A guide on franchising in Canada for non-Canadian franchisors
Canada is a vibrant, geographically proximate market, and a natural choice for the expansion of international franchise concepts. Franchises operate in more than 40 sectors of the economy and account for one out of every five consumer dollars spent.
Planning ahead
Expanding to Canada is an investment that must be well reasoned, capitalized, and thoroughly organized. We have seen many international brands achieve enormous success in Canada, but we have also seen others fail.
The successful ones acknowledge these two factors: you must engage Canadian professionals, and you must recognize that Canadians are not “just like Americans”. Canada, as well as each province, has its own culture, customs, and laws that need to be respected. These two recognitions separate the winners from the losers.
Start from scratch
Only six provinces have franchise legislation requiring disclosure documents; namely, Ontario, Alberta, British Columbia, Manitoba, New Brunswick, and Prince Edward Island, and they are all slightly different. In Quebec, the Civil Code of Quebec governs the franchise relationship. Unlike in some countries, there is no federal franchise legislation nor any requirement to register the disclosure document either federally or provincially. Given that an international franchisor disclosure document varies greatly from that of any Canadian province, Canadian counsel will likely start from scratch and create a new Canadian document since this is much cheaper than revising the international version. The new Canadian version is then easily modified per province.
“As a general rule, Canada is very welcoming to international brands”
Quebec, in particular, offers international franchisors the opportunity to simulate entry into European markets. Many international and especially European concepts enter Canada via Quebec because it’s a natural fit with their culture and language. Not to be overlooked for direct expansion,
Quebec residents makeup one- third of the entire population of Canada and are a target market not to be overlooked. Quebecers are the most loyal and least price-sensitive consumers in Canada.
As an Anglo-born Quebecer with an international franchise practice, I can say with all honesty that the French language fears are unfounded. Quebec professionals provide all the services, including translation, to ensure proper and easy entry. Traditionally, people with high capital are bilingual and most often Quebec is sold via a master franchise agreement. It is also good to know that Quebecers love anything European or exotic, so this is a market well worth the price of admission.
A model market
The two most popular expansion models in Canada are master franchising and area development agreements. In the former, the master franchisee buys the rights to operate and sell franchises in Canada. The master also assumes the out of country franchisor’s obligations to provide Canadian support and enforcement, in return for receiving a percentage of the Canadian royalties and other fees.
Many make the mistake of sharing the initial and royalty fees 50/50 between the master and the franchisor; however, this leaves little money on the table for the master developer to expand its business and provide a high level of service. A better ratio is 80 per cent for the master and 20 per cent for the franchisor. Area developers are sold a geographic territory for certain time periods within which they must open a number of franchises on a pre-set schedule. They must develop these locations themselves – they cannot franchise, and they are effectively multi-unit operators.
The biggest mistake by far is to sell “onesies”: single-unit locations to individual franchisees in different parts of the country. These franchisees cannot receive proper support or pricing and are doomed to fail.
I do highly recommend that the franchisor develops one single location as a corporate test center allowing it to operate a franchise, make its mistakes, and get all the kinks out before opening a public unit.
The franchisor will also learn about the market, its culture and consumer behavior, and can sell the corporate store as a means of financing the building of a second store or they can keep it as a training center. I recommend the latter. People like to see, feel and touch what they are buying, and corporate stores provide that experience.
Reap what you sow
This article is an extremely concise version of the considerations to be taken in expanding to the Canadian market. Those brands that do not take the time to understand the market properly have failed miserably and often go back home, leaving Canada in an economic mess of lost revenue and a loss of jobs in the hundreds of thousands.
As a general rule, Canada is very welcoming to international brands and we look forward to seeing more of you “somewhere up here”.
TOP FIVE FACTORS TO CONSIDER
1. Intellectual property. The franchisor must ensure that all international trademarks, trade names and patents can be registered and used in Canada without contestation.
2. Financing. Franchise financing is very different and much harder in Canada than in the U.S. For example, Canadian banks require an investment of a higher percentage of the total initial investment, which makes the prospect pool smaller.
3. Supply chain. Can franchisees get materials, inventory, or supplies and have the same margins as their international counterparts? Do products need to be sourced in Canada and if so, what is the effect on the product cost, taste profile, and quality?
4. Currency. What currency will both the franchisor and franchisee operate in? And what about market fluctuations? What currency will initial fees and royalties be paid in? It’s my belief that the franchisee is earning income and paying expenses in Canadian dollars, so these fees should be in Canadian, too.
5. Marketing and advertising. More often than not, new franchise and marketing materials need to be created; what resonated with Canadians isn’t the same as the U.S., or any other country for that matter. This is why local, Canadian representation is so important, as a good franchise consultant will have a deep understanding of the particulars and nuances of each province.
THE AUTHOR
Lori Karpman is the CEO of the multi-award-winning Lori Karpman & Company and is considered one of Canada’s leading experts on national and international franchising
