At Qualico Commercial, we get a lot of calls from would-be entrepreneurs who are interested in opening a franchise in one of our retail developments. While we applaud the initiative of these eager business owners, we find that there’s often confusion around what it takes to become a franchisee.
To help us sort out the realities of the franchise process, we talked with Tony Watters, Franchise Development Manager at Dairy Queen Canada.
In this article, we’ll go through some of Tony’s insights and point you toward some resources you might find helpful.
1) Understand the Commitment
“Before doing anything,” said Watters, “a potential franchise owner needs think about how committed they are to what lies ahead.”
The decision to become a franchisee shouldn’t be taken lightly. It requires a significant financial commitment and a huge time commitment.
Dairy Queen, for example, has their franchisees sign into a 20-year agreement.
“Often,” Watters explained “people come in saying ‘This first franchise is just a stepping stone. I’m going to have multiple units’. But they don’t even understand the commitment of owning a single franchise. A lot of potential franchisees don’t think in those terms.”
While some franchised brands will allow a franchise owner to hire a manager, there’s always an expectation for ownership to stay involved.
You’ll need to be committed for the long-term, and your first step should be understanding the extent of what you’re buying into.
If you realize you’re committing yourself to this lifestyle for the next two decades and you’re still interested, then you’re ready to take the next step.
2) Find the Right Fit
“When you’re buying into a franchise system you’re buying into a system that includes policies, procedures, and marketing,” said Watters.
Make no mistake: your franchise will be your responsibility. However, even though there will be plenty of businesses decisions you’ll have to make, you need to understand that you’re agreeing to follow the franchise’s systems.
The policies and procedures used by the franchisor will take the guessing game out of running a new business, but you’d better be sure that those policies and procedures are a good fit for your management style, because, as we mentioned above, you’re committing to them for the length of your operating agreement.
Beyond the procedures, you’ll also need to be sure that the franchise’s brand is a good fit. Do you like the ice cream you’ll be serving? How about the coffee you’ll be responsible for making every morning?
“The key point is finding what works for you, not for the franchisor,” said Watters. “Who cares if they like you? You’re going to be in an agreement for the next 20 years. You want to make sure you like them.”
If you’re not excited about the brand, you might want to think twice about ownership.
Once you talk to a franchise you’ll be asked to sign a disclosure document. In that document, you’ll find a list of past and current franchise owners. At this point, Watters tells potential owners to pick up the phone and talk to current owners.
“Talk to them,” said Watters. “These are the people who have seen what it takes to run a successful franchise under the brand. They’re your best resource in finding out if this is the lifestyle you want. Call them, talk to them, find out what it’s like.”
Finding a brand that you’re excited about will help motivate you to continue working hard on your franchise business. Keep looking until you find a brand that fits your personality.
3) Find a Franchise, not a Landlord
“You have to start by reaching out to the franchisor,” said Watters. “Reach out and identify yourself as an interested party.”
At Qualico Commercial, we find that it’s a common misconception that it’s up to you, the franchisee, to find a great location.
While there are some franchisors who will allow the franchisee to pick the location (subject to their approval) this is the exception, not the rule.
Month after month our leasing directors get calls from people interested in opening a Tim Hortons, a Dairy Queen, a Subway, or any other franchise, in one of our developments.
And we tell them the same thing:
It’s not your call.
“Franchisors have a proven system for finding locations,” Watters told us. “Look at Dairy Queen. It’s been operating for 77 years. It has a system that works.”
This attitude is shared by most franchise brands. They have a sophisticated model for selecting their locations, and it’s based on demographics, traffic flows, and household income, not on the opinion of the franchisee.
Focus your efforts on really getting to know the franchise in which you’re interested. If things move forward, the franchise will provide lots of help in selecting a location.
4) Have Your Finances in Order
“We need someone with a net worth of one million dollars.”
There should be no illusions on this point: it takes significant investment to open a franchise.
If you’ve decided that you still want to move forward with owning and operating a franchise, you’ll need to make sure you meet the franchisors financial requirements.
Franchisors have strict expectations regarding the financial health of their franchisees, and they’ll expect you to meet their standards in some (or all) of these categories.
Start Up Requirements
Net Worth – A minimum net worth is a standard requirement for becoming a franchisee, but the amounts can vary.
Liquid Assets – To reduce the amount of risk they’re taking on, franchisors will require a minimum level of liquid assets from their franchisees. This could mean having to hold $1 million USD in cash, stocks, or bonds before you’re eligible.
Investment – Opening a franchise will take an investment on your behalf, and could require anywhere between $300,000 and $3 million, depending on the location.
Franchise Fee – A one-time fee will be paid directly to the franchise to become a franchise owner. This can range from $10,000 to $50,000, and beyond.
Royalty/Service Fee (4-8% of gross sales) – A royalty fee will be paid back to the franchise every month.
Advertising Fee (3-5% of gross sales) – Being part of a franchise means you’ll benefit from the organization’s marketing and advertising efforts, but you’ll have to make contributions to the company’s advertising fund.
There are a lot of resources that have information on the types of investment required for different brands. We’ve grabbed two we think will be helpful:
www.franchisehelp.com has franchise listings and their associated investment requirements, helpful articles, and a quiz that will even match you to your perfect franchise. Keep in mind, these numbers are in US dollars.
lookforafranchise.ca is powered by the Canadian Franchise Association, and while it isn’t as slick as franchisehelp.com, it is Canadian specific.
5) Get Ready for Opening Day
If you’ve made it through all the above steps, you’ll be well on your way to becoming a franchise owner.
You’ll now be in the practiced hands of the franchisor that you’ve selected to work with, but there will still be plenty of work to do.
“Your toughest day is going to be the day you open your doors,” said Watters, “because you won’t know what to expect. Day two will be a little easier, and day three and day four will keep getting better. But from then on it’ll be up to you to maintain that level of operational excellence.”
The Franchise – A great model, but not for everyone.
“Anyone can excel at franchise ownership as long as they’re prepared for it,” said Watters.
The final point that we’d make to our clients is that franchise ownership isn’t for everyone. If you’re a creative entrepreneur looking to forge your own path into the business world, franchise ownership might not be for you.
If, however, you’re a detailed manager who thrives in a well-defined environment with clear directions and established processes, a franchise might be the perfect opportunity.
“Dairy Queen is an established brand,” said Watters, “they know what they’re doing. This goes for a lot of franchised brands out there. If someone’s prepared to follow the standards and procedures that have been set out, they’re going to do well.”
We’d like to offer special thanks to Tony Watters for taking the time to walk us through the realities of franchise ownership from the franchisor perspective.
We hope this post, and Tony’s insights, will help you on your journey to franchise ownership.