Cross-Border Franchise Agreements and the Canadian Currency Hit
The Canadian dollar going below 70 US cents is good news for the manufacturing sector and bad news for Canadian tourists and customers, and it might also spell new challenges for cross-border commercial agreements.
In the past, the Canadian dollar kept up with the US dollar enough that franchise agreement exchange rates were not a hotly debated matter. Plenty of Canadians are interested in acquiring national, regional or local rights to develop US brands, according to Edward Levitt of Canadian Franchise Magazine.
It is still too early to predict exactly what type of impact the lowered Canadian dollar will have on franchise deals that cross the border, but it is likely you will need to engage in more proactive negotiations with US franchisors. This will be necessary to help change the terms that are now typically used by US franchises with Canadian franchisees because those terms simply do not reflect the current state of the Canadian dollar.
Essentially, whether you’re going to buy franchise rights for a single unit, rights to develop multiple units, or the national or regional master franchise rights with sub-franchise rights, you’ll have to pay an initial franchise fee. With the Canadian dollar weakened, you will need to try to negotiate this fee downward. Unfortunately, this is something that will be easier for bigger franchisees, but a savvy smaller franchisee might just be successful with the right brand and negotiation tactics.
Ongoing royalty fees, which might be a percentage of sales, a flat fee, or a combination of the two, are another potential area of concern you can target. One route may be to negotiate so that the royalty payments end up in Canadian dollars to match the currency your sales are made in, with the franchisor taking responsibility for any conversion costs.
A little creativity can go a long way in franchise deals in general, and the same applies to cross-border US/Canadian franchise agreements. Some US franchisors, for example, may agree to a Canadian franchisee paying any money owned under the franchise agreement in Canadian dollars unless the total falls below a specific limit.
Disparate exchange rates are certainly not something new in the world of franchising, and with juggernaut American franchisors and fast-growing brands offering opportunities to Canadians, a weak dollar certainly should not deter you. Try a little creativity in your franchise deal to make the most of your investment dollars!