Checklist for Franchisees

Investing in a franchise is a major investment decision, and not every franchise will be the right fit for you. That’s why it’s important to ask the following questions if you’re considering the purchase of a franchise. You may need to ask many more questions to properly conduct your due diligence, and it’s also very critical that you retain franchise professionals to assist you through the process of determining whether to purchase the franchise.

This workbook has been prepared with the assistance of the following franchise experts:
Franchise Lawyer: Joseph Adler, Hoffer Adler LLP
Franchise Consultant: Gary Prenevost, FranNet
Franchise Accountant: Lyn Little, BDO Canada LLP

*Note: The Franchisee Checklist is a public resource of general information which is intended, but not promised or guaranteed to be correct, complete, or up to date. It is not intended to be a source of legal advice. Readers should seek the advice of competent legal, accounting, and business counsel.

Section 1: THE FRANCHISOR – IDENTITY & EXPERIENCE

Questions to ask the franchisor:

  1. Who are the officers, directors, and shareholders of the franchisor?
  2. What is the business experience of the franchisor’s shareholders, directors, and officers? For how many years have they been in the current business category? How many years in the franchise industry?
  3. Is the franchisor a subsidiary of another company (i.e. private equity company purchasing the franchisor system)?
    1. If so, who is the parent company? Who are the shareholders of the parent company?
    2. Has that franchisor or any of its affiliates ever franchised other concepts?
    3. If so, which concept(s), and how successful are they?
    1. Will any of the franchisor’s affiliates be your suppliers under the franchise agreement?
    1. convicted of fraud, unfair or deceptive business practices, or a violation of law that regulates franchises or business or been subject to an administrative order or penalty?
    2. bankrupt or insolvent in the last six years?
    3. charged (or have a charge pending) involving such matters?
    1. If a U.S. franchisor is coming into Canada, what work has been done to adjust for the Canadian market, i.e. supply chain, Canadianizing the marketing messages, PIPEDA, and e-marketing laws, etc.)

    Section 2: THE FRANCHISOR’S RELATIONS WITH ITS FRANCHISEES

    1. What is the franchisor’s reputation for relations with its franchisees, customers, and suppliers?
    2. How does the franchisor qualify, screen, and choose its franchisees?
      1. Have your qualifications been reviewed?
      2. Ask yourself: why do you feel you’re a good match?
      1. For expansion and/or diversification?
      2. How will these plans affect your dealings with the franchisor?
      1. What proportion of franchisees own one unit? Two to five units? Seven to 15 units? 16+?
      2. Does one franchisee have a disproportionate ownership of franchise units?
      3. Does the franchise agreement contain any provisions for acquiring additional units?
      1. Does the franchisor periodically inspect all of the franchises?
      2. What are the franchisee reporting requirements?
      3. Does the franchisor subject the franchisees to periodic audits of books and records?
      4. Does the franchisor have a KPI dashboard or scorecard to help franchisees focus on the right activities and information as they launch and grow their business?
      1. If so, who belongs: how many members are voted by the franchisees, and how many are appointed by the franchisor?
      2. Does the franchisor relate well with the association or council?
      1. Will the franchisor regularly provide franchisees with a statement of how the advertising funds are
        disbursed?
      2. Will the franchisor use the advertising fund to promote existing locations or fund expansion efforts?
      3. Has the franchisor documented how the advertising funds will be used?
      1. What amount of control does the FAC have regarding how the ad fund revenues are deployed?
      1. Was any financial support or royalty waivers provided as part of COVID-19 support?
      2. Was the franchisor quick to make changes as necessary to operations, as a result of the quickly changing market?
      3. How was the communication from the franchisor to the franchisees during the initial phase of the pandemic?
      1. Has the franchisor terminated any of its franchise agreements in the last three years? If so, how many, and for what reason?
      2. What are the reasons for the failure/turnover?
      1. What was the outcome of such litigation?
      1. What is the status, nature, and likely outcome of such litigation?
      1. How important is innovation to the franchisor’s industry?
      2. What successful innovation has the franchisor introduced since it began its business?
      3. How has the franchisor responded to technological change or innovation in its industry?

      Section 3: REQUIRED INVESTMENT

      1. How much is the initial franchise fee?
      2. Is there a deposit? If so, when is the deposit due and how much of the deposit is refundable, and under what circumstances?
      3. What is the minimum recommended operating cash requirement at start-up, in addition to the original investment?
      4. Is there a training fee, a site development fee, or a management or administration fee?
      5. What is the anticipated cost of leasehold improvements, equipment, signage, and start-up inventory? Does the franchisor supply any of these items? Is the price reasonable?
      6. What is the anticipated occupancy cost of the premises?
        1. Rental payments or purchase cost of real property?
        2. Anticipated construction costs for the premises?

        Section 4: FRANCHISED PRODUCT OR SERVICE

        1. What makes the franchisor’s product or service unique?
          1. Does it satisfy a need?
          2. Is it marketable in your territory?
          3. What is the size of the market in your territory?
          1. Who owns the trademarks, copyrights, or patents?
          2. Are the trademarks, copyrights, or patents registered in Canada or have trademark applications been filed for their protection?
          3. If the trademarks are in the process of being registered, is there any opposition or other barriers to the registration of the marks?
          1. On a scale from 1 to 10, how competitive is the cost with third-party suppliers?
          2. If supplies are interrupted, can purchases be made through alternate suppliers?
          3. Will the franchisor be receiving volume discounts or rebates? If so, will these savings be passed on to the franchisees?
          1. How much risk is there of supply chain disruption, should we experience future pandemic waves?
          2. How does the franchisor enable franchisees to protect profit margins when the supply chain experiences sharp or unforeseen increases?
          1. How often does the franchisor update product/service offerings?
          2. Do the innovation advances come from the franchisee base, or from head office?
          3. How are the innovations field-tested to prove viability?

          Section 5: SALES TERRITORY AND LOCATION

          1. Is your franchise territory exclusive?
            1. If not, would there be some other form of territorial protection?
            2. If so, what are the parameters of the exclusive territory granted to you?
            3. Will there be other outlets opening near your territory which may undermine your sales?
            4. Would these be company-owned or owned by other franchisees?
            5. Can you get a first right of refusal for any adjoining territories?
            6. Does the franchisor sell its products through other channels of distribution?
            7. If so, what are these channels, and how will they impact the profitability of the franchise?
            1. What is the percentage of revenue per sale?

            Section 6: QUESTIONS TO ASK CURRENT FRANCHISEES

            1. What was your total investment in the franchise?
            2. Were there any unexpected costs? If so:
              1. What were they for and how much were they?
              2. Were they unique to that individual, or is it something several franchisees experienced?
              1. If you were affected by mandatory lockdowns and/or capacity limits, how quickly did your business return to relative normal once those restrictions were removed?
              2. On a scale from one to 10, how well did the franchisor support and work with the franchisee base to come up with system innovations that helped you get through the pandemic?
              3. What were some of those innovations?
              1. Does the franchisor provide a periodic report on the marketing expenditures?
              2. Are you satisfied with how the marketing contributions are spent?

              Section 7: THE FRANCHISE AGREEMENT

              1. Have you retained a franchise lawyer with expertise in reviewing franchise agreements?
              2. Are the franchise, the location, and the territory clearly described in the agreements?
              3. If the premises is not identified, by what date are you or the franchisor, as the case may be, required to locate a premises and obtain a lease?
              4. Is there an opt-out provision that gives you the right to terminate the franchise agreement if you do not find a suitable premises within a certain period of time?
              5. Does the contract clearly describe the duration, type, and cost of the training to be provided by the franchisor?
              6. Does the contract clearly describe the support to be provided for the grand opening?
              7. Does the contract clearly specify the type, amount, method of payment, and timing of all payments to the franchisor? This includes the franchise fee; any deposits and the conditions for any refunds; royalty payments based on a percentage of gross sales; local, regional, and/or national advertising contributions; fees of continuing services provided by the franchisor; and any other payments.
              8. Does the contract clearly describe the rules around digital marketing and social media?
              9. Are you required to purchase supplies from the franchisor or other designated suppliers?
                1. If so, what and how much?
                2. Are there any minimum purchase quotas?
                3. If the franchisor receives rebates from the suppliers, are they reasonable in light of the cost of the products or services being purchased?
                1. Is the term renewable, and on what basis?
                2. Are the renewal conditions reasonable?
                1. Is the lease for the same period as the franchise contract?
                2. Can the lease be renewed, and on what terms and for what time period?
                3. Can you change locations? If so, on what conditions?
                4. Does the landlord have the right to demolish your premises or require you to relocate?
                1. Will the franchisor provide design and construction specifications, and/or monitor the construction?
                2. Can these specifications be changed?
                1. Does this require the franchisor’s consent?
                2. What are the conditions of such consent?
                3. How is the sale price determined?
                4. Is there a pre-determined valuation formula?
                1. If so, what are the termination conditions?
                2. What are the costs and/or penalties
                1. Will your survivors, for example, be entitled to operate and maintain ownership of your franchise in such event?

                Section 8: DISCLOSURE DOCUMENT

                1. For franchisees in provinces where legislation mandates the provision of disclosure documents – currently British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island.
                  1. Has the franchisor provided you with a disclosure document that complies with the applicable franchising disclosure statute? In particular, does the disclosure document contain all disclosure required by the relevant franchise disclosure statutes, including the franchise agreement, all other agreements, and the franchisor’s financial statements for its most recently completed fiscal year?
                  2. Was the disclosure document provided as one document at one time and fully up-to-date as of the date of disclosure?
                  3. Have you retained a franchise lawyer with expertise in reviewing disclosure documents?
                  4. Have you retained an accountant with expertise in franchising matters to review the franchisor’s financial statements?
                  5. Is the disclosure made by the disclosure document consistent with the terms of the franchise documentation and the representations made by the franchisor’s salespersons?
                  6. Has the franchisor complied with the disclosure requirements of the relevant disclosure statutes by providing you with at least 14 days in which you could review the documentation before paying the franchisor any monies or before you signed any agreements?
                  7. Did the franchisor include a signed certificate of disclosure in its disclosure document and if so, was it signed by two officers or directors or an officer and a director, if there are in fact two such persons?
                  1. Has the franchisor provided you with a disclosure document in accordance with the Canadian Franchise Association’s (CFA) voluntary disclosure rules? Please visit www.cfa.ca/About_Us/Disclosure_Documents for more information.