The Dangers of Buying a Franchise Business (in British Columbia)

The sign on the side of the road reads: “Danger! Beware!”

We receive continual requests for advice from people who are getting close to the point of buying a new business – specifically a franchise business.  The majority of these people are not coming from a business background and are looking for something that their family can operate or a place to invest some extra money that has the potential of generating more money than their conservative investments.  Others still are looking to buy as a way of making a career change – they are sick of their jobs.

Most have already been ‘sold the dream’ in their minds before they even find us.

Danger!  Beware!

Today we would like to publish a kind of summary article with hand picked articles just for you.  If you truly read these articles before you purchase a franchise business, you will be in a better position than anyone we know.  You will be in a very unique and powerful position.

So don’t just skim these articles.  Learn them.  If you can’t understand something, we can help you reach out for help from a professional advisor on each topic.

We truly wish you the best and most prosperous business future

General Education

True Stories that hit close to home

Purchase & Sale

We hope that the hand-picked articles found in this post have helped you tremendously to make the best possible investment.

As always, don’t hesitate to contact us at info@vcsfa.ca.

How to Start a Coffee Shop for under $25K without your money?

 

One of our members submitted this video uploaded by David Hayward and we thought it had tremendous value for potential coffee shop owner.

Many prospective coffee shop purchasers don’t have any confidence in themselves.  They think that since they don’t have any experience in the field, or they don’t have any small business background at all (financing, leasing, etc), that they will not be able to do something powerful on their own.  Instead, they often choose the path of Franchising.  We are not saying that it is not possible to make money with a coffee franchise, but we are suggesting that there are other ways (I.e. spending $25k versus $250K!)

This ten minute video is great because it gives tips that will even help you choose a coffee franchise if you are purchasing an existing store (ie. you should have your store on the right side of the road during morning traffic).

We hope this video will be just another tool along the road to creating a better chance of success for you and your family

Corporate vs Franchise vs Independent Business Model

I just thought it would be interesting to share this video by a proactive and clearly unhappy barista. Running a coffee shop in today’s market can be particularly difficult and being able to control labour costs while keeping happy employees whilst providing a quality and reasonably ethical drink is far from easy.

Like many people, I was under the impression that only a company of this size of these ‘green guys’ would be able to succeed in all categories.  To my surprise, though, it appears that in all categories even they are struggling – apparently even worse than I thought.

So then, what is the best business model for a coffee shop?  There are really only three options – independent, franchise and corporate.

An independent is a ‘mom & pop’ operation where the value of the brand is typically built around the owners (the people themselves) and the fact that they are not either a frachise or corporate chain.

A franchise is an independent store that has decided to ‘partner’ with other owners to run their brand under their rulebook.

A corporate model is an independent that has decided to open multiple stores but with managers employed to run the stores under their rulebook.

With the corporate model, you gain complete control over the whole operation.  If one store does poorly, you can just shut it down and share the loss across the other hopefully better performing stores.  You can introduce large benefit programs because insurers will typically give you a better rate with more people in the system.  You can compete with yourself because the more stores the merrier.  In Vancouver there used to be two locations of a major coffee shop chain right across from each other at Robson and Seymour.  That just changed, by the way, but it often confused the customers because many people thought the green guys was a franchise model.  With a corporate model you have the flexibility of simply replacing a manager if things aren’t looking good.  In a franchise, all of the above is slightly more difficult or complicated.  Plus, all of these advantages above are not necessarily taking place as we could see from this employees video.

With a franchise model you have an ‘owner’ who is responsible for the four walls of that location.  As long as the franchisee believes that their franchisor is truly a partner who cares about them and their family and truly has their success in mind, the franchise model has the potential of being a great one. In theory, as long as the hand-crafted franchisee agreement doesn’t remove the right – the franchisees should participate in the savings that the chain wide volume provides.  They should also, in theory be able to enjoy most of the other benefits of the corporate model like group benefit plans. All things fall apart, though, when the trust of one or more franchisees is breached.  At this point, they can’t just remove the unruly manager, because that manager is also the owner of that location and has certain rights according to the franchisee agreement. In order to get rid of this jaded rebel, the store must be sold as any other independent business would be – not necessarily fast or smooth.

The independent store has the pain of having to source all his or her low volume products which may not provide the volume discounts that franchise or corporate models may enjoy.  They must also be more hands-on because they cannot enjoy the windfall of customers just walking into their stores because of a brand name.  They must earn each customer one at a time and then find a way to get them back – a task much more difficult as an independent.  That said, they have the advantage of being able to own and operate their business the way they like – for good or for worse.  They are truly ‘owners’ where franchisees are, in effect, glorified managers with a lot of skin in the game.

This discussion barely scrapes the surface of this topic but hopefully gives a nice birds eye view of the three major categories of coffee shop business models.