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Looking for that Big Deal!

Soooooo many times, I am asked how one can position themselves to be selected to obtain the Canadian operating rights to a US franchise company. How do they choose? Who will they select? What are the criteria? How much money do I need? How does it work? Will the Canadian units be just as successful? Where should we start? Who do we talk to? Why will they want us? Why do they fail? How can we avoid failure? Is it worthwhile?

In most cases — the American franchisor does not target Canada and then go out of its way to find a master franchisee — it is just simply not worth it for them. There are so many pockets in the United States that are as large or larger than all of Canada, that even Southern Ontario is not on their radar screens.

So far off their radar screen in fact, that many US franchise operators target developing countries which have larger populations and less competition, that coming to Canada usually only happens when a potential master franchisee comes knocking on their door — making the opportunities limitless for entrepreneurial Canadians looking to gain a national operating license from a US franchisor.

First steps

If you are interested in gaining the rights to your favorite US franchise company, don’t get bogged down with the details until you get a firm handle on your vision. Forget what you read about and what you think you know about a certain concept or what you have heard about its quick growth. Pick yourself up and go down to the US and see the operations first hand — and go to as many operating units as you can find. Talk to the franchisees and find out if the company supports them in terms of operating systems, training systems and marketing. Ensure that the franchisees are happy with their results prior to moving forward.

Obtain printed data

The next step would be for you to go and obtain the company’s franchise sales information kits, examine their proformas, search the internet for additional promotional materials and search the internet’s Google for articles related to the company so that you can assess them on a cursory basis. Take their proformas and modify them to reflect the Canadian economy and our operating standards. For example, our taxes, rents, food and beverage costs and labour costs are all significantly higher in Canada than in the US. Couple this with the US tip tax credit, and Canadian operations generally produce only 50% to 60% of the operating profit experienced by their US counterparts. If you think you can still make money on the model — keep moving forward.

Market analysis

The first thing you must do is completely understand what you are about to get yourself into. Are you actually interested in the entire country or just a couple of territories (e.g. Southern Ontario and Quebec, English Canada, French Canada, etc). Once you have decided on the territory you are interested in, you must create a roll-out plan so that you have a realistic understanding of what resources you will need and how many units you can roll-out per year. Once you have your business plan mapped out, you are ready to start to make some serious inquiries.

Make a call

Once you feel that the operating units can work successfully up here in the ‘great white north’, then give the franchisor a call. Find out if they are interested in developing in Canada and if they develop through master franchise arrangements or area development rights. (Remember as an area developer you are likely not able to sub-franchise). If they are willing to get into it with you as a master franchisor set up the initial meeting and get prepared. The franchisor is going to look as carefully at you as you are at them — so get your presentation and senior management staff ready to put your best foot forward.

No matter what happens in this meeting, always remember that the Canadian market place is different than the US. Just keep looking back at Koo Koo Roo’s, Kenny Roger’s Roasters, TGI Friday’s, Fudrucker’s, Chi Chi’s, Ben & Jerry’s Scoop Shops, Manhattan Bagel, Brugger’s Bagel and remember that success in the US does not always translate to success in Canada. Know your stuff, stand your ground and make sure the deal works for you.

Be aware

There are many things that you should be aware of, but if the franchisor is not planning on coming to Canada you may have an upper hand. First if the franchisor is not looking to expand to Canada they may be willing to offer the master rights to a smaller operator who is knocking on their door rather than look for a larger operator with more experience.

However, the franchisor will likely be more receptive to someone who has community and real estate contacts than those who do not.

Determine how the franchisor will make their money and see how you can work with them. Most franchisors will suggest that you pay them an initial flat fee which will be calculated based on a cost for each operation you plan to open in the first five years, an on-going royalty fee, advertising contribution and product supply agreement. While this may be a typical approach you can absolutely negotiate this position. Understand that there is no set methodology of calculating the potential initial fee.

While some will try and base it on the number of units you should open, the amount of $1,000 per unit or $15,000 per unit is fully negotiable. In fact, at the end of the day, the amount is really whatever you and the franchisor agree too and will likely be enough to keep you fully committed to the project but will not be out-of-reach.

The franchisor will also be looking for a commitment as to the number of franchises that will be rolled-out each year throughout the term of the agreement. It is usual for this number to escalate year-over-year, with your objective to keep the number as low as possible. In fact, I suggested earlier that you develop a market study and roll-out plan prior to meeting with the franchisor so that you have a clear idea of what is realistic without all of the hype of negotiations to take you off track.

The franchisor will also be looking to collect on-going royalty fees. We have seen these range from 3% down to .5%. Depending on how you negotiate, you can reduce royalty fees to the franchisor. In most typical situations you will end up paying a royalty of 1.5% to 2% of the franchisees sales. National advertising fees should not be passed on to the US franchisor except in cases where the master franchisee must pay for advertising copy, and in that case, we recommend that you only pay for your proportionate fair share of the adverting costs and not more. The master franchisor should try and control all franchisee advertising contributions.

In negotiating these costs you can leverage on such things as the likely need to find new supply lines, modify recipes to reflect imperial measurements and Canadian tastes, rewrite operation manuals to reflect Canadian standards and laws, development of disclosure agreements in Ontario and Alberta, and a redraft of the franchise agreement among others.

This work has a huge cost to a US franchisor and your willingness to take on the work-load and cover the costs can reduce the amount of money you may have to pay out to a US franchisor.

By way of example, we are currently doing a deal where a US franchisor is actually becoming a partner of the Canadian master franchisee. Rather than take an upfront fee they are taking equity in the master franchisor. While they will not be providing any hands-on operational work, they will end up taking a piece of the Canadian business and sharing in the profit and loss of the Canadian master franchisee. In essence, they are willing to take both a financial and operational risk with the master franchisee and as a result, participate in much more than just simply and initial fee and small on-going royalty. The master franchisee has a fairly committed partner who brings all the expertise that one could dream of in this particular system. As a result, our client and the Canadian master franchisee are entering into a relationship that will undoubtedly be very successful.

And don’t worry about being too small

Many unlikely operators have been able to secure the rights to US concepts — some have been successful some have not. If you want to become the Canadian master franchisee — just show the passion and cut a deal you can live with — work hard, keep your head down — and you will enjoy success.

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