Franchisees: 4 Questions You Should Ask Before Signing on the Dotted Line
15 May 2019
Ms Guillaume Lapierre, LL.B., LL.M.
Franchising is currently booming across North America, and for several reasons. Perhaps the most common reason is that franchising enables people to go into business in many different sectors with the reassurance of a safety net to fall back on. That said, before you sign a franchise agreement, there are some crucial steps and checks you need to undertake to prevent costly, irreversible mistakes.
Far too many people rush into acquisition projects without properly analyzing the circumstances, and often without even checking or negotiating their franchise agreement. I’ve decided to list the four questions you should ask before signing on the dotted line.
1. Does the franchisor have a good reputation?
Checking out the franchisor’s reputation and notoriety, as well as that of their main executives and stakeholders, is the best way to see if their behaviour in the market is appropriate. There are plenty of public registers that can help you find the information you’re looking for, including, but not limited to, the Enterprise Register, Corporations Canada, the Canadian Intellectual Property Office, the civil and criminal judicial decisions database, and the Bankruptcy and Insolvency Records Search database. Many franchisors have had their reputations damaged by unfortunate events, so it’s crucial that you check. This precautionary measure can prevent the disastrous impacts that may face a franchisee who invests with a franchisor dealing with significant difficulties.
2. Is the franchisor protected?
Another important step you must undertake when buying a franchise is to check that the franchisor’s intellectual property is properly protected. In fact, protecting a franchisor’s intangible assets, such as trademarks, industrial designs and patents, for example, provides franchisors greater protection over their market share. In my opinion, this is one of the most important things you should verify as entrepreneurs often fail to invest sufficient resources to cover these elements.
3. Is the franchisor competent?
The franchisor’s experience is another factor that you need to examine. Does the franchisor know the ins and outs of their sector of activity? Have they established methods and procedures of standardization enabling them to maintain a certain level of quality control across their network? Talking with other franchise holders is a great way to get a feel for the franchisor’s competency and to see how they are regarded by their franchisees.
4. Will the project be profitable?
Finally, you absolutely must check whether your investment will be profitable in the long-term. The easiest way to do this is to visit your accountant and draw up some fiscal projections to demonstrate whether or not you will see a return on investment in a few years’ time.
It’s never been easier to access information, so it’s important to remember that an exhaustive verification of some elements, including those listed above, can help future franchise holders to avoid potential problems by ruling out any grey areas.