Sweat and equity: Franchises on the rise among Canadian investors

When Ken Whyte and his wife, Colette Fortin, bought a Fairway Divorce Solutions franchise a few years back, their goal was not only to build a business but also to find an alternative way to earn money for retirement.

Instead of relying solely on a workplace pension, or putting all of their savings in stocks, bonds or real estate, the couple is building wealth through the sweat equity they put into the business.

Call it active investing, to the extreme.

"It was a deliberate investment strategy," Mr. Whyte says of their decision to buy the dispute-resolution franchise in 2010. "It's different than just accumulating money in your pension fund and retiring. You're building something you're going to live and breathe for a while."

Businesses that franchise their operations can potentially benefit from ongoing royalty payments well into retirement, while franchisees such as Mr. Whyte and Ms. Fortin can build a company based on a proven business model.

Mr. Whyte, who is also president of Quarry Integrated Communications, based in the Waterloo region, describes franchising as a "hands on, roll up your sleeves and make it work" type of investment. It's also a good way for the couple to diversify their careers and income streams. Ms. Fortin left her teaching career to run the franchise as her full-time job.

For both franchisors and franchisees, payoffs include more control over wealth creation and the potential to sell the business for a profit down the road, taking advantage of the lifetime capital-gains exemption, which is about $835,000 in 2017.

The couple plan to run the business for a few years and then eventually sell it for a profit, helping to pad their retirement nest egg.

Franchising requests on the rise

A growing number of Canadians are looking into franchise opportunities. The Canadian Franchise Association (CFA) says it has seen an "overwhelming increase" in franchise information requests in 2016, up 89 per cent compared with a year earlier.

The CFA's research shows the top two reasons people consider owning a franchising are because they want to own a business (58 per cent) and to have direct control over an investment (18 per cent).

While franchising is a way to diversify wealth, experts warn the returns don't come quickly and require hard work and a lot of investment up front for both the franchisor and franchisee.

"It's one of the more difficult ways of making money on investments," says Kersi Antia, associate professor of marketing at Ivey Business School.

He cites a number of pros and cons: For people who buy into a franchise, the benefits are potentially profiting from an existing brand and being able to generate profit, after royalties, based on how much work you put into the business.

"That's a huge incentive for people to work hard and put their sweat equity in," Mr. Antia said.

On the other hand, franchisees also have to run the operation based on the original business model, with little room for negotiation.

"You have to go along with everything corporate decides. … Yes, you get the keys to the kingdom, but the kingdom poses a huge tax on you," Mr. Antia said.

The franchisor perspective

Franchising is a way for existing businesses to build out their brands more quickly, at a lower cost and with less risk than opening corporate stores, says John DeHart, the co-founder of two franchise operations, Nurse Next Door and his latest venture, Live Well Exercise Clinic.

The franchise model allows business owners to get paid a monthly dividend through royalties paid from the franchisee.

"It's a solid, powerful, diversified cash-flow stream," Mr. DeHart said. "When you're successful, you can do really well."

Still, Mr. DeHart, who is also a vice-chair of the CFA, says too often business owners underestimate the time and investment required to franchise their operations, including costs for accounting, legal, marketing and franchisee training.

"I can't tell you how many people get into franchising thinking it's a quick way to make money," he said. "Franchisors often fail because they underestimate the costs … It takes a good five yeas to really start making money – and that's for a successful franchisor."

Another challenge is finding suitable franchisees and figuring out the right pace at which to grow. Too many franchises have failed because they expanded too quickly.

"The business model has to be there," Mr. DeHart said.

For Mr. DeHart, franchising his businesses is a way to control his investment, and to build a steady cash flow into retirement.

"Depending on how hard I work and how good I am, I'm going to control how much money I make. In the market, I have very little control, if any," Mr. DeHart said. "If I'm successful, I can make more money and have this investment that pays me year after year. I can get a better return building a business than I can with investing."

There's also a feel-good element to the investment, compared with putting money into the stock market.

"There's a certain amount of pride in being a business owner and servicing the customer," Mr. DeHart said, as well as creating opportunities for franchisees. "Is there the same pride and passion with investing? Absolutely not."