A franchise is essentially a license to operate the franchisor’s business system and use its trademark according to the franchisor’s standards. The term is normally for between 5 and ten years, depending on the agreement and the lease. In exchange for the right to carry on business under the franchisor’s trademark and system, the franchisee usually pays the franchisor an initial fee for these rights (somewhere between $15,000 and $100,000), and an ongoing royalty linked to the gross sales of the franchised outlet (between 5 per cent and 8 per cent of gross sales). There’s usually a requirement for the franchisee to make regular contributions to a regional or national advertising fund as well (between 1 per cent and 4 per cent of gross sales), so that the franchisor can advertise the brand in high-cost media using the contributions of all franchisees. If it’s a bricks and mortar business, the franchisee either constructs and develops the premises itself (at its cost) or can buy the constructed premises on a ‘turnkey’ basis from the franchisor.
Franchisors are essentially selling three things: the value of a (hopefully) recognizable trademark and brand; the know-how associated with the franchisor’s business system (and the franchisor being able to teach that know-how to the franchisee); and the lower unit costs that come from the purchasing power of a large buying group. If you need help with a franchise in Ontario contact Law Works in Vaughan.