How a Franchise Agreement and a Franchise Disclosure Document differ
There are two documents that are of vital importance...
Before you decide to invest in any Canadian franchise, it goes without saying that you have to try to determine how risky they are. Keep in mind that the perceived risk of any franchise isn't limited to just one factor; it's actually the sum of all the risk factors that could damage your investment.
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The fad level
When something has been popular for years and has a set market, it's more likely to be around in the future. But if it's new, you have to be more careful. New often means higher risk, and there's a chance it won't survive in the future. Of course, you can still make money on a fad franchise if you get in early and get out in time, but if you're looking for something long-term, a fad franchise is not the best way to go.
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The seasonality and your location
That awesome ice cream place you went to in Nova Scotia may seem like the perfect franchise for your Manitoba home, but in reality, the climate could sink your ice cream, no matter how great it is. Ice cream franchisors do better in places with warmer weather for a longer period of time than in areas with harsher winter months. Consider how well your franchise will fit in where you want your location to be throughout the year.
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The legal end of things
Government regulations can potentially threaten any business. You can't predict what the government will end up doing, but you can take a look at laws and regulations that are in the pipeline for your franchise's industry and consider how they could impact your investment in the future.
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The recession resistance
While no one business is free from the effects of a down economy, some businesses do hold up better than others when the economy goes south. Franchises based on discretionary purchases and services--such carpet cleaning or car washing--tend to struggle in down times. Of course, this doesn't mean you shouldn't invest in this type of franchise, but you should be aware of how the brand tends to perform under varying economic conditions so you can plan accordingly.
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The franchisor's resources
Your franchisor needs to have the resources available to meet its growth plans and other obligations to the system. Take a close look at the financial statements in your franchise disclosure document to get an idea of how capitalized your franchisor is. If the franchisor is struggling when it comes to cash flow, it's best to move on to the next brand on your prospect list.
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