Buy a franchise: costs, steps and what to check first

What you actually pay for

The franchise fee is only one line. Most franchise systems charge some combination of these:

• Initial franchise fee. Paid when you sign, for the right to use the brand and system.
• Setup and build-out. Premises, renovation, equipment, vehicles, first inventory, signage, software and training travel. This is often the largest part of the total.
• Working capital. Money to pay rent, wages and yourself while the business builds up to break-even. Running out of it is a common reason new owners struggle.
• Royalties. An ongoing payment to the franchisor, often a percentage of your sales, paid whether or not you make a profit.
• Marketing fund. Another ongoing contribution.
• Other fees. Technology fees, renewal fees, transfer fees if you sell, and required purchases from approved suppliers.

The honest question is not "what is the franchise fee?" but "what is the total amount I will spend before this business pays me, and what do I keep paying after that?"

The disclosure documents you are entitled to

In many places, a franchisor must give you a disclosure document before you sign or pay. The rules vary by country, so check the law where you would operate. Some examples:

• United States. Under the FTC Franchise Rule, the franchisor must give you its Franchise Disclosure Document (FDD) at least 14 calendar days before you sign a binding agreement or pay any money. Some states add registration or extra rules.
• Canada. Several provinces have franchise laws. Ontario's Arthur Wishart Act and Alberta's Franchises Act both require a disclosure document at least 14 days before you sign or pay. British Columbia, Manitoba, New Brunswick and Prince Edward Island have franchise laws too.
• United Kingdom. There is no franchise-specific disclosure law. The British Franchise Association is a voluntary industry body with its own code for members.
• European Union. Several EU countries require pre-contract disclosure. In France, the Loi Doubin requires a disclosure document at least 20 days before signing or paying; Italy and Belgium have their own disclosure laws.

Where no law requires disclosure, ask for the same information anyway.

In a US FDD, a few items do most of the work for a buyer:

• Item 5: initial fees.
• Item 6: other fees, including royalties and marketing contributions.
• Item 7: the estimated initial investment, usually as a range with each cost listed.
• Item 19: financial performance representations. If the franchisor makes any claim about what outlets earn, it belongs here, with its basis. Many franchisors leave this item empty.
• Item 21: the franchisor's financial statements.

Disclosure documents in other countries are organized differently, but usually cover the same ground: fees, costs, the franchisor's finances and any earnings information.

How to buy a franchise in 7 steps

1. Decide what you can afford to lose

   Work out the total amount you could invest and the period you could go without income. Treat the total investment, not the franchise fee, as the number that matters.

2. Choose the kind of business you want to run

   A franchise is still a business you operate every day. Pick a sector whose hours, staff and customers you would be happy with for years.

3. Ask for the disclosure document

   Request it early and read the fees, investment table and finances before you get attached.

4. Call current and former owners

   The disclosure document lists franchisees and often those who left. Ask them about real costs, support, and how long it took before they paid themselves.

5. Build your own numbers

   Using the franchisor's cost ranges and what owners told you, build a cash-flow plan with a pessimistic case. Ask an accountant to check it.

6. Have a franchise lawyer review the agreement

   Ask about the term, renewal, territory, what happens if you want to sell or leave, and any personal guarantees you are signing.

7. Arrange financing and sign only after the waiting period

   Never sign or pay before any legal disclosure waiting period has passed, take real time to review even where there is none, and never sign under pressure to "lock in" a deal.

Can you buy a franchise with no money?

Not in the usual sense. Almost every franchise needs some upfront fee plus setup and working capital, even when part of it is financed. Treat nothing-down offers with extra scrutiny. If you have little or no capital, other routes, such as building a service business slowly or working on commission for an established company, may fit better than borrowing heavily to buy in.

Franchise due diligence checklist

Before you sign anything, check that you have:

• The full disclosure document, received within any waiting period your local law sets, or with ample time to review where there is none.
• A written total of every fee, upfront and ongoing.
• The franchisor's own estimate of the total initial investment, and your own version of it.
• Any earnings information, and what it is based on, or a clear statement that there is none.
• Conversations with at least several current and former franchisees.
• The franchisor's financial statements, reviewed by an accountant.
• A franchise lawyer's review of the agreement, including exit and transfer terms.
• A plan for living costs during the time before the business pays you.

If you aren't ready to buy

Some people searching to buy a franchise are really looking for a way to earn from their own network without putting their savings at risk. Play 2 Earn Sports is piloting a Territory Partner program for people who know their local sports community.

Territory Partners pay a one-time territory fee for an exclusive area: about CAD 5,000 in Ontario. The fee depends on where you are, and we confirm it in writing before you sign. In Ontario this is a franchise under the Arthur Wishart Act. Because the total initial investment is $15,000 or less, no disclosure document is required, but the Act's duty of fair dealing still applies. We don't sell territories where a disclosure document or registration would be required, including British Columbia, Saskatchewan and several US states. There you can join as a Sports Ambassador instead, which has no fee. After the territory fee, partners are independent and paid commission only: a share of the platform fee each time a player registers and pays at a club they brought in, every season. The terms are proposed and can change before you sign, and the signed agreement is what applies. There is no salary, and many people in commission sales earn little or nothing.

Whether any arrangement is regulated as a franchise or business opportunity depends on its actual terms and the law where it is offered. We are having the program reviewed by counsel, and we make no claim that it is exempt from franchise or business-opportunity rules.

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