FRANCHISING IN CANADA FOR UNITED STATES FRANCHISORS THE RECIPE FOR SUCCESS
Canada is a vibrant geographically proximate market, and a natural choice for the expansion of United States franchise concepts.
Franchises operate in more than 40 sectors of the economy and account for one out of every five consumer dollars spent. Expanding to Canada is an investment that must be well reasoned, capitalized and thoroughly organized. We have seen many U.S. brands achieve enormous success in Canada, but we have also seen others fail.
The successful ones acknowledge these two factors: (1) engage Canadian professionals and (2) 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.
Only five provinces have franchise legislation requiring disclosure documents namely, Ontario, Alberta, Manitoba, New Brunswick, and PEI, and they are all slightly different. In Quebec the Civil Code of Quebec governs the franchise relationship. Unlike the U.S., there is no federal franchise legislation nor any requirement to register the disclosure document either federally or provincially.
Given that the U.S. 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 U.S. version. The new Canadian version is then easily modified per province.
Quebec, in particular, offers U.S. franchisors the opportunity to simulate entry into European markets. Many international 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 make up a 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 a national practice I can say with all honesty that the French language fears are unfounded. Quebec professionals provide all the services (including translation) to ensure a 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 American so this is a market well worth the price of admission.
The two most popular expansion models are master franchising and area development agreements. In the former, the master franchisee buys the rights to operate and sell franchises in Canada. It also assumes the U.S. franchisor’s obligations to provide Canadian support and enforcement, in return for receiving a large percentage of the Canadian royalties and other fees. 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 themsleves, they cannot franchise, and they are effectively multiunit 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 develop 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 behaviour and can sell the corporate store as a means of financing the building of a second store.
The Top 5 Factors to Consider in a Nutshell:
1. Intellectual Property: The franchisor must ensure that all U.S. trademarks, trade-names, patents, etc, can be registered and used in Canada without contestation.
2. Financing: Franchise financing is very different and much harder in Canada. Canadian banks require a higher percentage of the total initial investment which makes the prospect pool smaller.
3. Supply Chain: Can Canadian franchisee get materials, inventory or supplies at the same margins as the U.S. locations? Do products need to be sourced in Canada and if so, what is the effect on the product cost, taste profile, quality? How will volume discounts on Canadian purchases be handled?
4. Currency: What currency will the franchisor/franchisee operate in? The Canadian master’s income is in CDN$ so it should still pay royalties in USD$? If it has to pay USD$ for supplies then the margins will be smaller – how is that compensated for if at all? And what about market currency fluctuations?
5. Marketing and Advertising: Often new materials have to be created as U.S. messages do not resonate with Canadians. Will a Canadian ‘ad fund’ be created and when? Will all Canadian money stay in Canada or will there still be a U.S. ad fund payment?
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 (read: Target) have failed miserably and often go back home leaving Canada in an economic mess of lost revenue and jobs in the hundreds of thousands. As a general rule, Canada is very welcoming to American brands and we look forward to seeing more of you “somewhere up here”.
Lori Karpman is considered one of Canada’s leading experts on franchising and multi-unit business development models. She is also the President/CEO of the multi-award winning consulting and legal services firm, Lori Karpman & Company. During her esteemed career, Lori has been a franchisor twice and the Master Franchisee of the Pizza Hut brand for the Province of Quebec. The firm’s clients range from the Fortune 500 brands to the local start-ups. Lori is a prolific writer and sought after guest speaker and has been featured on television, YouTube and radio.