Psst, investor, wanna buy a franchise?

Sounds easy, but the woods are full of people who plunged their savings into a franchise and wish they hadn’t. The complexity of the financing/royalty arrangements, the vagaries of location and the shifting sands of public taste mean buying a franchise is very much a dice toss, just like a regular startup.

The Toronto Star
October 18, 2001

Psst, investor, wanna buy a franchise?
Kim Lockhart

The franchising industry is in a looking glass mirror – peer inside and you see the big picture in reverse. When the Canadian economy is absolutely racing, new franchising muddles along. When the general economy tanks, franchising hits top gear.

“When middle managers get parachuted out of their regular jobs, then they start to think about buying themselves a job,” explains Gord Metcalfe, president of Francon Canada, a Toronto consultancy that charts the franchising industry on behalf of private clients like the big banks.

Franchises have appeal because an investor gets to buy into a pat hand, rather than attempting to crank up a no-name business from scratch. “You get to buy a trademark and proven managerial systems – what’s known as ‘the back of the house’” says Metcalfe.

Sounds easy, but the woods are full of people who plunged their savings into a franchise and wish they hadn’t. The complexity of the financing/royalty arrangements, the vagaries of location and the shifting sands of public taste mean buying a franchise is very much a dice toss, just like a regular startup.

Francon charts about 1,300 franchising entities in Canada and divides them into 48 categories, including 10 restaurant types (fast food, chicken, pizza, family dining, etc.).

A benchmark rating of any franchisor's track record as a money-maker is its "turnkey" fee. That's how much a new investor typically must pony up to open — turn the key — for the first day of business.

The turnkey fee includes:

Franchise fee (which varies widely — the Canadian average is $23,000).

Construction costs (this may include a franchisor's outfitting fee).

Leasing costs (First and last months' rent).

Startup inventory.

Staff hiring and training costs.

Legal costs, advertising/promotion and any other one-time costs.

The graphic at left has this year's price list — standard turnkey fees — for a variety of Canadian franchises tracked by Francon.

A key variable changing any franchise's turnkey fee is the choice of location. Hanging out a sign at Yonge and Eglinton costs several hamburgers more than it does in Cornwall, say, or at the four corners of Shelburne, Ont.

"The majors like McDonald's also have A, B, C and D franchise packages in terms of location size," Metcalfe adds. "A full-size McDonald's goes for about $1 million, but a McDonald's Express doesn't cost nearly that much."


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