A franchise is a business model in which a company (the franchisor) licenses out its name, branding, products, and services to individual owners (franchisees), who in turn operate locations of the business. Here’s how franchise businesses work.
Understanding What a Franchise Is
If you’ve ever grabbed a coffee from Tim Hortons or eaten at Boston Pizza, then you already have some familiarity with what a franchise is – but you might not know it. That’s because franchise businesses are independently owned, but similar to corporate-owned businesses, they operate under a common brand name and offer consistent products, services, and experiences across locations.
Franchise businesses leverage the name and branding of their parent company and sell their products or services. But unlike chain corporations in which all locations are commonly owned, franchise locations or branches are owned by individuals, who pay various fees to leverage the franchise brand.
Franchise ownership structure
Franchises consist of two parties: the franchise owner (franchisor) and the franchise licensee and operator (franchisee).
What is a franchisor?
A franchisor is the owner of a franchise brand. Franchisors hold all trademarks associated with the franchise brand. They also establish and control the franchise business model, products, services, training, operating procedures, and other business details that guide each individual franchise.
What is a franchisee?
A franchisee is a business owner who licenses the right to operate under the franchise brand. The franchisee pays up-front and ongoing fees to operate the franchise, and is responsible for running the franchise location, including adhering to brand standards and operational rules established by the franchisor.
Franchising basics: How a franchise business operates
The relationship between franchisors and franchisees is governed by a contractual agreement which sets out the fees and rules for how franchise businesses operate.
Franchise fees explained
Becoming a franchisee requires paying fees to the franchisor for the rights to leverage the franchise branding, products, and supports, and to operate under its name. There are several types of franchise fees that form the total cost of becoming a franchisee:
Franchise fee: The initial franchise fee is the up-front cost of becoming an owner of a given franchise. This fee includes the rights to use trademarks and logos, along with access to the franchise’s systems and operational guidelines.
Up-front franchise fees vary according to the brand, industry, market size, and level of support and resources the franchisor provides the franchisee. Costs are typically higher for franchises with strong brand recognition. Even within a franchise brand, fees may vary based on location and type of outlet, such as a store vs. a kiosk.
As one example, Tim Hortons requires franchisees to have between $100,000 and $500,000 in liquid assets to qualify for franchise ownership, although the actual cost of becoming a franchisee depends on restaurant size, location, and other factors.
Royalty fees: Royalties are the fees franchisees continue to pay back to the franchisor throughout the duration of their relationship in return for ongoing brand use and the various supports received from the parent company. Royalties are typically based on a percentage of revenues (for example, four to eight per cent of gross revenues), but may consist of a flat fee.
Some franchises use alternative payment structures to royalty fees, such as ongoing markups or leasing fees on products, services, or supplies.
Marketing fees: Some franchisors charge franchisees a separate fee to cover costs associated with advertising, digital marketing, and other centralized brand awareness efforts.
Key franchise rules
There are no federal laws governing franchises in Canada, however six provinces have enacted franchise lThere are no federal laws governing franchises in Canada, however six provinces have enacted legislation that sets out rules for franchises within their jurisdictions. Canadian franchises are subject to the following laws:
- Alberta’s Franchises Act
- British Columbia’s Franchises Act
- Manitoba’s Franchises Act
- New Brunswick’s Franchises Act
- Ontario’s Arthur Wishart Act (Franchise Disclosure)
- Prince Edward Island’s Franchises Act
As well, franchises in Quebec are subject to the province’s Civil Code and the Charter of the French Language.
Some common rules under these laws include:
- Franchisors are required to provide franchisees with a disclosure document at least 14 days before either party signs a franchise agreement or pays any fees
- Franchisees may rescind their agreement if disclosures are deemed insufficient
- Franchisees have a right of association with other franchise owners and may join franchise associations
What is a franchise agreement and what information does it include?
A franchise agreement is a legally binding contract that sets out the obligations and rights of both the franchisor and franchisee. It typically covers the following information, and more:
- Rights to intellectual property such as brand logos, trademarks, systems, and products
- Franchise territory and exclusivity
- Training and support obligations
- Operational standards/requirements
- Fee structure
- Agreement term and renewal
- Termination
What is a franchise disclosure document?
A franchise disclosure document (FDD) is required in provinces governed by franchise laws. An FDD is a document that provides extensive details about the franchise company, including its history, fee structure, litigation history, franchise agreement terms, and other key disclosures.
This document enables potential franchisees to thoroughly evaluate the franchise opportunity and any risks.
Corporation vs. Franchise: key differences
| Corporation | Franchise |
|---|---|
| Owned by company shareholders (public or private) | Locations are individually owned |
| Parent company manages locations or branches | Branches or locations are fully managed by individual owners, governed by the franchising agreement and operating procedures determined by franchisor |
| Parent company retains all revenues | Franchisee retains profits after royalties and fees |
Advantages and Disadvantages of Franchising
Here are some pros and cons of franchising:
Main advantages of owning a franchise
- Franchises are ready-made businesses, with defined products, services, branding, and operating procedures. This eases some common challenges entrepreneurs experience when starting a new business.
- Franchisees are able to leverage well-known brands with established customer bases.
- Franchisors provide franchisees with business support such as assistance in site selection and training.
Disadvantages & risks to consider before investing
- Because franchisors determine branding, products and services, and operating procedures, franchisees don’t have the same freedom and ability to make their own business decisions as other business owners.
- Both the initial investment and ongoing costs associated with owning a franchise can be high compared to starting an independent business.
- Franchise locations are reliant on the reputation of their parent brand, and can be negatively affected by decisions outside of their control.
Popular Franchise Industries and Opportunities
The franchise industry in Canada is projected to contribute more than $133.3 billion to the national GDP in 2026, according to the Canadian Franchise Association. The organization also reports there are nearly 68,000 franchise units in Canada, collectively employing nearly two million people.
There are many types of franchise businesses in Canada spanning numerous categories, including food and beverage, retail, and service franchises. These include both Canadian and international brands. Some popular franchises include:
Food and Beverage:
- Tim Hortons
- Subway
- Boston Pizza
Retail:
- Circle K
- Canadian Tire
- Gateway Newsstands
Services:
- Marlin Travel
- Mr. Lube Canada
- H&R Block of Canada
The information provided in this article is for general informational purposes only and does not constitute legal, financial, or investment advice. Franchise laws in Canada are governed at the provincial level and vary by jurisdiction. Readers should consult qualified legal and financial advisors familiar with the applicable provincial franchise legislation before making any franchise-related decisions.
