CIBC Private Wealth
June 27, 2023
How to open and run a successful franchise
Could opening a franchise be the right financial move for you? In the quest for financial diversification, franchises are becoming an increasingly popular path. According to the Canadian Franchise Association, franchising is the 12th largest sector of the Canadian economy. And opening a franchise may offer the potential for generating passive income.
Here are four factors to consider when deciding if opening a successful franchise is right for you.
The franchise factor: What is a franchise?
A franchise is a business model where you (the franchisee) obtain the right to operate under the brand name of an established company (the franchisor). As a franchisee, you get access to the franchisor's business systems, marketing strategies and products or services. Tim Hortons and 1-800-GOT-JUNK are just two examples of successful franchises in Canada.
Unlike starting your own independent business, when you decide to start a franchise, you're buying into a proven business with established systems and processes shown to work. This means you can hit the ground running with a recognized brand instead of having to build an entire business from scratch.
Franchise perks: The benefits of starting a franchise
Unlike traditional startups, franchises offer several unique benefits:
- Diversify your income. A franchise adds a new revenue stream to your financial portfolio.
- Generate passive income. Many franchises allow for income generation even when you're not actively working on the business.
- Tap into an existing customer base. Franchises offer the advantage of an established brand and its customer base.
- Explore your passion. Owning a franchise lets you explore your passion, whether it's food, fitness, or any other niche.
- Enjoy ongoing support. Franchises typically offer continuous support, including training and marketing.
The franchise checklist: What to consider before you dive in
What should you consider before embarking on your franchise journey?
- Explore multiple franchise options. Treat franchise selection like car shopping: Don't settle on the first option you see.
- Hire a franchise matchmaking consultant. Consider consulting with an expert to guide you through the franchising process and help you avoid potential pitfalls.
- Research what's in high demand. Like any other startup, identify areas with strong market demand.
- Consider location options. Choose a location that's accessible, visible, and attractive to your target market.
Money matters: Financial planning for your franchise
Starting a franchise involves several financial aspects:
- Start-up costs. Typically, you'll pay a lump-sum franchise fee, but other start-up expenses can include equipment, inventory, leasehold improvements, marketing, advertising, legal fees, and permits and licenses.
- Additional financial factors. Beyond start-up costs, you'll also need to consider your potential earnings, credit needs (such as an operating line of credit), day-to-day operating expenses, and cash flow timing (such as seasonal revenue variations).
- Ongoing franchise fees. Don't forget to factor in ongoing franchise fees, which might include royalty fees (typically a percentage of your gross sales), marketing fund contributions, and IT infrastructure support fees (for example, for online ordering platforms).
- Your risk tolerance. Starting a franchise carries financial risk. Assess your investment capacity, return on investment timeline, comfort level with financial uncertainty, and ongoing costs.
The bottom line: Financial tips for running your franchise
Running a successful franchise is as much about managing your finances as it is about delivering quality products or services. Here are some financial tips to keep your franchise in good shape:
- Prepare a detailed budget. Create a financial roadmap with a comprehensive budget outlining your expected income and expenses.
- Monitor key metrics. Keep an eye on critical financial indicators such as gross profit margin, cash flow and net profit.
- Maintain adequate working capital. You want to have sufficient working capital to cover not only your daily expenses but also seasonal variations and unexpected costs.
- Control operating costs. Regularly evaluate your expenses to identify potential opportunities to streamline your costs without sacrificing the quality of your offerings.
- Build supplier relationships. By developing stronger relationships with your suppliers, you may be able to negotiate more favourable terms.
Ready to dive into the financial aspects of starting a franchise or have questions about managing your current venture? If you'd like to discuss financial planning when starting a franchise or if you have questions about managing your existing business, please reach out to me anytime.