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Friday 7th October, 2022

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Franchising in Canada: the ultimate guide


Franchising in Canada: the ultimate guide

Canada’s proximity to the U.S. has made it the most common first destination for international expansion by U.S. franchisors

How does the world see Canada? A country with breathtaking scenery populated by extremely polite people? For sure. A tolerant country? Absolutely. An honest broker among other countries? Definitely. However, that’s just the start of what Canada has to offer. It is also an exciting franchise location between the vast North American market and the rest of the world, full of ambitious and innovative franchisors and talented, eager franchise investors.

Canada’s proximity to the U.S. has made it the most common first destination for international expansion by U.S. franchisors, who find a lot that is familiar in Canada, but with sufficient challenges to allow them to build their international resources and expertise. American brands that have successfully launched a franchise opportunity includes the likes of Edible Arrangements, Dunkin Donuts, iHop, Planet Fitness, Taco Bell and many, many more.

Many other international franchises, especially from Europe, also find it a much more familiar and compatible place to enter the North American market and come to terms with its unique identity. Potential franchisees from the U.S. also respond especially well to franchises that have already succeeded in Canada. No wonder, then, that so many overseas investors are seeing it as the perfect proving ground for their franchise network.

So, it is well worth taking your time to understand how the Canadian franchise community and market works, and how to get the most out of it. As with many large and complex markets, working with international consultants that have knowledge and expertise of the region can give you a huge advantage when it comes to avoiding any pitfalls that can happen during the international franchise expansion process.

Prospective franchisees: do your research

Like with any franchise industry, perhaps the most important stage in the international franchising process is background research. This is especially true for Canada, where disparate provincial laws and ununified regulations can prove tricky for investors who haven’t done their homework.

Let’s look at the big picture: according to the Canadian Franchise Association (CFA), Canada has approximately 1,300 franchise brands, with over 76,000 individual units peppered across its lush, frosty landscape. The province with the largest franchise market is Ontario ($49bn), followed by Quebec ($15bn), and then British Columbia ($13bn) – this, of course, results in a vast number of Canadian franchise opportunities.

Of the country’s 34.6 million population, 90 per cent live within 100 miles of the U.S. border. This has proven beneficial to large American franchise brands, as Canadians can be approached with a pre-existing familiarity in mind.

“Canada has been a great stepping stone for American franchisors expanding internationally, since the Canadian market is so close,” says Wayne Maillet, president of Franchise Specialists and author of Franchising Demystified: The Definitive Franchise Handbook. “For American franchisors, there’s often a brand presence and knowledge in the market already, where we’re so close in the media and TV. Overall, consumers are familiar with American brands.”

This has certainly been the case for the giants of the American franchising world – the likes of Subway, McDonald’s, KFC, Dairy Queen and many other large food franchises – which have all found great success within the country. McDonald’s, specifically, benefitted from Canadian expansion as it was a Canuck franchisee who introduced the now-iconic McFlurry to the brand’s renowned menu in 1995.

But you don’t necessarily have to be a huge, established brand to make it big in Canada. Burger Village, a modest, eco-friendly U.S. burger franchise announced its first Edmonton location late last year: “Burger Village was looking to expand internationally and opportunity knocked from Edmonton in the form of a franchise inquiry,” said Nick Yadav, CEO of Burger Village. “Things worked out and here we are with our very first opening in Canada.”

However, as with any story of a brand venturing into Canada, Burger Village faced some initial teething pains. As Yadav explained: “We had to face a challenge related to cooking temperatures as per Board of Health, Edmonton. We had to serve burgers cooked well done only, whereas, in all of our locations in the U.S.A., we can serve anywhere from rare to well done as per the customer’s choice.”

Canadian laws that impact franchising opportunities

Unlike the U.S., there are no federal laws governing franchise businesses in Canada; the responsibility lies within the provincial government. And as of writing, the only Canadian provinces that legislate franchise laws on franchise disclosure documents and franchise agreements are Alberta, Ontario, Manitoba, Prince Edward Island, New Brunswick, and British Columbia. Furthermore, these agreements don’t necessarily correlate across provincial borders.

“A lot of brands come to Canada and what they don’t realize is that the country is quite fragmented, in terms of franchise development,” says Lori Karpman, CEO of Lori Karpman & Company, a franchise management consultancy. “Typically, the brands that do come either start in Western Canada, Ontario, or Quebec.”

Quebec is perhaps the epitome of Canadian individuality, as the province could almost be a sub-market within Canada itself.

However, even for a European franchisor, Quebec isn’t a sure fire ticket to success. Protective language laws require that all signage for a brand is predominantly in French, and cultural preferences could prove jarring for concepts that have otherwise worked perfectly elsewhere.

“Here’s a perfect example: Pizza Hut came into Quebec many years ago,” explains Karpman. “There’s a big difference in Quebec with how we make our pizza. The rest of the world puts their cheese and then toppings on, but in Quebec, we put the toppings on first, then the cheese. Sounds like a minor distinction, right? But it’s not. When Pizza Hut came to Quebec for that first time, it didn’t do too well and ended up leaving. It didn’t offer French fries, which we eat with pizza, and it didn’t butter the crust like we prefer here.”

But Pizza Hut’s story didn’t end there: “It subsequently came back and became very successful,” says Karpman, “because they partnered with a Quebec development group – a group of people who understood the needs of the market.”

A comprehensive 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.

Expanding to Canada is an investment that must be well reasoned, capitalized, and thoroughly organized. We have seen many international brands achieve enormous success by promoting Canada franchise opportunities, 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.

Franchise Canada: popular business models

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 franchise unit locations to individual franchisees in different parts of the country. These franchisees cannot receive proper support or pricing and are doomed to fail.

it’s highly recommended 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. People like to see, feel and touch what they are buying, and corporate stores provide that experience.

Ensure your franchise concept is Canada-ready

Interestingly, despite the journey from the U.S. into Canada being an international one, many franchisors are opting for direct franchising when crossing the border – not something you’d commonly see when entering a new regional market.

“A high majority of my clients are looking at direct franchising because they feel that they can service their franchisees from the U.S.,” says Canadian franchise lawyer, Andrae Marrocco. “A fitness concept out of Rochester, New York, utilizing all custom proprietary equipment, gets it all on a truck and brings it to Canada because of the proximity. If you’re a restaurant, however, and there’s a lot of supply chain nuances that need to be addressed, then master franchising may be the preferred choice of franchise structure for your business opportunity.”

Master franchising hasn’t always been a sure fire path to success in Canada though, and this has led franchisors to sometimes consider alternative routes.

“In the past, the franchisor was relying on the master to know the market that they’re going into, and to make changes that needed to be made. 20 years ago, we had a lot of failures, because the franchisor left too much down to the master franchisee,” says fellow Canadian franchise lawyer, Ned Levitt. “In the last 10 or so years, what we’re finding is that more franchisors are not going the master route and are instead considering multi-unit franchising. More are realizing the benefits of multi-unit; they would give a multi-unit operator a sizable territory in the target country, but there would still be the franchisor/ franchisee relationship.”

With all of this taken into consideration, the experts are still confident that there is prosperity to be found by U.S. franchisors heading North: “Any U.S. franchisor who has domestic success, does their research, has sufficient capital and patience – their chances of success in Canada are great,” says Levitt.

Expert advice: avoid assumptions!

Despite the U.S. and Canada appearing similar on paper, it would be a mistake to take all of the above information and simply flip it, assuming that it could be utilized by Canadian franchisors heading into the States. While the close proximity of the two countries benefits brands taking the leap, there are still many considerations that need to be made before formulating an entry strategy.

“From a cultural perspective, while Americans reap the benefits of cross-border brand awareness, it doesn’t always work the other way around,” says Canadian franchise expert, Angela Coté. “What I mean by this, is that probably mostly through the media, we Canadians often get exposed to American concepts, so by the time a U.S. franchise enters Canada, there’s a good chance there has already been some brand awareness built up. When a Canadian franchise enters the U.S., we are often starting more from scratch.”

Starting from scratch isn’t always a bad thing, of course. For the right franchisor, this blank slate can be an attractive prospect. It allows seemingly limitless growth – just as long as a proper market strategy is put in place. After all, as Bill Edwards, CEO of Edwards Global Services puts it: “U.S. consumers are very open to international concepts and trying new things. You have to test your brand, but there’s rarely any pushback.”

Franchising – Canada: Top five factors to consider

1. Intellectual property. International franchisors must ensure that all international trademarks, trade names and patents can be registered and used in Canada without contestation before they plan for growth.

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?

5. Marketing and advertising. More often than not, new franchise and marketing materials need to be created; what resonates 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 Canadian province.

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