George Cohon, renowned businessman and founder of...
Canadian Franchise Lingo: Demystifying the Jargon
You've probably come across quite a few industry terms while investigating Canadian franchise brands. Some of them are self-explanatory or easy enough to understand, but others can throw you for a little loop. Here are some of the more common confusing terms you may see during your research and what they mean for your potential investment.
The Designated Supplier: Where You Have to Go
A designated supplier is the selected and approved provider of services and/or products for a specific franchisor, and this can be a good thing or a bad thing. The pros here are the fixed and discounted pricing you'll receive if your franchisor has negotiated well and the fact that using the same set of suppliers can help improve consistency across all locations in the same system. The downside, however, is pretty steep: if the suppliers your franchisor is using are expensive or not up to snuff, you'll be stuck paying those prices or dealing with those service issues. Look into the designated suppliers of any Canadian franchise you're considering before signing on.
Royalty: Another Cost of Doing Business
Your franchise cost isn't just the fee and the initial investment, but this is a common misconception people have at the start of their search. Another cost may be the royalty, which is a payment you make to the franchise periodically for the services you're receiving. This fee is usually stated as a percentage of your gross sales revenue for a specific period, such as one month. It can also be a fixed fee that doesn't change no matter what your sales are.
With the royalty fee, it's good practice to compare the stated rate and payment frequency to the potential rate of return you'll receive on the business. This way, you can judge whether what you're possibly paying in royalties is worth it.
Territory: Your Area of Operations
The term "territory" refers to the area the franchisor is going to assign you and where you're allowed to market and operate your business. The location of your business is vital, so make sure your territory is right for your business in areas such as demographics and foot traffic. If you see the term "exclusive territory," that means you will be the only franchisee of that brand operating in that area for a specified period of time.
Make sure you have a complete understanding of all the terms you see in a franchisor's marketing materials, disclosure documents and franchise agreement. The more knowledgeable you are about franchises and the industry, the better able you'll be to make an informed choice.