ASK THE EXPERTS

QASK A LEGAL EXPERT Besides the franchise fee and royalties, what other provisions should I consider when reviewing my franchise agreement?

AWHILE EVALUATING POTENTIAL FRANCHISES, prospective franchisees may naturally zero in on the franchise fee and royalties, but there are three other provisions to consider and revise in the franchise agreement, if possible.

1. Resale conditions

No one wants to rain on the exciting parade of purchasing a franchise by considering the exit strategy before things have even started. Still, whether due to life changes, shifting priorities, or as part of the business lifecycle, it’s natural for a franchisee to consider selling the franchise at some point. They’ll generally not be able to sell without the franchisor’s consent. The following are common examples of conditions to the franchisor’s consent: • Right of first refusal: the franchisor may have a certain period to step in as the purchaser. This right could be a continuing right, where the franchisor gets another “kick at the can” if the sale isn’t completed within a certain period of time. A franchisee will want a short period (for certainty with their potential purchaser), and a sufficiently long period to complete the transaction to account for any disclosure period, obtaining landlord’s consent, and the purchaser completing financing arrangements and due diligence. • Release: the franchisor may require a release from the franchisee. A franchisee may want to ask their lawyer to review whether this provision is enforceable. • Fees: various fees may be payable by the seller on a transfer provision, such as transfer fees, administration or “other fees.” Rather than generally described fees, for certainty, fees should be specifically enumerated, such as the franchisor’s reasonable legal costs, training, legal fees, costs associated with credit checks, and more. When the time comes, the seller will need to factor these fees into their desired purchase price. • Store upgrades: the franchisor may also require that the premises be updated prior to the transfer. It may be possible to include certain exemptions, such as if the premises were recently updated at time of the transfer. Franchisees are well-advised to budget for this when prepping their business for sale.

3. Renewal

Franchisees often assume that the renewal of a franchise agreement is a “given,” which can be a dangerous assumption. Renewals are generally subject to conditions, such as the following: • Notice: franchisees are commonly required to provide written notice of their intent to renew within a window prior to the expiry of the current term. This window should be reviewed to ensure that it’s not overly broad or restrictive and lined up with any lease renewal notice windows, if possible. • Release: similar to the resale condition, the renewal provision might also require that the franchisee provide a release of the franchisor, which legal counsel may also want to review for enforceability. • New franchise agreement: franchisors often require that franchisees sign the then-current form of the franchise agreement on renewal, which may contain materially different terms and fees. These changes could be quite impactful on the franchisee’s business. The franchisee should request that the renewing franchise agreement preserves critical terms, such as its exclusive territory. • Store upgrades: similar to the resale conditions, the premises may need to be upgraded to the franchisor’s then-current standards prior to or immediately after renewal. Franchisees are well-advised to plan for this expense by either setting aside a renovation budget during the term or by making financing arrangements in advance of the term’s expiry.

These three examples highlight how important it is to fully understand all provisions of the franchise agreement. These and other provisions may seem

2. Rebrands, system updates, and renovations

Generally, franchise agreements will require a franchisee to implement all system changes that the franchisor imposes at any time at the franchisee’s cost. Additionally, a franchisee may be responsible for conducting a “midterm” refresh of the premises. For example, franchisees may need to purchase new equipment for new product lines or change signage to reflect new logos or store designs. Some franchisors may allow for a “freeze” period so that the franchisee would be exempt from making these changes in the early part of a franchise agreement’s term while the business is still being established. Capping the amount that the franchisee will be required to spend may also be appropriate. Ultimately, franchisees should budget for these requirements and regularly set aside funds.

Dixie Ho

V.P. Legal

Mary Brown’s Inc.

dixie@marybrowns.com

burdensome, but franchisees are encouraged to raise any concerns with the franchisor. Even if a franchisor won’t make changes to the franchise agreement, this discussion can be helpful to gauge how a franchisor might generally respond to a franchisee’s inquiries and can help ensure that each party has a clear understanding of its obligations, which are the foundation of any successful franchise relationship.

QASK A FINANCE EXPERT What do I need to know about borrowing money to finance my franchise business?

ATHERE ARE MANY BENEFITS to owning a franchise business. A franchise gives you flexibility, control, and the feeling of ownership over your career. It also provides instant brand recognition to your business, and customer loyalty that comes from investing with a wellknown brand name. Franchises have a higher rate of success over independent businesses, becoming a lucrative option for prospective franchisees. When preparing to buy a franchise, the best place to start is the Canadian Franchise Association (CFA). The CFA provides industry and franchisor related resources and materials that are valuable for your initial assessment. You should also request a promotional kit from the franchisor to understand the history, values, performance, number of locations, and more vital information about the franchise system. Every franchise system must have a Franchise Disclosure Document (FDD) in place in order to sell franchises. The FDD provides all relevant information about the franchise, including all provincial legislative requirements, the total number of locations, required fees, disclosure of any litigations within the organization, officers of the company, and more. Most FDD’s will have company financial statements attached. If not, you can request one from the franchisor and have a consultant or an accountant review and analyze it for you. The financial statement provides information about the franchise’s financial position. Typically, once your application is accepted, you’ll be asked to attend an interview. These take place because the franchisor will want to ensure that you’re the right operator and that you have the qualities they’re looking for to entrust their brand to you. The interview is also your chance to ask questions about the franchise, its operation, and your expected earnings. Lastly, when preparing to buy a franchisee, do your due diligence at all levels. This includes receiving and reviewing the FDD, but that’s only one part of it—you’re also required to complete a proper investigation and evaluation of all aspects of the franchise opportunity.

Approaching a lender

Starting any business requires a strategic approach and planning, and a franchise business is no different. Before approaching a lender for franchise financing, first assess your financial situation and your capacity to invest in the business. Consider not just a minimum down payment amount for injection in the business, but that you’ll also need extra available cash or cash equivalent that you can use for daily operation and to cover any occasional shortfall or contingencies. Ensure that you have sufficient funds put aside to keep your own finances afloat until you begin to make a return on your investment.

Next, understand the total cost of the franchise purchase and the cost of running a business. Get assistance from an accountant or small business consultant to guide you in doing some preliminary calculations so that you’re clear on how much to invest from your own resources and how much you need to borrow to run your franchise operation.

Finally, get the paperwork ready. Typically, a statement of personal net worth, proof of your assets and debt-related statements, a business plan, a draft of your franchise agreement, and a lease offer will suffice for your first interview with the lenders. Seek help from a business consultant or accountant to assist you in preparing the documents. A comprehensive business plan and related documents that are prepared professionally will be acknowledged immediately by the lenders.

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Neil Roy

Regional Franchise Manager, Business Banking

CIBC

Neil.Roy@cibc.com

TUTORIAL 7: THE FUNDAMENTALS OF FRANCHISING

INTRO TO INITIAL TRAINING

ONCE YOU’VE BEEN GRANTED A FRANCHISE, one of the first things that’ll happen is initial training. This training provides you with the knowledge and skills to duplicate the franchisor’s proven business model and to provide a consistent customer experience.

Training is the foundation of a strong franchise system. Successful franchising is all about duplication and consistency.

A brand is strongest when the customer has the same experience each time they visit a franchised location, no matter what time of day or which location. The only way that brand consistency can be accomplished is through training. Initial training is so important that it’s typically mandatory. Some franchisors will even go so far as to stipulate in the franchise agreement that if initial training isn’t successfully completed, the franchise licence can be terminated, or that the franchisee must repeat the training until all of the necessary skills are learned.

During training, new franchisees must set aside any preconceived ideas of how the business should be run, and be open-minded to learning new methods that are being taught by the franchisor. This can sometimes be difficult for franchisees that have been in business for themselves before, especially if it’s in the same industry. The franchisor will be assessing your ability to learn and to adapt to their method of doing business.

The goal of initial training is to ensure that a franchisee has all the knowledge they need to be successful and to duplicate the brand. Someone wanting to get involved in a franchise is usually looking to be shown how to do this, as they don’t want to have to figure it out themselves. In addition to training the critical elements that make the brand, strong franchisors will also provide training in all aspects of running a business. Key areas that are typically covered in an initial training program include the following: • Initial site selection and store build-out • Operating standards and procedures • Technical operations for providing the service or product • Merchandising • Recruitment, retention, and management of employees • Training of employees • Marketing, advertising, and public relations • Financial management and controls • Administration • Point of sale systems • Approved suppliers.

The duration, costs, and where the training is conducted will vary from franchise to franchise, depending upon the maturity of the franchisor, the complexity of the business model, and the industry. Some franchisors provide training in a group setting at the head office, while others provide training one on one at the new location. Some franchisors provide initial training for several weeks, while others have training that lasts several months. Some franchisors include the training costs in the initial franchise fee, while others charge a training fee over and above the initial franchise fee. Costs for flights, accommodation, and meals while attending the training are typically paid by the franchisee. Who attends the initial training will vary from franchise to franchise. In some cases it’s strictly the franchisee, in other cases it includes the franchisee and key management, and with some franchises, the training may include all new staff.

As a result of the large variations, the only way that you’ll understand the details of the initial training is to carefully review the disclosure document provided by the franchisor and ask a lot of questions. Often the disclosure document will provide a training outline. Ask the franchisor critical questions so that you have a good understanding of what the initial training entails: who, where, when, and what. Talk to existing franchisees and get their input and impressions of the initial training. Some franchisors may let you review the operations manual or sit in on a part of a training program so that you can get a sense of the quality of the initial training. Don’t be afraid to ask the franchisor your questions to learn as much as you can about the training.

There’s a lot to learn when you’re starting a new business, especially when it’s in an industry in which you’ve had no previous experience. Good training is more than just how to make the product. It’s all about how to duplicate a complete, proven business model. A good initial training program provided by the franchisor will instill you with confidence and start you off on the right track to building a successful business.

TUTORIAL 8: THE FUNDAMENTALS OF FRANCHISING

INTRO TO ONGOING TRAINING

GREAT FRANCHISORS DON’T STOP at providing initial training. They provide ongoing training and support designed to continue to develop the skills of the franchisee and their staff for the duration of the franchise agreement. As with initial training, the details and extent of ongoing training varies widely between franchise companies and requires you to ask a lot of questions. Not all franchisors provide ongoing training, so don’t assume that they do.

Franchise licences will often have a term of five to 10 years, or longer. During this time, the business model should evolve. New products, technology, and innovations require that franchisees have ongoing training to keep current with the evolving brand and continue to be competitive in changing markets. When the quick service restaurant (QSR) franchises started in the ’50s, the menu often consisted of only burgers, fries, and milkshakes. Today, QSR menus have dramatically changed to remain competitive in the market, to respond to the growing trend towards healthier food choices, and to provide menu items for meals such as breakfast. All of this change requires training so that the entire franchise system evolves together, and the customer continues to have the same experience at each franchise location. Strong franchise systems will define clearly that ongoing training is mandatory in their franchise agreements.

Depending upon the franchise and the industry, ongoing training is often provided for employees of the franchised location. This can be useful in assisting you when dealing with a business that’s technical and needs welltrained staff. There’s also advanced training for franchisees who wish to take the business to new levels. The ongoing training updates franchisees and their staff on new products, services, or system-wide enhancements. Franchisors will use training to introduce new technology, marketing programs, and other initiatives.

There may be a charge for sending employees to ongoing training, or it may be covered as part of your ongoing royalties. Be sure to review the franchise agreement to determine who’s responsible for the costs. Typically, you’re responsible for paying the employee’s salaries, flights, accommodations, and meals during their training.

Franchisors may have reduced these costs by the method of delivering the ongoing training to the franchisee. Some franchisors have set up regional training centres to minimize travel. Others have support staff from head office go out into the field and provide training at the franchised location, and some have set up online training over the internet or via video so franchisees and their staff can get training at their own convenience. Training is also often delivered as part of national conferences or regular regional meetings. Franchisors that put a lot of emphasis on ongoing training will use all or a variety of these methods to deliver the training and get the new information out.

Providers of ongoing training are not limited to the franchisor. The franchisee may look to other education sources over and above the training provided by the franchisor. Suppliers of products to the franchise system may provide training to update franchisees and ensure that the franchise staff is knowledgeable when representing these products to end-user consumers. There may also be tradeshows and conferences put on by industry associations to provide further education. The franchisor often communicates these external training opportunities to the franchisee.

Successful franchisors put a heavy emphasis on ongoing training. The goal is to ensure that the franchise system is consistent as a whole and continues to be competitive as industries change and evolve. The quality and thoroughness of ongoing training often has a correlation to the quality of the franchise system, and ultimately, your success. Be sure to ask questions and ensure that effective ongoing training is provided when you’re researching franchise opportunities and choose to be part of a franchise system that has a long-term view of the business.

Watch the Franchise Tutorials video on Franchisee Training

STUDY QUESTIONS

TUTORIAL 7

1. Initial training provides a franchisee with:

a) an opportunity to operate a franchise for six months under the supervision of head office staff. b) the knowledge and skills to duplicate the franchisor’s proven business model and to provide a consistent customer experience. c) educational opportunities through industry associations.

2. During initial training, new franchisees must:

a) set aside any preconceived ideas of how the business should be run. b) be open-minded to learning new methods that are being trained by the franchisor. c) both a) and b).

3. As franchising is a business model, initial training is the same for every franchise system.

True or False?

a) True b) False

4. Costs for flights, accommodation, and meals are always covered by the franchise system.

True or False?

a) True b) False

TUTORIAL 8

1. Ongoing training updates franchisees and their staff on:

a) new products, services or system-wide enhancements. b) head office staff changes. c) new products and services of competing franchise systems.

2. There’s often a correlation between the quality and thoroughness of ongoing training and:

a) the franchisor’s level of post-secondary education. b) the franchise fee. c) the quality of the franchise system and ultimately, your success.

3. You may only receive ongoing training from your franchisor. True or False?

a) True b) False

4. Ongoing training is also provided via Internet and video. True or False?

a) True b) False

4) b 3) b 2) c 1) b Answer Key: 4) a 3) b 2) c 1) a Answer Key:

ASK A FINANCE EXPERT

(continued from page 99)

Borrowing to finance a franchise business is a very common practice. A proper business plan helps to analyze whether to borrow more or less in the initial stage. A lender prefers a realistic business plan with a reasonable equity injection from the business owner. Franchise businesses are looked at favorably by the lenders over other independent businesses. A smart way to finance your business is to combine both the equity capital and the debt capital. Equity capital is the fund that the owner will inject into the business and debt capital is the loan that’ll be acquired from a lender. In most cases, you can comfortably borrow three to four times the equity you’ll invest in the business. Remember, it’s easy to get into a cash crunch in the early stages of a business despite all planning. Saving and putting aside enough cash can help overcome working capital, cash flow, and contingency challenges.

You may be wondering what loans are available for franchise businesses, and where to apply for them. Most traditional lenders offer business installment loans at variable or fixed rates to finance leasehold improvements and equipment to support franchise businesses. Some lenders offer a working capital loan and inventory financing.

Also, the Canada Small Business Financing Program (CSBFP) loan is a government guaranteed loan program that’s available to business owners to finance leasehold improvements and equipment. Details about how to apply for such loans are available through most traditional lenders, credit unions, online lenders, and the Government of Canada-owned crown corporation, BDC.