What's a Good Franchise?

I was recently speaking to a group of prospective franchisees about legal issues that arise in the acquisition of a franchise. At the end of my presentation a member of the audience asked me what he probably thought was a fairly simple question, “what’s a good franchise”. The problem is that there was no simple answer to his question because, at least in part, what is a good franchise for one individual may not be for another.

Obviously, a good franchise is one that makes a reasonable financial return for the investment that a franchisee makes to acquire the franchise. However, franchisees should not simply judge a franchise by the money that he or she might make from operating the franchise. It is equally as important that an individual acquire a franchise that they will be passionate about and enjoy operating. The chances of a franchise being successful will diminish markedly if the franchisee really has little passion for the business or is not excited about being involved in its day-to-day operation.

While what is a good franchise will differ between individuals, there are some common characteristics of good franchise systems. Most notably, a prospective franchisee must ask themselves what value is the franchisor adding, because one can always operate an independent business that is not tied to any franchise system. A prospective franchisee will want to ensure that there is true economic value in becoming part of a franchise system, otherwise it makes little business sense to pay the franchisor an initial fee and ongoing royalty payments.

Good franchisors add value to their franchisees in a number of different ways, which to some extent will vary between different franchise systems. The following are some of the more common ways franchisors offer value to their franchisees:

1. Almost all significant franchisors in Canada assist their franchisees by generating customers to the franchisee’s business through a number of different strategies, such as building brand awareness, large scale advertising campaigns and operating call centres. For example, a number of maid service franchise systems offer their franchisees the very real benefit of a centralized call centre that helps generate work for the franchisees. Obviously, most independent maid service businesses cannot afford to operate a large call centre. The benefit of brand awareness, advertising campaigns and call centres is that these techniques of generating customers are often beyond the reach of most small businesses that are not part of a franchise system. As a result, a franchisor’s ability to assist its franchisees in generating customers is one of the very real values that is associated with acquiring a franchise.

2. Some franchisors provide a benefit to their franchisees by supplying them with products to be re-sold from or used in their franchise. Often these products are not available to be purchased at wholesale by anyone other than one of the franchisor’s franchisees. The advantages of becoming a franchisee in this scenario are obvious as an individual will not be able to acquire the right to sell or use the product unless it becomes a franchisee. Some franchisors do not manufacture products or have exclusive rights to acquire a product, but provide an advantage to their franchisees by way of being able to obtain products at reduced prices. As an example, franchisors of coffee shops are often able to acquire coffee beans at prices that are significantly reduced from the prices that are paid for beans by independent coffee shops.

3. Many franchisors assist their franchisees in obtaining a location for the franchise that would not be otherwise accessible. Franchisors often have strong relationships with large landlords and are able to acquire real estate that would not otherwise be available to someone who is not part of the franchise system.

4. While less common, some franchisors provide financing to assist their franchisees with acquiring a franchise or the inventory of products that is to be sold from the franchise. These sorts of financing packages are only available to one of the franchisor’s franchisees as the financing is provided either directly by the franchisor or through a financing arrangement that the franchisor has with a financial institution.

5. Franchisors commonly provide their franchisees with operating systems and procedures. These operating systems detail exactly how the franchise will be constructed, what products will be sold from the franchise, suggested retail pricing of products or services offered by the franchisee as well as providing direction as to how the franchise will be operated on a daily basis. Those franchisors that have been in business for a significant number of years tend to offer their franchisee the benefit of more developed operating systems and procedures than most start-up franchise systems.

While there is no one simple answer to the question of what is a good franchise, there are certainly common characteristics of good franchise systems. The hallmark of these characteristics is a franchisor that provides a benefit to their franchisees that is not otherwise easily obtainable by someone who is not one of the franchisor’s franchisees.