The Evolving Status of Franchise Ownership in Canada

Author: lori@lorikarpman.com

Date: JUL 4th, 2014

Topic: Industry Experts

The franchise model was developed to allow individuals of all kinds to enjoy the pride of self employment. The financial model is based on the franchisee being the owner /operator and being paid the manager’s salary as employment income.

Most franchise financials do not accommodate having the franchisee and a manager and the Franchise Agreement is conditional upon the franchisee working full time in the business. As a result of the growth of the (aging) baby boomer, downsized executive, and retirement market segments, franchisors have began to relax the “franchisee-owner-operator” policy.

These prospects are not always looking for a full time career but are not ready to retire fully and still require an income. To address this the franchise industry has created:

  1. A bevy of home based franchises that only require a minimal investment of time;
  2. Exceptions that allow the franchisee to hire a manager for the business, (eg, high sales volume, retail stores, big box restaurants, or groups of persons buying together), and;
  3. Allow for absentee ownership, and require a very minimal investment of time of the franchisee or manager.

This category is extremely unique and there is only one player in the Canadian market to offer this option.

There are thousands of home based businesses but not all of them require 100% of the franchisee’s time. For example, a weekly community newspaper franchise requires the franchisee to sell advertising space. Once a yearly ad contract is signed it becomes passive income for ensuing months.

There are other options where the franchisor does the lead generation, booking and collection of payment from the client for its franchisees taking 50% of the work off the franchisee’s plate. Million dollar businesses allow for managers as the franchisee can’t run a business that size without assistance. However, in these cases the manager must own between 10%-20% of the equity in the franchise company and be approved by the franchisor.

Absentee ownership (AO) is unheard of and a radical departure from the very definition of the franchise model. AO is not the same as hiring a manager as in the latter case; the franchisee is still directly involved on a regular, possibly daily, basis.

In this new model, the franchisee can be the operator or a manager can be hired. The uniqueness lies in the lack-of time commitment; in this case it’s the equivalent of about 1 day per week. It’s a real estate franchise that doesn’t require any investment in real estate. It involves the leasing of 15-20 private suites to professional salon owners and once fully leased, the only obligation of the franchisee is to collect monthly rent cheques. This is a very modern and very attractive, franchise model to address the needs of this new and growing generation of prospects.

The franchise model has always evolved to meet the needs of the times and the rules of ownership will be no different. Home based businesses with a limited time commitment are becoming more popular as franchisors find better ways to support their franchisees. We now have one Absentee Owner model and I predict it be very very successful because it’s ownership/operational structure targets prospects that were never prospects before. I will be watching to see what new and creative operation/ownership models franchisors develop address the needs of this next and most lucrative generation of prospects.