisee have experience with franchising?
    6. Has the franchisor and/or any of its associates, or any of their respective directors, officers, or shareholders been:
    • convicted of fraud, unfair or deceptive business practices, or a violation of law that regulates franchises or business or been subject to an administrative order or penalty?
    • bankrupt or insolvent in the last six years?
    Has there been a charge pending against such persons involving such matters?
    7. For how many years has the franchise been operating?
    8. For how many years has it been offering franchises in Canada? Outside of Canada?
    If a U.S. franchisor is coming into Canada, what work has been done to adjust for the Canadian market, i.e. supply chain, Canadianizing the marketing messages, PIPEDA, and e-marketing laws, etc.)
    9. How many franchised and corporate units are currently operating in Canada? In the U.S.?
    10. Is the franchisor a member of the Canadian Franchise Association? If not, why not?
    11. What is the franchisor’s reputation with the Better Business Bureau? With the Chamber of Commerce? With D&B Canada (Dun & Bradstreet)?
    12. What is the franchisor’s financial condition? Have you reviewed its most recent financial statements, and have they been prepared in accordance with the applicable franchise legislation in your province? If the franchisor is permitted to simply disclose an opening balance sheet or is exempt from providing financial disclosure, do you have sufficient financial information regarding the franchisor to make an informed decision?

Section 2: THE FRANCHISOR’S RELATIONS WITH ITS FRANCHISEES

  1. What is the franchisor’s reputation for relations with its franchisees, customers, and suppliers?
    2. How does the franchisor qualify, screen, and choose its franchisees?
    • Have your qualifications been reviewed?
    • Ask yourself: why do you feel you’re a good match?
    3. What are the franchisor’s plans for future development, including product, service, and/or technology innovation?
    • For expansion and/or diversification?
    • How will these plans affect your dealings with the franchisor?
    4. How does the franchisor monitor franchisee operations to help improve performance? How much is by automated CRM and how much by manual reporting?
    • Does the franchisor periodically inspect all of the franchises?
    • What are the franchisee reporting requirements?
    • Does the franchisor subject the franchisees to periodic audits of books and records?
    5. Is there a franchisee association or advisory council (FAC)?
    • If so, who belongs: how many members are voted by the franchisees, and how many are appointed by the franchisor?
    • Does the franchisor relate well with the association or council?
    6. Does the franchisor keep advertising funds in a separate account/entity?
    • Will the franchisor regularly provide franchisees with a statement of how the advertising funds are
    disbursed?
    • Will the franchisor use the advertising fund to promote existing locations or fund expansion efforts?
    • Has the franchisor documented how the advertising funds will be used?7. Does the franchisor solicit franchisee input into marketing strategies, new product development, etc.?
    What amount of control does the FAC have regarding how the ad fund revenues are deployed?
    8. Does the franchisor account for the unique needs of different marketing (geographic) areas as it implements its marketing strategies?
    9. Do all franchisees and corporate stores pay into the advertising fund at the same rate?
    10. Has the franchisor provided you with a list of all of its franchisees?
    11. What is the failure/turnover rate for franchisees?
    • Has the franchisor terminated any of its franchise agreements in the last three years? If so, how many, and for what reason?
    • What are the reasons for the failure/turnover?
    12. Has the franchisor litigated with any of its franchisees in the past?
    •What was the outcome of such litigation?
    13. Is there any pending litigation by or against the franchisor or any of its associates?
    • What is the status, nature, and likely outcome of such litigation?
    14. How does the franchisor describe its corporate culture and will you be comfortable with this culture?
    15. Does the franchisor have a recognition program for exceptional performance and if so, what does this program involve?
    16. How innovative is the franchisor?
    • How important is innovation to the franchisor’s industry?
    • What successful innovation has the franchisor introduced since it began its business?
    • How has the franchisor responded to technological change or innovation in its industry?

 

Section 3:  REQUIRED INVESTMENT

  1. How much is the initial franchise fee?
    2. Is there a deposit? If so, when is the deposit due and how much of the deposit is refundable, and under what circumstances?
    3. What is the minimum recommended operating cash requirement at start-up, in addition to the original investment?
    4. Is there a training fee, a site development fee, or a management or administration fee?
    5. What is the anticipated cost of leasehold improvements, equipment, signage, and start-up inventory? Does the franchisor supply any of these items? Is the price reasonable?
    6. What is the anticipated occupancy cost of the premises?
    • Rental payments or purchase cost of real property?
    • Anticipated construction costs for the premises?
    7. What is the general timeline between site selection and opening?
    8. What other costs may be incurred?
    9. Does the franchisor assist in the financing of the franchise?
    10. What assistance, if any, does the franchisor provide to assist with site selection/lease negotiation? If there are no in-house resources, how closely do they work with external real estate professionals to assist with site selection/lease negotiation?
    11. What is the anticipated period of time between start-up and profitability?
    12. What are the anticipated franchise earnings, and has the franchisor provided you with any financial performance representations? If so, have you been provided with the underlying assumptions that substantiate the representations?
    13. What is your anticipated “personal” working capital required through the launch period (the amount you need monthly to cover living expenses, multiplied by the number of months before you can draw income from your franchise)?
    14. Do you have the resources to finance the initial investment? Has the franchisor negotiated any franchise finance programs?

Section 4: FRANCHISED PRODUCT OR SERVICE

  1. What makes the franchisor’s product or service unique?
    • Does it satisfy a need?
    • Is it marketable in your territory?
    • What is the size of the market in your territory?
    2. Is the franchise system easily replicated, and if so, how will the franchisor differentiate itself from its competitors?
    3. Is there any goodwill attached to the franchise system?
    4. How long has the product/service been on the market?
    5. What is the competition for the franchisor’s product or service in your market?
    6. On a scale from 1 to 10, how competitive is the pricing of the franchisor’s product or service?
    7. Is the sale of the product or service subject to certain legal restrictions? If so, what are the applicable federal and provincial standards and regulations, and does the franchisor comply?
    8. Is the product protected by patent, trademark, or copyright?
    • Who owns the trademarks, copyrights, or patents?
    • Are the trademarks, copyrights, or patents registered in Canada or have trademark applications been filed for their protection?
    • If the trademarks are in the process of being registered, is there any opposition or other barriers to the registration of the marks?
    9. Are there product warranties and if so, who is responsible for such product warranties – the franchisor, the franchisee, or a third-party supplier?
    10. What products must be purchased from the franchisor or designated suppliers?
    • On a scale from 1 to 10, how competitive is the cost with third-party suppliers?
    • If supplies are interrupted, can purchases be made through alternate suppliers?
    • Will the franchisor be receiving volume discounts or rebates? If so, will these savings be passed on to the franchisees?
    11. Innovation:
    • How often does the franchisor update product/service offerings?
    • Do the innovation advances come from the franchisee base, or from head office?
    • How are the innovations field-tested to prove viability?
    12. What are the franchisor’s policies with respect to gift cards and certificates, online orders, and food delivery applications? And is pick-up, delivery, or drive-thru an important component of the service offering?
    13. How often does the franchisor require your premises to be renovated or upgraded and what is the estimated cost of these renovations/upgrades?
    14. Will you be able to renew the franchise agreement without completing renovations?

Section 5: SALES TERRITORY AND LOCATION

  1. Is your franchise territory exclusive?
    • If not, would there be some other form of territorial protection?
    • If so, what are the parameters of the exclusive territory granted to you?
    • Will there be other outlets opening near your territory which may undermine your sales?
    • Would these be company-owned or owned by other franchisees?
    • Can you get a first right of refusal for any adjoining territories?
    • Does the franchisor sell its products through other channels of distribution?
    • If so, what are these channels, and how will they impact the profitability of the franchise?
    2. Can you decrease or expand your sales territory? If so, under what conditions and at what additional investment level?
    3. Has the franchisor conducted a site selection analysis of the location of the franchised business and the territory, and provided you with information that substantiates the viability of the location and territory? If not, how could you obtain this information?

Section 6: QUESTIONS TO ASK CURRENT FRANCHISEES

  1. What was your total investment in the franchise?
    2. Were there any unexpected costs? If so:
    • What were they for and how much were they?
    • Were they unique to that individual, or is it something several franchisees experienced?
    3. Are the royalty, advertising, and other fees charged by the franchisor reasonable in comparison to your profits?
    4. On a scale from 1 to 10, how good is the quality of the products or services supplied by the franchisor or its designated suppliers? How satisfied are you with the price-quality relationship? How reliable are these deliveries from the franchisor or its designated suppliers? Are you allowed to use alternative suppliers?
    5. On a scale from 1 to 10, how effective was the franchisor’s initial training? How long was the training?
    6. What is the franchisor’s initial and ongoing training program? On a scale from 1 to 10, how effective is the:
    i) initial training?
    ii) ongoing training?
    iii) group training calls?
    iv) mentoring by the franchisor?
    v) mentoring by other successful franchisees?
    7. On a scale from 1 to 10, how effective is the franchisor in responding promptly and helpfully to questions you have or advice you seek?
    8. What are the most important things a new franchisee needs to know about business generation (prospecting, digital and traditional advertising, networking and community engagement, etc.)?
    9. What type of ongoing support and advice (including advertising, marketing, and promotional assistance) do you receive from your franchisor? On a scale from 1 to 10, how satisfied are you with this support?
    10. On a scale from 1 to 10, how profitable is your franchise as compared to initial expectations?
    11. How long did it take for revenue to cover operating costs?
    12. How long did it take for you to break even?
    13. What have you done to make your franchise successful, and would you recommend this franchise?
    14. Does the franchisor have a dispute settlement board with both franchisee and franchisor representatives? On a scale from 1 to 10, how effective is it?
    15. Have you ever had a serious disagreement with your franchisor? What was the disagreement about? How was it settled?
    16. If you have experienced financial difficulty in operating the franchise, how has the franchisor supported you through the difficult time?
    17. What is the time investment for the franchisee (high amount of owner involvement, or more self-sufficient operations)?
    18. Knowing what you know now, what are the three most important things you would tell new franchisees that they must do? And that they must avoid doing?
    19. Knowing what you know now, would you do it over again? Why or why not?
    20. How effective are the marketing and advertising programs implemented by the franchisor?
    • Does the franchisor provide a periodic report on the marketing expenditures?
    • Are you satisfied with how the marketing contributions are spent?
    21. Do the corporate outlets contribute to the marketing fund?
    22. Are you aware of other franchisees who are not happy with the system or who are struggling with their franchise?
    23. How involved is the franchisor with the day-to-day operations of the franchise? Do you feel that you have the autonomy you require to operate your franchise as you see fit?

Section 7: THE FRANCHISE AGREEMENT

  1. Have you retained a franchise lawyer with expertise in reviewing franchise agreements?
    2. Are the franchise, the location, and the territory clearly described in the agreements?
    3. If the premises is not identified, by what date are you or the franchisor, as the case may be, required to locate a premises and obtain a lease?
    4. Is there an opt-out provision that gives you the right to terminate the franchise agreement if you do not find a suitable premises within a certain period of time?
    5. Does the contract clearly describe the duration, type, and cost of the training to be provided by the franchisor?
    6. Does the contract clearly describe the support to be provided for the grand opening?
    7. Does the contract clearly specify the type, amount, method of payment, and timing of all payments to the franchisor? This includes the franchise fee; any deposits and the conditions for any refunds; royalty payments based on a percentage of gross sales; local, regional, and/or national advertising contributions; fees of continuing services provided by the franchisor; and any other payments.
    8. Does the contract clearly describe the rules around digital marketing and social media?
    9. Are you required to purchase supplies from the franchisor or other designated suppliers?
    • If so, what and how much?
    • Are there any minimum purchase quotas?
    • If the franchisor receives rebates from the suppliers, are they reasonable in light of the cost of the products or services being purchased?
    10. Can you use alternate suppliers (provided the franchisor’s quality standards are maintained) if the franchisor’s supply deliveries are interrupted or for other reasons?
    11. Do you have the right to use any innovations developed by the franchisor?
    12. Are there sales quotas that you are required to meet? If so, are they attainable and what are the consequences if you fail to meet them?
    13. What is the length of the contract term?
    • Is the term renewable, and on what basis?
    • Are the renewal conditions reasonable?
    14. What types of records and reports are you required to provide to the franchisor? How cumbersome are the requirements?
    15. Are you leasing your location directly with your landlord, or will you enter into a sublease with the franchisor?
    • Is the lease for the same period as the franchise contract?
    • Can the lease be renewed, and on what terms and for what time period?
    • Can you change locations? If so, on what conditions?
    • Does the landlord have the right to demolish your premises or require you to relocate?
    16. Are you required to build, or can you renovate existing franchise premises?
    • Will the franchisor provide design and construction specifications, and/or monitor the construction?
    • Can these specifications be changed?
    17. Do you choose the location or sales area of the franchise, or does the franchisor?
    18. Can you operate more than one franchise in your sales area? Do you have any development rights?
    19. Can you sell your interest in the franchise?
    • Does this require the franchisor’s consent?
    • What are the conditions of such consent?
    • How is the sale price determined?
    • Is there a pre-determined valuation formula?
    20. Can you terminate the contract?
    • If so, what are the termination conditions?
    • What are the costs and/or penalties?
    21. On what basis can the franchisor terminate the contract?
    22. If the contract is terminated, will you be compensated for any component of the goodwill that you have built up in the business?
    23. Is there a post-term non-competition covenant, and is it a reasonable one? What is the length of the post-term covenant and what is the geographical boundary?
    24. If you violate any provision of the agreement, do you have adequate time to correct the situation?
    25. Does the contract provide for arbitration or mediation as a pre-requisite before litigation is commenced? If so, how will the arbitrator be selected? How are the costs of the arbitration/mediation to be divided? Are there any rights of appeal?
    26. What happens if you suffer a prolonged illness or death?
    • Will your survivors, for example, be entitled to operate and maintain ownership of your franchise in
    such event?
    27. Can you engage in any other business enterprise during the term of the contract or are you required to devote your full-time efforts to operating the franchise?
    28. Are you required to provide any personal guarantees?
    29. Can you enter into the franchise agreement personally, or are you required to incorporate? If required to incorporate, are there any requirements for how your corporation is to be organized?
    30. Are you allowed to operate your own website or social media accounts?
    31. What is the effective date of the franchise agreement? Have you diarized the expiration of your possible two-year rescission period, during which time you may be able to rescind the agreements if you have not been properly disclosed?

Section 8: DISCLOSURE DOCUMENT

  1. For franchisees in provinces where legislation mandates the provision of disclosure documents – currently British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island.
  • Has the franchisor provided you with a disclosure document that complies with the applicable franchising disclosure statute? In particular, does the disclosure document contain all disclosure required by the relevant franchise disclosure statutes, including the franchise agreement, all other agreements, and the franchisor’s financial statements for its most recently completed fiscal year?
    • Was the disclosure document provided as one document at one time and fully up-to-date as of the date of disclosure?
    • Have you retained a franchise lawyer with expertise in reviewing disclosure documents?
    • Have you retained an accountant with expertise in franchising matters to review the franchisor’s financial statements?
    • Is the disclosure made by the disclosure document consistent with the terms of the franchise documentation and the representations made by the franchisor’s salespersons?
    • Has the franchisor complied with the disclosure requirements of the relevant disclosure statutes by providing you with at least 14 days in which you could review the documentation before paying the franchisor any monies or before you signed any agreements?
    •Did the franchisor include a signed certificate of disclosure in its disclosure document and if so, was it signed by two officers or directors or an officer and a director, if there are in fact two such persons?
  1. For franchisees in provinces without legislation mandating the provision of disclosure documents.
  • Has the franchisor provided you with a disclosure document in accordance with the Canadian Franchise Association’s (CFA) voluntary disclosure rules? Please visit www.cfa.ca/About_Us/Disclosure_Documents for more information.

 

 

 

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