U.S. brands aren’t so cool there, but with work still do well
Canada reports a population of 34.8 million, 81 percent urbanized.
Expanding to Canada first makes sense. But there’s more to our neighbor to the north than many franchisors take into account. Here are some of the rewards and red flags about international expansion there.
When the U.S. Commercial Service’s foreign posts evaluate the likelihood of U.S. companies finding franchise partners in their country, one of the phrases the specialists use is: “Likes American brands.” America is the cool kid on the block for countries in Asia and even the Middle East.
But don’t try that tack in Canada, warns Steve Overholser, chief financial officer and treasurer of Minneapolis-based Great Clips. He once had a Canadian businessman remind him bluntly over drinks that the U.S. invaded Canada once and Canada won. (It was during the War of 1812, and Overholser’s companion used much more colorful, mocking language than portrayed here.)
Not every Canadian holds a grudge, of course, but still: “Be mindful you’re operating in Canada, not just another (U.S.) state,” Overholser says. “Don’t underestimate their national pride.”
Great Clips has just 100 salons in Canada and yet when they revised their gift card promotion, they expected to customize the rules and regulations on how to use the card, but Canadian franchisees also wanted different graphics to make it the Canadian version.
Ron Olsen found the same thing when he took his group of resale franchises to Canada back when he was CEO of Grow Biz. “Canadians are Canadians and Americans are Americans,” he says. “They’re great people, but they want to be managed by Canadians, not U.S. (employees).”
Another bit of foreignness about Canada is that in one province, Quebec, all business communications, such as contracts and signage, must be translated into French as well as English, says Richard Leblanc of Miller Thomson in Toronto.
Overholser says other areas of “English-speaking Canada” also have dual-language requirements, so Great Clips prints its products’ labels in both French and English just to ensure they’re in compliance. They can’t use their U.S. labels, Overholser points out, because Canada uses the metric system.
Restaurant companies, be forewarned you will have to revise your recipes to reflect the differences between tablespoons and milliliters. In addition, temperatures are tracked in Celsius, not Fahrenheit, and gas is sold by the liter, not the gallon.
The same differences
But for all the differences, there are some similarities. Canadians tend to be entrepreneurial people, and more and more workers are finding themselves in middle age without employment—which is good for the franchising model.
“We’re in an environment where the money is there,” Leblanc says, “But it’s not as easily accessible as before the recession.”
Because access to capital is difficult, Overholser says, franchisors need candidates with more capital backing. There is some type of small business loans, but there are a limited number of banks.
But some of the larger financial institutions do have franchise finance departments and there’s some government-supported small business loans.
A lesson Great Clips learned the hard way was that services are taxed. In addition to sales tax, there’s also a goods and services tax. So, for instance, sales tax is 5 percent, plus an additional value-added tax of 6 percent. To further complicate matters, he says, some provinces rely on “harmonized taxes.”
Goods and services taxes must be collected on royalties. Franchisees can take it as a credit, but the franchisor must pay it to the government.
A more subtle point is the difference in the spelling of some words, an affectation Canada shares with England. When the owners of the 30-unit boutique franchise, Savory Spice Shop, contacted attorney Chad Finklestein of Dale & Lessmann in Toronto, he told them one thing to take note of is the spelling of their name would be different in Canada (Savoury).
If the owners do decide to expand their spice franchise into Canada, most likely they will stick with the current spelling, and not spend the thousands of dollars to redo their collateral, CFO/COO Joe Cohen says. But right now the jury is still out on whether the trip north of the border would be a good move.
“In the U.S., the prospects sell us on themselves,” Cohen says. Canadian prospects have to not only sell the franchisor on themselves, but also on whether the concept will work there. Although the reason they’re looking at Canada in the first place is “we’re hearing there is a trend toward higher-quality food, more upscale ingredients.”
While there aren’t major differences in how franchises are disclosed in Canada, not all the provinces’ requirements are the same. “In Canada, there’s no registration requirement,” Leblanc says, “but five provinces regulate.” Those five are Ontario, Alberta, Prince Edward Island, New Brunswick and Manitoba.
Canadian franchisors are also bound by a code of ethics set forth by the Canadian Franchise Association, he says.
All material facts have to be disclosed before signing the agreements. For instance, if a franchisor is aware of significant construction that will impact the traffic flow to a certain location, he or she has to disclose that information.
One area in which Canada does seem to be following the U.S. in is franchise litigation, Leblanc says. “There’s a growing number of class-action suits.” Finding local counsel is just as important here as it is halfway around the world. For the most part, many Canadian law firms have offices that can cover the entire country. Miller Thomson has offices across the country.
Quebec's civil code applies a general duty of good faith in the negotiation and performance of contracts, Leblanc says.
Marketing will also be slightly different. For instance, for Great Clips, which has had an extremely successful NASCAR promotion, Canadians for the most part are not fans of speeding cars. Perhaps hockey would be a better choice, Overholser says.
But for all the pros and cons of expanding your concept to Canada, perhaps the most notable one comes from longtime international consultant William Edwards of Edwards Global Services, who points out: “Canada is one of the safest places in the world to visit and do business.”
Name the city in Canada (answers below, but no peeking)
Answers: A. Calgary B. Vancouver C. Ottawa D. Quebec E. Toronto