Franchising: The Heart of Canadian Business Enterprise

An Exclusive with Canadian Franchise Association President & CEO Lorraine McLachlan

Franchising, quite simply, is one of the primary fundamental business models that helps drive our national economy. A successful franchise brand is one that manages to blend the optimum in franchisor and franchisee relations and operations down the same successful path.

For decades, opportunities in franchising here in Canada have experienced tremendous growth and evidence indicates the potential moving forward is essentially limitless.

The concept of franchising is quite straightforward, although it can be misunderstood at times. Simply put, it’s a relationship between an individual or company that owns the rights to an original concept and brand which is developed into multiple duplicate systems. The creator – or franchisor – then contracts the use of the new brand and operating system for what is known as a franchise fee. After the initial investment, the franchisee agrees to pay a royalty back to the franchisor on an ongoing basis – usually in monthly installments over the fixed term of the agreed-upon contract. The franchisee essentially leases the brand and its associated peripherals, but never actually owns it.

At the core of the contract is an agreement between both sides that the franchisor will provide a proven business model along with proprietary products and services which must be used by each individual franchisee. Compliance of the rules and regulations for each franchise setup are always strictly enforced. The model is beneficial to both sides; it provides the franchisor with faster access to an increased number of markets and final points of distribution of their products and services. From the franchisee perspective, he or she is given immediate and continued support and instant name recognition of the brand.

Over the past 50 years, franchising has become a part of most large industries here in Canada. Some of the most successful include: accommodations (hotels and motels), automotive, business services, fast food, real estate, retail chains and real estate. Even major sports leagues such as the NHL, Major League Baseball, NFL and the NBA work on a franchising system.

A small group of franchisors who were extraordinary business visionaries founded the Canadian Franchise Association (CFA) in 1967 as a non-profit national trade association. The creation of the CFA was induced due to a burgeoning need for a national organization to oversee the many franchising opportunities that were developing quickly from coast to coast. Now, some 45 years later, CFA represents about 500 franchise operations and the professionals who support the industry as a whole. The not-for-profit organization works closely with federal, provincial and municipal governments in order to achieve the best results possible for its members.

“Franchising did not have a voice with government; it did not have a cohesive voice to the general population and there was a need for best practices and just a commonality of learning and understanding that was facilitated through having an association that could be the focus of that,” says CFA President and CEO Lorraine McLachlan during an interview with CBJ.

Serving as the primary platform for all franchising in this country, CFA has a mandate to promote the positive aspects of franchising while also working with each level of government to ensure all programs and initiatives are used to their full advantage. Furthermore, CFA educates Canadians about the finer points of franchising, and can assist in tracking down specific franchise opportunities that may be of particular interest to an individual or group.

“Advocacy is one of the fundamental pillars of what the CFA does,” states McLachlan, who has been at the helm of the Toronto-based organization since October, 2006.

McLachlan is proud of how the CFA has grown and expects the trend will continue in its efforts of serving the national franchising community.

“When I came to CFA it was a strong organization that had a good track record of success and delivering quality products to its members and to the Canadian public in terms of information about franchising,” McLachlan states. “I think there is always opportunity to do more, different and better. In the generally rapidly changing landscape that all businesses are in, there are an incredible amount of opportunities.”

As example, McLachlan made note of the launch of the CFA’s digital version of their magazine, which will make it available to the growing number of readers who prefer the digital format rather than traditional print. It’s all part of a wise, strategic decision to keep up with the technological changes while remaining current and relevant as the popularity of smartphones, tablets and laptops continues to ascend.

Franchising is a method of doing business, as opposed to an industry unto itself. A restaurant might be corporately owned or it might be a franchise and it’s of little interest to members of the public as they enter through the front doors of the establishment.

“What it makes is a difference in the structure of the business,” McLachlan says. “Who derives the profits from that business and the ability to expand and when looking at the franchise business model, you’re looking at the opportunity for prospective franchisees to have their own small business but not have to invent it, and that’s a big piece of the value of franchise.”

Benefits in Being a Franchisee

If you’re someone with an entrepreneurial spirit, there are three basic options from which to choose. You can create an entirely new business model from scratch, hoping to attract clientele from your idea and concept while also dealing with any missteps along the way; you can buy an existing business in which case it’s largely caveat emptor – let the buyer beware. There’s the necessity to be completely knowledgeable about the books of record and depending on how the deal is structured, the previous owner may or may not stick around to show you how to operate the business. Finally, with franchising you are still responsible for running your own business and you by and large will be responsible for its success or failure.

“It is very much just like the other two options – a sweat equity proposition,” McLachlan declares. “One of the things I say when I’m speaking to groups of prospective franchisees is that if you want a guaranteed investment, go buy a GIC. A franchise is not a guaranteed investment but rather a guaranteed opportunity. You have to work hard, but I don’t know any business where you don’t have to work hard.”

The franchisee is provided disclosure by the franchisor in five provinces in Canada and wherever you are, if you are a member of CFA. Right from the start, this provides the franchisee with a legally binding document that describes the business and the conditions you’ll keep it. There’s also information on any litigation or closings within the network.

“In a franchise you get a far higher level of transparency,” McLachlan remarks. “For a prospective franchisee, they are going in with their eyes hopefully wide open. They’re also being handed the operations manuals on how to run that business – here’s the blueprint for how you do it.”

Whether it’s a business to business company, automotive, retail or quick-service restaurant, the procedure is essentially the same. From this stage, it’s up to the individual franchisee to ensure all quality control standards are met and that the consistency in the products, goods and services are maintained. Part of that consistency includes staying with the specifications set out by the franchisor.

McLachlan gave the example of a coffee shop that sells muffins. One franchisee might decide to make his muffins larger than other stores in order to keep his customers happy. But a problem arises when those same customers visit another outlet within the chain and get the smaller muffins as specified by the franchise. The result is the customer feels ripped off. While the renegade franchisee quite likely had only the best of intentions, he wound up overstepping his authority, which in turn undermined the other franchisees in the network.

Front-line vs. Administration

There comes a time when certain franchisees will have experienced a great deal of success and will be given the opportunity to expand to other locations and become a multi-unit franchisee. This also quite likely will mean a different routine in terms of daily responsibilities, and requires a lot of thought because the type of work is starkly different.

“When you start out with one franchise unit you’re typically an owner-operator,” McLachlan reveals. “But at the point you have five, you’re probably not actually in any of those units and you’ve become a straight-up administrative and managerial business person. You’d be running your own little mini franchise empire, but not everybody is cut out for that.”

One of the attractive qualities of franchising is its diversified nature according to McLachlan.

“There is an extraordinary range of opportunity for people of all different skill sets, interests, investment levels and industries – it’s virtually infinite what the possibilities are and I think that’s one of the exciting things about franchise,” she says.

As the leading national voice for franchising in Canada, CFA protects the interests of those who are part of this working environment. Membership also lends tremendous credibility.

“The advocacy work that CFA does benefits franchise systems regardless of whether they’re members or not; but if you’re a member you have the opportunity to help shape what our response to the government will be,” McLachlan notes. “That is a very important thing especially for the larger more mature franchise systems.”

In order to make an informed, educated decision on what type of franchising may be best suited for a particular individual, it’s important to know all the facts of that specific industry and a brand before jumping in with both feet. It’s a common mistake people can make, and one McLachlan has seen all too often. Due diligence is key. To buy into an existing franchise is a major step in one’s career given the amount of time and finances required to make a successful go of it.

A good resource for anybody thinking about this type of career move is the CFA website where you can find tutorials and sign up for the email newsletter, free of charge.

“One of the problems that we find is we see people who become ‘brandazzled’ – they want THAT brand,” McLachlan says. “You can tell them whatever you want, even if it’s as negative as the day is long, and they still want that brand.”

Be educated on the industry and the specific brand. Otherwise the potential franchisee may solely be relying on information from the franchisor, who naturally will only outline the positives of the organization.

“Think of it as dating,” is McLachlan’s parallel analogy. “Make sure this is somebody you want to marry because it’s a long time you’re going to be married to this organization.”

The CFA puts out the annual Franchise Canada directory and produces The Franchise Show, which is the only all-franchise trade show in Canada running in Vancouver, Toronto and Montreal. There’s also an Ombuds program to handle any potential misunderstandings whereby a third-party negotiator can bridge a gap where disagreements arise.

CFA Annual Awards

The 2012 awards ceremony was held in Niagara Falls. The Grand Prize winner was Pizza Nova. The Awards of Excellence have been ongoing for more than 20 years. To qualify, the franchisor must have been in business for at least three years with a minimum of six franchisees.

The peer-to-peer learning and networking is something McLachlan is extremely proud about. She says it’s not uncommon for a well-established franchisor to offer help to someone just starting out in the business.

The franchisees do the voting and it’s all done anonymously. Even CFA executives don’t know who responded or how. It’s all designed to safeguard the franchisees, allowing them to be completely candid in their responses. It’s all handled by a third-party ensure there can be no allegations of favoritism in any regard. There are about 35 questions in total, covering such areas as: how the franchise is awarded, to the operations, the education, leadership, management and business development . The franchisees will rank their franchisor on a scale of 1 to 10. The aggregate score determined how the franchise is ranked.

“The beauty of the franchise business model is that the franchisor succeeds by putting in place the systems and processes that will enable their franchisees to succeed and the more the franchisee succeeds the higher the royalties they pay to the franchisor and so it becomes a very symbiotic relationship that is mutually supporting,” notes McLachlan.

In speaking with CBJ, Pizza Nova president Domenic Primucci said he felt like he’d won an Academy Award and something the CFA strives to achieve within the franchise sector.

“To win the Award of Excellence or one of the category Awards of Excellence is an enormous achievement because it’s your investors – your franchisees – who’ve made it possible,” McLachlan confirms.

Next year’s awards ceremony will be held in Montreal.