How to buy a franchise in Canada – a guide

Is a Franchise a Good Business Model?

Not all franchise systems are created equal.

Some franchisors are highly sophisticated and well-established, with strong financial backing, a popular brand, and a proven track record of success. On the other hand, there are franchisors with limited financial support, little brand awareness, and minimal experience running a franchise system. Most franchise systems fall somewhere in between.

If you are looking to buy a franchise in Canada, you should do your research and assess the franchisor’s track record when you are evaluating which franchise system you want to purchase.     

The degree of sophistication of the franchise system can also impact a potential franchisee’s ability to negotiate more favourable terms and conditions in the franchise agreement – something for you to keep in mind:  

A more established and reputable franchise system:  

• In a retail system, it will require you to raise more capital to purchase a store/location; 
• You’ll have a lower business failure risk, and  
• You’ll be more likely to have a “standard” franchise agreement with little room for negotiation.  

A smaller franchise system or one that is relatively new or possibly a start-up: 

• It may require a smaller upfront investment;  
• It could pose a significantly higher business failure risk, and 
• They’ll typically offer a little more room to negotiate the terms of the franchise agreement. 

How Much Do Franchise Owners Make in Canada?

The potential earnings of franchise owners in Canada vary widely.

One of the biggest misconceptions about franchising is that it is a way to leverage a proven brand, operating model, and marketing machine to get rich quickly. Although owning a franchise can ultimately be lucrative (especially if you own multiple locations and have an economy of scale), you are, in essence, an entrepreneur who is starting a new business. Like any small business, it takes hard work, dedication, business acumen and time to become profitable.   

Before you buy a franchise, one important question to ask yourself is: are you making the decision as a businessperson or a consumer? All too often, franchisees decide to purchase a franchise wearing their “consumer hat” – they can’t get enough of the burger.  As a prospective franchisee, you need to think like a businessperson and develop a solid business plan. (In fact, you will need this if you need to raise capital via a small business loan).   

It is wise to work with an accountant to prepare a reasonable and conservative business plan, especially if you are doing this for the very first time. As a potential franchisee, you should have a reasonable understanding of your expected: 

• Fixed costs (e.g., startup costs such as site construction or renovation, and monthly costs like rent and payroll); 
• Variable costs (e.g., how much does it cost to prepare each burger); 
• Key assumptions you are making;  
• How much revenue do you need to break even, and  
• How long will it reasonably take to break even and begin to make a profit. 

Steps to Selecting a Franchise

It is important to conduct a comprehensive review of all key documents and agreements and to do your due diligence when you are buying a franchise in Canada. This includes going over the following documents with a fine-tooth comb: 

• Franchise Agreement: the contract by which the franchisor grants the franchisee the right to operate a location within the franchise system, and the associated terms, conditions, and obligations for operating a business under the franchisor’s brand.   
• Franchise Disclosure Document: a document that the franchisor provides to prospective franchisees pre-sale that reveals all vital information about the franchise system, its financial performance, and the location in question that a prospective franchisee needs to make an informed purchase decision.  
• Lease Agreement: who holds the lease (the franchisor or the franchisee), the associated rights and obligations, and what happens post termination or when the franchise agreement has expired.  

Law Works can provide advice or review these documents for you when you are considering purchasing a franchised business. There are also more in-depth articles about each type of document in our website resources. 

Often eager first-time franchisees will rush to sign the franchisor’s agreements to get up and running as soon as possible. Then, when the franchisee starts operating their business, they begin to appreciate the complexity of the franchise relationship. The franchisee realizes that they may have been able to negotiate terms to meaningfully improve their financial investment or to better protect themselves in the event of a dispute or if their business fails to meet expectations. You want to avoid being in this situation with some preventative action.  

It is wise to work with a franchise lawyer who is knowledgeable and experienced in franchise law in your province to conduct a comprehensive review of all documents and agreements before you sign anything. A franchise lawyer’s due diligence investigation can identify any “red flags” that might impact your decision to buy the franchise, any unreasonable/unusual terms and conditions, and help you to negotiate a more favourable deal as a buyer of a franchised business.   

The Law Works website offers a vast number of resources by way of blog articles and webinars about franchise law. Subscribe to our newsletters to stay up to date on the latest information from us. 

This article is provided for general information purposes only and is not intended to provide legal advice.  Prospective franchisees should obtain legal advice from a knowledgeable franchise lawyer.

Law Works offers complimentary initial 15-20 min telephone consultations which you can book online.