As a prospective franchisee, evaluating a franchisor may seem a daunting proposition. It is recommended that prior to expending resources (both time and money) negotiating with a franchisor, a prospective franchisee should learn about the reputation and background of the franchisor and the results of the franchise system to date. There are several sources and methods of evaluating the franchise opportunity, including:
Disclosure Documents
The single best source of information about a franchise or franchisor should be the disclosure document, which is required to be prepared and provided under the Arthur Wishart Act (Franchise Disclosure), 2000. In general, the disclosure document will provide written information about the history of the franchise, financial performance and other information important to a prospective franchisee’s decision whether to buy the franchise.
Franchisees of the Franchisor
Information about the franchisor’s support, commitment, integrity, business acumen, etc. should be readily available from the existing franchisees (as well as past and terminated franchisees) in the system. By speaking to a range of franchisees (from most successful to lease successful), a prospective franchisee should obtain a better perspective of the franchisor and the franchise system or opportunity.
Associations
Associations such as the Canadian Franchise Association (“CFA”) are an excellent source of information about franchisors and franchises. For instance, the CFA may have information regarding previous complaints, membership standing with CFA, as well as competitors of the franchisor.
Industry Publications
There are a number of franchise magazines that provide ongoing analysis on the franchise industry in general and feature articles on specific franchises in particular. The CFA publication regularly prints statistical information about franchises as well as provides various franchise rankings over the course of the year. The writer cautions that rankings should be used only as an aid in your evaluation and should not be relied upon in your decision making.
Credit Rating Services
Credit rating services should not be overlooked as an evaluation tool, particularly inrespect of a non-public company.
Business References
Though it is always recommended to request a list of references from the franchisor, a prospective franchisee may also want to contact others not listed withwhom the franchisor does business.
Competitors
In order to analyze a franchisor’s strengths and weaknesses, it may be very helpfulto contact the franchisor’s competitors.
Trade Shows and Expos
Franchise and business opportunity trade shows provide a great opportunity to meet a number of franchisors at the same time.
Franchise Consultants
There are numerous franchise consulting companies and independent consultants who can provide a wealth of information on either the franchise industry or a specific franchisor.
The Internet
There are a great number of franchise specific websites that will assist you in researching the franchise industry. In conclusion, there are several sources and methods of evaluating a franchisor’s history as well as the franchise system. The prospective franchisee should review all of the information and have it evaluated by professional legal and business advisors.
© 2005 AYLESWORTH LLP
This article is for information purposes only and should not be taken as legal advice.
FOR INFORMATION ABOUT AYLESWORTH’S FRANCHISE GROUP CONTACT:
DAVID J. GRAY
416-777-4047
dgray@aylaw.com
www.franchiseontario.com
P.O. Box 124, 18th Floor
222 Bay Street
Toronto, Canada
M5K 1H1
www.aylesworth.com
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