 |
Here are answers to the questions that you asked us. In some cases, similar questions have been grouped together.
| | 1. Franchised businesses | | 2. Seeking guidance | | 3. Choosing a franchise | | 4. Starting a restaurant franchise | | 5. Am I ready to franchise? |
| | 1. Franchised businesses | Q. We're looking to acquire a franchised business. Any tips or due diligence processes that may vary from non-franchise business? How does Ontario franchise legislation make it easier/better for us?
A. The due diligence is the same for any other comparable business however the following are some Franchise-specific issues to deal with.
A thorough review of the franchise agreement will be necessary and you should also have a good commercial lawyer who specializes in franchises review it.
Prior to signing a franchising contract, you should be able to answers the following questions:
- Does the franchisee have an exclusive territory?
- Is the franchise transferable? - How long is left on the existing franchise agreement?
- Is the franchise renewable? And for how long?
- Is it renewable at the Franchisor's or the Franchisee's option?
- Determine what you are getting for the franchise fee? i.e. accounting - systems? operating systems? lower prices on supplies?
- Determine exactly what are you buying: i.e. Property rights: The right to use the name? Location: Is the building part of the deal, do you own the real estate? Will you be paying rent?
Confirm that the current franchisee is in good standing with the franchisor and talk to other franchisees within the group to ensure that there is no hidden issues with the franchisor.
For information on Ontario legislature regarding franchise, you may want to consult the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 . You may also want to look at Ontario Statutes and Regulations website for other pertinent information. http://www.e-laws.gov.on.ca/search_E.asp?lang=en&searchwhat=CL | Back to top of page
| Back to this month's theme
| Return to my human resources management project
|
| | 2. Seeking guidance | Q. I'm looking to acquire an existing business, where should I start? Which professional(s) can guide and help me with in my future acquisition?
A. There are two key professionals that can help you with the acquisition of a business: a professional accountant such as a Chartered Accountant (CA) and a corporate lawyer.
Accountant
The accountant will be necessary to guide you through the due diligence process that will be required to make sure there is good value in the business you are buying and the due diligence will include such things as determining that there are no unrecorded liabilities, lawsuits or tax reassessments outstanding and that the company is in good standing with Canadian Revenue Agency.
The accountant will also help you determine whether the asking price is reasonable given the historical earnings and asset base of the business. They can also help you structure the deal to minimize the tax implications by recommending either a share purchase or an asset purchase. They may also help you structure the financing of the deal to minimize your total investment.
Lawyer
Once the deal has been structured to your satisfaction it will be time to contact a corporate lawyer to review or draw up the agreement of purchase and sale so that all of the legal aspects are handled properly to minimize your risk. Depending on how the deal is to be structured, you may require them to incorporate a holding company to hold the shares.
Buying a business can be complicated. We recommend that you engage both a professional accountant and a corporate lawyer early on in the process. | Back to top of page
| Back to this month's theme
| Return to my human resources management project
|
| | 3. Choosing a franchise | Q. As a corporate franchise owner, how should I select potential franchisee's?
A. The relationship between you as a franchisor and a franchisee is not the same as an employer/employee relationship but many of the principles used in "selecting" a franchisee are the similar to choosing an employee.
The franchisee will own and operate their own business with a contract/license to use the franchise. This contract will define your relationship and how the business must be operated. An employer/employee relationship is defined by the employment regulations of your jurisdiction as well as employment common law.
The skills, knowledge, abilities and competencies required to run a successful franchise would be similar as those of a president operating a small business or a an entrepreneurial division of a large company.
Start the process by determining what and who you need. As with an employment situation you will need to develop a "job description" and a "job posting" that will summarize the key work outcomes, processes, equipment used, work environment and skills required to successfully operate a franchise. (See Q. I would like to know how to write an effective job posting as well as a clear job description.)
This information and the financial and credit requirements for franchisee applicants would become part of your screening process.
Once the applicants meet the financial requirements, tools and processes used in an employee selection could be applied: interviews, references, practical assessment exercises and perhaps psychometric evaluations.
An example of a practical assessment exercise for your franchisee applicant may include a stint in a "Hamburger University like" environment. This will allow you to evaluate their operational skills and ability to learn and direct activities related to the business. | Back to top of page
| Back to this month's theme
| Return to my human resources management project
|
| | 4. Starting a restaurant franchise | Q. They say that the hospitality industry has become very unstable in the recent years. In particular, referring to the restaurant business, do you think its a good business to start? I am thinking of opening a franchise.
A. "They" are right: The hospitality industry is a tough one and it has grown tougher in recent years. And the restaurant sector of the industry is particularly notorious. Statistics show that, generally, as many as 50 per cent of restaurants fail every year.
This has not stopped many people from opening them, however, since, in a society where dining must be convenient and quick, or is increasingly becoming a social occasion, the market for restaurants is growing all the time. Also, for new immigrants, restaurants are often the easiest businesses to start: By simply applying the cooking techniques used at home in a native country, a person has an instant business.
This latter situation points out one of the large problems with the restaurant industry, however – it often illustrates the "staying small" trap. This is simply that, yes, it can be easy to start a restaurant, but it is often very difficult to grow it beyond a business that demands long hours and extreme amounts of work, often by the entire family, yet supplies very little financial return.
You have already taken a large step to conquering this problem by considering a franchise situation. Indeed before they open, all independent businesses, especially restaurants, should be considered as potential franchises, whether they ever reach that goal or not. By thinking of a first restaurant as the beginning of a franchise, an operator is already on the way to beating the biggest problem most restaurants have – differentiation, or some way in which it is unique and will engage or attract customers. This could be a particular kind of food, a certain ambiance, but especially a process that can be duplicated and performed by anyone.
This latter point is extremely important in the restaurant business: Every aspect of its operation must be analysed and tested for efficiency and effectiveness (even small details such as what servers wear, or seating arrangements), and then written down, so that it can be followed by anyone, including the restaurateur. That way the restaurant operator will concentrate on the business of restaurant operation, and not on the technical aspects, such as cooking or serving.
Before you do this, however, examine your motivations and personality. If you simply like to cook, or serve people, you are a doer, and will not be happy or successful operating a full-blown restaurant business. If you are a manager type, you will concentrate only on financial and logistical aspects, but be frustrated by the more artistic cooking and serving process. An entrepreneur, on the other hand, will spend much time visioning about a restaurant chain, but avoid the detailed managerial work that must also be undertaken. A successful restaurateur must combine the three personality types and accompanying tasks. That is why process codification becomes important.
This codification also helps with that other large problem in the restaurant industry, attracting investors. These days, a restaurant must invest large amounts of capital in equipment, décor, and staff, and people who supply this capital – investors or lenders – require that the restaurateur know what he or she is doing. Having a clear and detailed strategic business plan, with all processes identified and codified, goes a long way to meeting this requirement.
In summary, operating an independent restaurant is an intense business that is not to be undertaken lightly. But many people do it successfully because they treat it as a business, and not simply as a way to perform particular tasks they like doing.
If you are thinking of becoming a franchisee of an existing restaurant chain, much of the above listed work has been done for you. For these reasons, franchise networks tend to be much more successful than independent restaurants. Not all are, however, so it is up to you as a potential franchisee to investigate to determine if the network meets all the above requirements. Also determine if the master franchiser will offer intensive training in restaurant operation: As we have seen, it will be important.
| Back to top of page
| Back to this month's theme
| Return to my human resources management project
|
| | 5. Am I ready to franchise? | Q. I am a small business owner with a desire to offer franchise opportunities. I have been approached twice now by two serious customers. I've been open only for 5 months. How can I assess if I am ready?
A. Before you begin to consider franchising consider what it means. Franchising is a method of financing business expansion by making the business extremely "repeatable" so that a franchisee – can buy and easily run it.
The aim is for a franchisee to simply pay the franchise fee and begin operating the business, without in-depth knowledge of how that business works. Think of the hamburger chain that standardizes operations to the extent that anyone can walk in and make a profit. Without this standardization, there would be no profit, no franchise fee, and likely, no franchise chain.
How to franchise
To achieve this kind of expansion, every aspect of the business operation must be standardized in terms of operational procedures, codified in the form of operating manuals, and analyzed so that revenue and expenses are extremely predictable.
Also, a franchise is a network of businesses, in which the franchisor, or master business, for a fee, takes care of network wide chores like finding locations, setting up real estate leases, ordering and distributing supplies, and marketing and advertising. In some cases, the chain also takes care of financials and accounting for individual franchisees.
Franchising a business concept involves much more than simply opening more stores to expand. It requires that extremely rigorous systems be in place before you begin selling franchises. Although you have been approached by people who appear to like your concept, you have to ensure that your business is standardized and your operations codified with the rigor required to expand in such a way.
The first years of business operation usually involve many unknown factors, so is a period of refinement and fine-tuning. If you have thoroughly understood every aspect of your operation and can show others how to do the same thing, you may want to consider franchising. | Back to top of page
| Back to this month's theme
| Return to my human resources management project
|
  
|
|
|
