In this segment, we’re going to talk about what franchising is and what makes franchising work. Quite simply, franchising is the creation of a specialized distribution model. It’s a business model designed to gain and keep disproportionate market share, to build brand equity, and capture market dominance—and this is done far more quickly than if a company were to expand corporately instead of through franchising.

A franchise is a business license for a set period of time, and that time is usually in five-year terms or ten-year terms, with renewable terms thereafter. You get to use the name and the trademarks of that franchise for the life of the relationship, while also using the proven systems of the franchise to sell the product or service that the franchisor provides.

The franchisor offers all of this to you in exchange for an initial franchise fee and ongoing royalties. The initial franchise fee is usually in the range of $25,000 to $75,000. But please understand that this is not the complete investment—this is only the franchise fee. Depending on the rest of the business, there can be a much bigger investment.

The franchisor also charges ongoing royalty fees. These royalties are usually taken as a percentage of gross sales or as a flat monthly fee, and they’re paid regardless of whether you’re profitable or not.

One of the most common questions I get is, “Gary, what is a fair royalty rate?” Well, unfortunately, that’s a very difficult question to answer because it’s all about the value. I’ve seen franchisors that are charging 4% royalty and aren’t doing a lot for the franchisees—so I think they’re ripping the franchisees off. I’ve also seen franchisors that charge 14% royalty and are providing a tremendous amount of value to the franchisee.

The better question to ask is, “How much value am I getting for the royalty dollar the franchisor is asking me to pay?” And the only people who can accurately answer that question are the existing franchisees. So, you want to talk to enough franchisees—we recommend 8 to 10—so that you can get a balanced perspective and hear about their experience of how much value they’re receiving.

You may have seen this saying before—it’s a very common saying, but it’s also very true: Franchising is about being in business for yourself, but not by yourself. Franchising is a hybrid between the corporate executive world—where there’s a tremendous amount of support and structure—and the completely independent operator. You have some independence with a franchise, but you also have proven systems and processes and, in effect, a safety net. You’re not by yourself. You have the systems and processes to ensure a stronger likelihood of success.

Now let’s look at some of the reasons why franchising works. Franchising, as we’ve previously said, is a proven and systematic approach to starting and staying in business.

First, let’s look at experience. As a new franchisee, you’ll be benefiting from a massively consolidated experience base and an exponential learning curve. This comes first from the combination of knowledge and experience of the leadership on the executive team. Then, it’s all the experience and knowledge of all the franchisees that have gone before you. The franchisor harvests that consolidated learning curve and all of that information, and continues to capitalize on it by improving and systematically optimizing the business systems and processes. That enables you to avoid critical mistakes and also enables you to do the right things at the right time as you’re launching your business.

Next is simplicity. Because you’re working with proven systems and processes, it’s much simpler to run compared to starting a business from scratch, where you have to figure everything out on your own.

Next is initial training and ongoing support. You’re going to be guided and supported through the most difficult phase—which is startup. Then, as you grow in your business, the franchisor can adjust that training and coaching. That’s where the ongoing support comes in, so you can grow and perform to the levels you’re capable of.

Next is sales, marketing, and operational systems. Depending on the business you’re buying, there might be name recognition, but you’ve also got sales, marketing, and operating systems to help you launch the business faster and achieve higher levels of success because of those systems.

A really big one—and often overlooked—is the culture of teamwork. As I previously mentioned, the business family is going to be part of your support network. In good franchise systems, there’s a culture of teamwork among the franchisor and franchisees. Everybody’s on the same team, going in the same direction. So, there’s a lot of support, synergy, and sharing of information. When you need additional help, often it’s your fellow franchisees who have faster answers than the franchisor.

For all the components listed here—and several others—can you start to see how the franchisor helps you become an expert business operator faster and with less risk than operating a business from scratch? We think so.

Let’s talk about disproportionate market share for a moment, because that’s another reason why franchising works. This data is taken from an industry study done by the Canadian Franchise Association in 2018. There are over a million small businesses in Canada—defined as companies with under 100 employees. There are only 78,000 franchise units in Canada. So, 78,000 out of a million is 7%. That 7% of small business in Canada captures 17% of the total gross domestic product generated by all small businesses in Canada. That’s what we mean by disproportionate market share.

One of my personal metaphors is that franchising is like the HOV lane of business. Think about this—have you ever been jammed in traffic? You’re in heavy traffic and you’re by yourself in the car, sitting in the slow lane. Over to the left is the high occupancy vehicle lane, and people are going by—zoom, zoom, zoom. What are you thinking? I bet you’re thinking, “Gee, I wish I had one more person in my car.”

Think about what it took to create express lanes or HOV lanes. It took a lot of planning and infrastructure to build. There are rules that must be abided by—buses, taxis, a certain number of people in the car, lanes you can’t cross over—all those different things. And vehicles in those lanes are almost always going faster, more efficiently, and getting to their destination—dare I say—with less stress than the people who are stuck in the slower lanes.

I strongly believe that when you pick a good franchise that’s a solid match for you, then you enter the express lane of small business. In good franchising, the franchisor is that extra person in the vehicle with you. They’ve often invested a lot of money—sometimes hundreds of thousands or even millions of dollars—in their business and systems over time. And based on that consolidated learning curve and the knowledge of senior management, all that infrastructure and effort helps you get to your destination faster and more successfully. You’re running your business more efficiently. You’ve got less stress and less risk than your non-franchise competitors.

When we talk about going faster than your non-franchise competitors, there are three main time compression points I want you to think about.

The first is from the time you sign your franchise agreement to the time of opening. If you start a business from scratch, you have to figure everything out. If you buy a franchise, the franchisor tells you what to do first—what type of location you need, what architect, what plan. Then, as you get close to opening, what type of staff you need, and so on.

The next compression point is from opening to break-even. This is about getting the name out in the marketplace, building relationships, hiring the right people, doing all the right things to build awareness for your business.

Once you hit break-even, the next compression point is getting from break-even to full stride. The franchisor has helped you build and launch the business, and now they help you optimize. How do you scale up? What staff do you need? Where should you focus additional marketing? How do you gain more customers or more business from existing customers?

All of these elements create a faster launch at each compression point because of the proven systems and processes. Many franchises are able to reach higher profitability per revenue dollar—and get there faster.

Simply put, when done correctly, you get on an accelerated and proven path that enables a faster break-even and higher profitability compared to a non-franchised independent competitor. Franchising is also a proven vehicle to help you reach your destination while maintaining your lifestyle and financial goals, and doing so with less stress—because you’re not trying to figure everything out on your own. You’ve got a team and a support system. You’ve got a safety net.

With all of these factors—and a lot of historical data—franchising creates a proven way to reduce your risk when launching your own business. Most of our clients tell us they look to franchising because of the lower risk and because it’s a managed-risk process due to the amount of information they can get through research.

We’re now going to talk about the Franchise Disclosure Document.

This is one of the very unique things about franchising: the amount of information that gets disclosed—which you simply can’t get when starting a business from scratch or buying an existing business.

The Franchise Disclosure Document is a critical component of franchise research in Canada. We carefully guide each client through learning about the document when they reach that stage of their research.

We could talk about this subject for over an hour, but for today’s discussion, we’ll only touch on a few key aspects.

It’s important to understand that the franchisor’s requirement to provide the Franchise Disclosure Document is driven by franchise law in most Canadian jurisdictions. Much of this is based on consumer protection. The franchisor must provide you with a tremendous amount of transparency about the material facts of their franchise model.

Remember: franchise organizations are no different than the corporations many people have worked for. Some are great and have excellent leadership. Some are good. Some—not so much. With the Franchise Disclosure Document, you get to look under the hood and gain far more insight than any other opportunity can provide.

You’ll see information about the franchisor—how long they’ve been in business, and the experience of the leadership team. You want to ensure they have franchise industry experience, not just operating experience.

You’ll also see all litigation over the past 10 years—whether initiated by or against the franchisor or franchisees—or litigation for brand protection, such as against outside parties violating trademarks.

Another important part of the document is the financial statements. The franchisor must provide their most recent annual financials so you can assess their financial strength.

Costs and total investment are also detailed. You’ll see the initial franchise fees, costs for setting up the business (including buildout and marketing), and working capital requirements.

The Franchise Disclosure Document includes a sample of the franchise agreement, outlining your rights and obligations, as well as those of the franchisor. This document creates a level playing field, providing consistent information in the same format to all potential franchisees.

When it comes to earnings claims, franchisors must be very careful about what they tell you regarding how much money you can make. Some provide detailed breakdowns of unit economics and profitability—but that’s rare. Most provide partial information. The disclosure document is the only place a franchisor can legally present earnings data. That’s why it’s critical to talk to existing franchisees and hear what they’re earning and what kind of effort it took to get there.

The document also includes territory information—some franchisors have protected territories, others don’t. Whatever the model, it must be disclosed.

You’ll also find a list of all current franchisees in Canada—name, address, and contact info—as well as franchisees who have left the system or failed in the past three years.

Finally, the Franchise Disclosure Document includes term, renewal, and termination policies. You’ll learn the length of the term (five or ten years), how many renewal options are available, and what the conditions are. It also details transfer policies for selling the business or passing it to family. Termination clauses outline under what conditions either party can end the agreement.

As you can see, the Franchise Disclosure Document contains a tremendous amount of information not available when starting from scratch or buying an existing business. This level of transparency is one of the key factors that helps mitigate your risk.

This concludes the segment on Franchising 101. In the next segment, we’ll explore some of the myths and misconceptions about franchising.