Helping franchise owners

Wannabe franchise owners pose a special challenge, says David Wilton, director of small business for Scotiabank.

“The dream of franchise ownership can cloud the reality. Reputable franchises bring the value of the brand and a proven track record, but investors need to do due diligence.”

Franchise fees, asset requirements, and marketing and training support vary widely.

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A franchise fee alone can reach the high five figures. “If you are opening a franchise that requires equipment, that’s a double hit. Look at both personal and business costs to ensure you have enough capital in place for unexpected expenses.”

Wilton says some new owners assume the brand will carry the business. Yet it still takes time to build customer loyalty.

“There could be many long days until you generate enough sales to hire adequate staff. Most franchise owners will pay staff ahead of themselves. They need adequate financial resources to weather that kind of hit to the personal finances.”

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At a minimum, a client needs enough cash on hand that’s shielded from the new business to cover at least six-to-eight months of living expenses.

And while franchise owners receive preferential supplier and insurance rates, operators may be limited to specific suppliers, store layouts and products, regardless of local preferences and availability. Those requirements are in the franchise contract.

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Be sure to ask, “Do your clients have the necessary skills to run a franchise? If not, how will they compensate?” says Wilton.

“Not everyone is ready for the challenges of running his own business. Most agreements have a clause that allows the franchisor to take back the franchise if it’s not run according to the terms.”

Read: When clients want to open a franchise >