FRANCHISING
FRANCHISING
Trademarks and copyrights,
Marketing and advertising programs,
Management training programs,
Assistance with site selection and development,
Specialized computer accounting programs,
Public relations,
On-the-job training; continuous training,
Patent and liability insurance protection,
Financing.
MY OWN BUSINESS VERSUS A FRANCHISE
There is a lot of debate over whether franchises are more successful that just owning your own business. Consider whether the advantages that trademark and name recognition bring are all that important in the type of business you are starting. Remember you will be paying many fees to start the franchise initially that may make a serious dent in your profits. Dont overlook royalty fees--they are a continuing percentage of your profits.
Buying a franchise can be intimidating. There are disreputable franchises out there that are selling franchises just to sell franchises. On the other hand, there are also a lot of excellent, reputable franchises that will assist you to become a successful entrepreneur. This section will highlight how to become an informed consumer and purchase the franchise that's right for you.
START WITH NUMBER ONE
What type of business will really interest YOU? Is it your DREAM or ambition to spend your waking hours in this type of business?
Are you detail oriented, risk oriented? Do you enjoy sales?
Do you want to work from your home? Home-based franchises do cost less and typically involve less risk.
Do you have the physical stamina, experience, and education for this?
Do you want a franchisor that exerts very little control over your business or one who controls every minor detail?
How does your spouse feel about investing in a franchise?
Do you have the physical stamina and learning capacity for this field?
UNDERSTANDING FRANCHISE TERMINOLOGY
Franchise fee: is a one-time payment that assures you the right to use the trademark and company name and receive the initial training.
Royalty fees: ongoing payments that are made to the main company or "franchisor" for you to stay in the system. They are typically monthly or weekly charges based on a percentage of gross sales.
(For a 6% royalty on a gross sales of $100,000 you would pay $6,000 annually.) Royalty payment may also constitute a fee for service that the franchisor provides for you such as: computerized accounting services, merchandizing services, operating manuals and training programs.
Advertising fees: fees paid by each franchisee for group advertising.
Total initial investment: initial costs of starting a franchise such as working capital, the franchise fee, office and computer equipment and start-up advertising.
Total cost may include:
1. Purchasing or renting the business property,
2. Down payments on fixtures and equipment,
3. Leases,
4. Construction, remodeling or redecorating costs,
5. The costs of finding and buying a business property.
Terms like initial fee, total cost, etc., should be defined and made clear to you. Terms like "down payment" and "equity investment" can be interpreted differently by different franchisors.
"Business opportunities" are different than franchises. Franchises tend to be more sophisticated and give more assistance to the franchisee. A business opportunity might be an opportunity to fill vending machines or racks in stores, or even an arrangement by a seller to purchase items assembled at home.
EVALUATING POSSIBLE FRANCHISES
Checklist:
Find out how long the business was established before it sold franchises. You will want a long-established franchise.
Contact other franchisees who have recently failed (within the same franchise) and discuss the franchise with them.
Evaluate the competition's franchise in your area -- assess market saturation.
A Distributor versus Dealership Franchises
A distributorship costs more and requires more business background. Beginners should start with a dealership. If your franchise is a dealership, be sure to visit the distributor with whom you will be conducting most of your business.
THE SBA: The Small Business Administration has some publications available on-line. There is an SBA registry of franchises. The franchises listed enjoy a streamline process for SBA loan applications. You may also call with small business related questions toll-free at 1-800-U-ASK-SBA. A general site for government links to information on franchising is also provided by the SBA.
THE FTC: The Federal Trade Commission publishes many business guides on-line. This link has information on franchises and business opportunities. You may contact the FTC by calling toll-free at 1-877-FTC-HELP.
LIBRARIES: The business sections of major public and university libraries have excellent reference guides on franchises. Listings may include items such as financing availability, training offered, and royalties. Some informative directories are "The Small Business Sourcebook" edited by Kathleen Maki; "The Best Home-Based Franchises" by Gregory Matusky; and "The Sourcebook of Franchise Opportunities" by Robert Bond. You may also want to check old issues of Entrepreneur, Success and other periodicals to see how long the franchise you want has been in business. Business school libraries typically have these magazines.
BOOKS AND MAGAZINES:
Entrepreneur Every year Entrepreneur has an issue with the "Annual Franchise 500", a franchise guide. It also has the Franchise 500 and other lists for franchises, and home-based franchises.
"The 220 Best Franchises to Buy" by Constance Jones.
OTHER SOURCES OF INFORMATION
There is an excellent pamphlet written by attorneys called "Investigate before Investing" published by the International Franchise Association (IFA). It is available at low cost. It cautions that even though the franchise is registered in your state and even though you have received a UFOC, you must still independently verify the information in the disclosure statement. The IFA also recommends that you engage both an attorney and an accountant to review all disclosure materials.
Your Attorney General may be able to tell you if the franchisor you are considering has a good track record or if it is in business "just to sell franchises." Your job should be to evaluate the financial condition of the franchise and determine whether or not the concept has been successful.
If there are stores that have been performing below others, investigate the nature of the problem. Compare the sales and profits of franchised stores to others in the same market. Try to find an organization that could provide you assistance such as the:
Small Business Development Center (SBDC): The SBDC's are better for those further along in business rather than those just starting a business.
SBA's Service Corps of Retired Executives (SCORE) is excellent for those first starting a business
The International Franchise Association.
THE FEASIBILITY STUDY
You may be told you have to conduct your "own" feasibility study. For franchises such as fast food restaurants, stores, or businesses with customers on site, this may be a reason for not choosing this particular franchise. Feasibility studies track information such as the traffic patterns in various locations, the number of young families in a community and average income of the area. If you pay any money to have a feasibility study done on a franchise, be sure you can have it "refunded" if the results of the study show that opening a business (franchise) in this particular location would not be profitable.
CONSTRUCTION
Construction of a new building is very costly and involved. If you chose a franchise that involves new construction, make sure than the franchisor offers assistance. You may want to lease a building instead.
If you must build, talk to a reputable realtor about the details in labor problems, weather and other factors that influence construction.
If you lease a building, note the duration of the lease.
You may want to break the lease if your business expands. Would there be a penalty? Is the space expandable?
The major part of the franchise fee really is for construction of a new building. If construction of a building is not necessary, the fee should be substantially less.
You can research both public and privately held franchises for FINANCIAL STABILITY. Your most critical source of information will be information about sales, costs and profits from "established" franchisees of the actual company. Franchisors are required to provide you with the names of these "established" franchisees.
Most prospective franchisees will have difficulty obtaining information about financial problems other franchisees may have had with the main company. The established franchisee may be reluctant to provide this information. This is understandable because the information is personal, especially if it reveals poor financial results. After all, prospective franchisees could become a competitor and could use this information against the established franchisee.
There is a way, however, suggested in "Franchising Dollars and Sense" by Warren Lewis which increases your chances of obtaining the information. Do your own financial projections before you take them to the established franchisee. There are charts to help you get started with this task in the book. This will be less threatening than asking to look at the established franchisee's books and records. You can ask what changes should be made to your projections or expenses.
THE UNIFORM FRANCHISE DISCLOSURE DOCUMENT.
Among the shiny promotional materials you will receive after your first visit with the Franchise Sales Department might be something called a "UNIFORM FRANCHISE DISCLOSURE DOCUMENT" (UFDD) or disclosure document. Although it may look like a lot of legalese, it is this document that may keep you from buying a bad franchise.
Be sure you read and study this document and have your attorney and accountant do so.
Obtain a lawyer and an accountant who specialize in small businesses, before receiving the UFOC. Have them review your copy of the UFDD before you sign it. Look for:
1. Total costs,
2. Termination,
3. Selling and renewal clauses,
4. Cooperative advertising and promotion funds.
Also, ask such questions as:
Are the home office services detailed?
Does the franchisors patent and liability insurance protection extend to you the franchisee?
Are financing details spelled out, including repayment and interest?
Are commissions and royalties specified?
Does the franchisor provide formal initial training? Is there a specific training schedule? Does the franchisor provide costs for room, board and transportation while you are receiving on-the-job training?
Is training cost included in the franchise cost? (Check with other franchisees to see if their training was adequately provided.)
What is the interest rate for financing and when does financing have to be paid back?
Is the territory covered outlined, including whether the territory is "exclusive" or "non-exclusive"?
Can the franchisor or his representative sell direct in my area?
Most importantly, review the TERMINATION CLAUSE to make certain that you have a sufficient grace period and that your rights, as well as those of the franchisor, are represented.
SUMMARY
The franchisor summary includes the corporate name, its place and date of incorporation and a basic description of the franchise. Business experience of the executives and officers is given in the initial items. How long the business has been A FRANCHISOR is important, because one can be in business for a long time, but not have the skills to run a national franchise. New franchises are riskier because of this. Franchises that have been operating for a while with a good track record may be a better bet.
LITIGATION
Item 3 of the UFDD lists litigations against the franchisor. Look for any evidence of:
Fraud or racketeering,
A significant number or kind of breach of contract suits,
Bankruptcy history,
Have your lawyer pay special attention to this section.
FEES
Items 5 through 7 will give you information on the fees you will have to pay the franchisor. The company will provide an estimate of your total investment in the franchise. There will be a chart in Item 7 detailing the initial expenses you are likely to have in starting the franchise. Pay particular attention to the ROYALTY FEE and any other continuing fees because they will take a slice off the top of future profits. When you interview other franchise owners, ask if their initial expenses are the same or less than those listed in your UFOC.
The section that lists how many franchises have been terminated in the past year is significant. Too many? Find out the reasons for termination from the small franchisees.
The references that are listed are important. Visit these in person and don't rely on a phone survey.
Don't forget to speak with current franchise owners about earnings potential. This is a crucial step. Be wary if the franchisor wants to select the franchise owners for you. Select franchise owners by yourself.
Find out facts such as:
Training,
Their total investment,
Franchise fees,
Hidden or unexpected costs,
Product costs,
Net earnings.
EARNINGS CLAIMS
The financial statements in Item 19 are important. Have your accountant go over these statements. The franchisor may say that they don't make any earnings claims, but then make oral claims at a personal meeting. This is highly suspicious.
Most franchisors have elected NOT to provide information about the earnings potential of the franchise, but if they do, the information must conform to certain standards. Be aware that average incomes can make the overall franchise look more successful than it is if a few very successful franchises are averaged into the figure. NET income figures should reveal more to you than gross sales figures that do not subtract rent and overhead expenses.
If any franchisee has gotten a lower franchise fee within the past year, it will be noted on the new format UFOC in Item 5. Remember that the franchise fees and other fees are NEGOTIABLE. Many items are negotiable. You may want to negotiate for a higher quality protected territory or for the right to purchase your supplies from a lower cost supplier than the one that the franchisor has designated. Include any verbal agreements in the final written agreement.
Product and supplier information is listed in the UFOC in item 9. Many franchisors require that you purchase supplies from special cooperatives or suppliers. There may also be standards for purchases. If you think you can get a better deal from another supplier you may want to negotiate for this.
OBLIGATIONS OF THE FRANCHISOR
The franchisor is required by contract to deliver the services listed in item 11, such as supervision, assistance and advertising. There may be restrictions on your advertising or a minimum that must be spent on local advertising. Its best to get as much money as possible for your local ads.
TRADEMARKS
Section 8 which covers trademark disclosure shows whether the trademark is registered. Check to see if you will have to be the one to defend any trademark action brought against a franchise owner -- you want the main company to handle suits such as these.
By law you must receive a copy of the UFOC at least 2 weeks (10 business days) before you put any money or deposits down and before any purchasing commitment is made. The UFOC may be delivered at the first personal meeting where you officially discuss the sale of the franchise. You may want to set up an appointment with your trusted business advisors prior to receiving the UFDD.
ATTACHMENTS TO THE UFDD
There are two important attachments to the UFOC. The UFOC contains copies of documents you will be required to sign for the FRANCHISE AGREEMENT. It is not written in plain English and should be reviewed by a good lawyer familiar with franchising and representing small business owners. The franchise agreement will tell your options in getting out of the agreement should the franchise fail. Review these statements with your lawyer carefully. The UFDD also contains the franchisor's three most recent annual AUDITED FINANCIAL STATEMENTS. You should be sure to check the franchisor's financial standing by reviewing its financial statements with an accountant and by checking its standing with the Better Business Bureau. It is better to discover complaints before you commit. If you do your homework using the UFOC, you will be much more likely to have a successful business in the future.
MARKETING AND OTHER SERVICES
Some franchisors will provide leads or you may be required to obtain them yourself. Your franchisor should provide a "profile" of the typical sales prospects. Samples of national advertising should be given to you. Make sure the local advertising program is an outgrowth of the national one. Ask to see a sample kit of plans for your grand opening.
Other items the franchisor should supply:
Ad materials,
Radio scripts,
TV commercials,
Sample media programs,
Direct mail programs,
Point of purchase material,
Sample publicity releases and accompanying photographs.
Look for titles of service departments such as:
Finance and accounting,
Advertising and promotion,
Sales and marketing,
Research and development,
Real estate,
Construction,
Personnel, training & manufacturing operations.
Look for sound business experience in the franchise operation in the board of directors and your advisors. Be sure you ask questions about field support, that is, exactly what is done, who does it and how often it is done.
FRANCHISE FRAUD
Unfortunately there are some disreputable franchisors. If a franchisor cannot provide you with the disclosure document (UFDD), rushes you in any way, or wants money before the disclosure document is presented, you should be alert to fraud.
It is also suspicious if the franchisor:
Tells you other buyers are waiting to buy your territory.
Makes earnings claims that are not noted in the disclosure document is suspect--ALL earnings claims should be in writing.
Suggests that the business could be run for less than the disclosure document states.
Suggests that you do not have the qualifications to run the franchise, (using "reverse psychology to manipulate you into buying).
If the franchisor has trouble providing a list of its current franchisees or pressures you to talk to certain franchisees and not others, you should be suspicious of a cover-up. Con artists may be in franchising for a long time but new to this particular business.
Franchisors that talk to you not one-on-one, but with a team sales approach are suspect.
Ask yourself if the franchise trademark seems a little too similar to another franchise already in business. If the franchise name and trademark are not well known to the public, perhaps you should question the advantage of this business over one you start yourself. It's also a good idea to obtain a franchise that is based in your state--to address possible legal problems in your own home state, rather than traveling to another state to do so.
FINANCING YOUR FRANCHISE
After you prepare a business plan, you should investigate franchise companies that fit your interests, personal direction and financial resources. You will want to choose an ATTORNEY, BUSINESS ADVISOR or ACCOUNTANT who have had experience in representing franchisees.
Use your advisors to carefully discuss the:
Full initial cost,
Financing possibilities,
Licensing fees,
Land purchases,
Leases,
Building construction,
Equipment,
Training,
Start-up inventory,
Promotional fees,
Franchise operation manuals.
Evaluate CONTINUING COSTS related to the franchisor such as:
Insurance,
Interest on financing,
Cooperative advertising fees,
Continuing training, and royalties.
Are you required to purchase supplies from the franchisors? Are they more expensive than purchasing them elsewhere?
In addition:
What restrictions apply to competition from other franchises?
Check renewal rights and the process for reselling the franchise.
Further investigate these companies including their financial statements, and the financial and training assistance they offer. Look carefully at the success and track record of the franchisors, their financial condition, and how much initial capital is required. What is the long-term capital commitment, including facility and equipment lease obligations? What are you contractually obligated to do?
Is it better to reduce your own personal liabilities as much as possible, perhaps by forming an S corporation? The disclosure document (UFOC) should be obtained and read in detail. Research items such as renewal rights, franchisor control and quality control of the operation and enforcement policy.
When you begin to look for financing, keep in mind that any outside funding source is going to want proof that you have carefully planned your business. You can get a lot of guidance from your franchisor on this, but you need to do your research in addition.
Have an accurate idea of what your own assets are -- this could be real estate, retirement and savings accounts, vehicles, and other investments. If you have a large amount of assets, financing will be easier. If you borrow money, you will probably be asked to guarantee the loans you make.
DEBT VERSUS EQUITY FINANCING
You may also take on investors who buy shares in your business. This is called "equity financing" as opposed to "debt financing" or borrowing money. This means that you may lose complete control of the business. Some investors, however, may want little to do with the everyday tasks of the business. They are just looking for a place to invest their money. It's best to get your relationship with the investor down in writing before starting the business.
BUSINESS PLAN
Have a detailed business plan that analyzes cash flow and makes operation projections that are realistic. If you are constructing a building, you will need quotes from local contractors, insurance rates, taxes, and local labor costs. There may be advertising and promotional costs, continuing royalty payments, employee salaries and benefits and equipment leases.
For good background information, contact franchisees from other industries or locales to find out how they financed their businesses. Since you won't be in direct competition with them, they may be more open about discussing financing. Local and state development agencies can present good sources of information for women, veterans, and minorities. The Small Business Administration has several loan programs to assist you. Some franchisors will assist with financing, but that is generally left to the buyer.
Keep in mind that you should not allow yourself to be pressured into a franchise that is not right for you. Some franchises may be poorly managed, financially unstable, or offer little assistance. It's up to you to do your research to discover these facts. Take your time and use the advice of your advisors extensively.
FRANCHISING - To learn more about this author, visit Ken Hollowell's Website.
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A franchise is a copy of the original company with the right to use items such as:
Trademarks and copyrights,
Marketing and advertising programs,
Management training programs,
Assistance with site selection and development,
Specialized computer accounting programs,
Public relations,
On-the-job training; continuous training,
Patent and liability insurance protection,
Financing.
MY OWN BUSINESS VERSUS A FRANCHISE
There is a lot of debate over whether franchises are more successful that just owning your own business. Consider whether the advantages that trademark and name recognition bring are all that important in the type of business you are starting. Remember you will be paying many fees to start the franchise initially that may make a serious dent in your profits. Dont overlook royalty fees--they are a continuing percentage of your profits.
Buying a franchise can be intimidating. There are disreputable franchises out there that are selling franchises just to sell franchises. On the other hand, there are also a lot of excellent, reputable franchises that will assist you to become a successful entrepreneur. This section will highlight how to become an informed consumer and purchase the franchise that's right for you.
START WITH NUMBER ONE
What type of business will really interest YOU? Is it your DREAM or ambition to spend your waking hours in this type of business?
Are you detail oriented, risk oriented? Do you enjoy sales?
Do you want to work from your home? Home-based franchises do cost less and typically involve less risk.
Do you have the physical stamina, experience, and education for this?
Do you want a franchisor that exerts very little control over your business or one who controls every minor detail?
How does your spouse feel about investing in a franchise?
Do you have the physical stamina and learning capacity for this field?
UNDERSTANDING FRANCHISE TERMINOLOGY
Franchise fee: is a one-time payment that assures you the right to use the trademark and company name and receive the initial training.
Royalty fees: ongoing payments that are made to the main company or "franchisor" for you to stay in the system. They are typically monthly or weekly charges based on a percentage of gross sales.
(For a 6% royalty on a gross sales of $100,000 you would pay $6,000 annually.) Royalty payment may also constitute a fee for service that the franchisor provides for you such as: computerized accounting services, merchandizing services, operating manuals and training programs.
Advertising fees: fees paid by each franchisee for group advertising.
Total initial investment: initial costs of starting a franchise such as working capital, the franchise fee, office and computer equipment and start-up advertising.
Total cost may include:
1. Purchasing or renting the business property,
2. Down payments on fixtures and equipment,
3. Leases,
4. Construction, remodeling or redecorating costs,
5. The costs of finding and buying a business property.
Terms like initial fee, total cost, etc., should be defined and made clear to you. Terms like "down payment" and "equity investment" can be interpreted differently by different franchisors.
"Business opportunities" are different than franchises. Franchises tend to be more sophisticated and give more assistance to the franchisee. A business opportunity might be an opportunity to fill vending machines or racks in stores, or even an arrangement by a seller to purchase items assembled at home.
EVALUATING POSSIBLE FRANCHISES
Checklist:
Find out how long the business was established before it sold franchises. You will want a long-established franchise.
Contact other franchisees who have recently failed (within the same franchise) and discuss the franchise with them.
Evaluate the competition's franchise in your area -- assess market saturation.
A Distributor versus Dealership Franchises
A distributorship costs more and requires more business background. Beginners should start with a dealership. If your franchise is a dealership, be sure to visit the distributor with whom you will be conducting most of your business.
THE SBA: The Small Business Administration has some publications available on-line. There is an SBA registry of franchises. The franchises listed enjoy a streamline process for SBA loan applications. You may also call with small business related questions toll-free at 1-800-U-ASK-SBA. A general site for government links to information on franchising is also provided by the SBA.
THE FTC: The Federal Trade Commission publishes many business guides on-line. This link has information on franchises and business opportunities. You may contact the FTC by calling toll-free at 1-877-FTC-HELP.
LIBRARIES: The business sections of major public and university libraries have excellent reference guides on franchises. Listings may include items such as financing availability, training offered, and royalties. Some informative directories are "The Small Business Sourcebook" edited by Kathleen Maki; "The Best Home-Based Franchises" by Gregory Matusky; and "The Sourcebook of Franchise Opportunities" by Robert Bond. You may also want to check old issues of Entrepreneur, Success and other periodicals to see how long the franchise you want has been in business. Business school libraries typically have these magazines.
BOOKS AND MAGAZINES:
Entrepreneur Every year Entrepreneur has an issue with the "Annual Franchise 500", a franchise guide. It also has the Franchise 500 and other lists for franchises, and home-based franchises.
"The 220 Best Franchises to Buy" by Constance Jones.
OTHER SOURCES OF INFORMATION
There is an excellent pamphlet written by attorneys called "Investigate before Investing" published by the International Franchise Association (IFA). It is available at low cost. It cautions that even though the franchise is registered in your state and even though you have received a UFOC, you must still independently verify the information in the disclosure statement. The IFA also recommends that you engage both an attorney and an accountant to review all disclosure materials.
Your Attorney General may be able to tell you if the franchisor you are considering has a good track record or if it is in business "just to sell franchises." Your job should be to evaluate the financial condition of the franchise and determine whether or not the concept has been successful.
If there are stores that have been performing below others, investigate the nature of the problem. Compare the sales and profits of franchised stores to others in the same market. Try to find an organization that could provide you assistance such as the:
Small Business Development Center (SBDC): The SBDC's are better for those further along in business rather than those just starting a business.
SBA's Service Corps of Retired Executives (SCORE) is excellent for those first starting a business
The International Franchise Association.
THE FEASIBILITY STUDY
You may be told you have to conduct your "own" feasibility study. For franchises such as fast food restaurants, stores, or businesses with customers on site, this may be a reason for not choosing this particular franchise. Feasibility studies track information such as the traffic patterns in various locations, the number of young families in a community and average income of the area. If you pay any money to have a feasibility study done on a franchise, be sure you can have it "refunded" if the results of the study show that opening a business (franchise) in this particular location would not be profitable.
CONSTRUCTION
Construction of a new building is very costly and involved. If you chose a franchise that involves new construction, make sure than the franchisor offers assistance. You may want to lease a building instead.
If you must build, talk to a reputable realtor about the details in labor problems, weather and other factors that influence construction.
If you lease a building, note the duration of the lease.
You may want to break the lease if your business expands. Would there be a penalty? Is the space expandable?
The major part of the franchise fee really is for construction of a new building. If construction of a building is not necessary, the fee should be substantially less.
You can research both public and privately held franchises for FINANCIAL STABILITY. Your most critical source of information will be information about sales, costs and profits from "established" franchisees of the actual company. Franchisors are required to provide you with the names of these "established" franchisees.
Most prospective franchisees will have difficulty obtaining information about financial problems other franchisees may have had with the main company. The established franchisee may be reluctant to provide this information. This is understandable because the information is personal, especially if it reveals poor financial results. After all, prospective franchisees could become a competitor and could use this information against the established franchisee.
There is a way, however, suggested in "Franchising Dollars and Sense" by Warren Lewis which increases your chances of obtaining the information. Do your own financial projections before you take them to the established franchisee. There are charts to help you get started with this task in the book. This will be less threatening than asking to look at the established franchisee's books and records. You can ask what changes should be made to your projections or expenses.
THE UNIFORM FRANCHISE DISCLOSURE DOCUMENT.
Among the shiny promotional materials you will receive after your first visit with the Franchise Sales Department might be something called a "UNIFORM FRANCHISE DISCLOSURE DOCUMENT" (UFDD) or disclosure document. Although it may look like a lot of legalese, it is this document that may keep you from buying a bad franchise.
Be sure you read and study this document and have your attorney and accountant do so.
Obtain a lawyer and an accountant who specialize in small businesses, before receiving the UFOC. Have them review your copy of the UFDD before you sign it. Look for:
1. Total costs,
2. Termination,
3. Selling and renewal clauses,
4. Cooperative advertising and promotion funds.
Also, ask such questions as:
Are the home office services detailed?
Does the franchisors patent and liability insurance protection extend to you the franchisee?
Are financing details spelled out, including repayment and interest?
Are commissions and royalties specified?
Does the franchisor provide formal initial training? Is there a specific training schedule? Does the franchisor provide costs for room, board and transportation while you are receiving on-the-job training?
Is training cost included in the franchise cost? (Check with other franchisees to see if their training was adequately provided.)
What is the interest rate for financing and when does financing have to be paid back?
Is the territory covered outlined, including whether the territory is "exclusive" or "non-exclusive"?
Can the franchisor or his representative sell direct in my area?
Most importantly, review the TERMINATION CLAUSE to make certain that you have a sufficient grace period and that your rights, as well as those of the franchisor, are represented.
SUMMARY
The franchisor summary includes the corporate name, its place and date of incorporation and a basic description of the franchise. Business experience of the executives and officers is given in the initial items. How long the business has been A FRANCHISOR is important, because one can be in business for a long time, but not have the skills to run a national franchise. New franchises are riskier because of this. Franchises that have been operating for a while with a good track record may be a better bet.
LITIGATION
Item 3 of the UFDD lists litigations against the franchisor. Look for any evidence of:
Fraud or racketeering,
A significant number or kind of breach of contract suits,
Bankruptcy history,
Have your lawyer pay special attention to this section.
FEES
Items 5 through 7 will give you information on the fees you will have to pay the franchisor. The company will provide an estimate of your total investment in the franchise. There will be a chart in Item 7 detailing the initial expenses you are likely to have in starting the franchise. Pay particular attention to the ROYALTY FEE and any other continuing fees because they will take a slice off the top of future profits. When you interview other franchise owners, ask if their initial expenses are the same or less than those listed in your UFOC.
The section that lists how many franchises have been terminated in the past year is significant. Too many? Find out the reasons for termination from the small franchisees.
The references that are listed are important. Visit these in person and don't rely on a phone survey.
Don't forget to speak with current franchise owners about earnings potential. This is a crucial step. Be wary if the franchisor wants to select the franchise owners for you. Select franchise owners by yourself.
Find out facts such as:
Training,
Their total investment,
Franchise fees,
Hidden or unexpected costs,
Product costs,
Net earnings.
EARNINGS CLAIMS
The financial statements in Item 19 are important. Have your accountant go over these statements. The franchisor may say that they don't make any earnings claims, but then make oral claims at a personal meeting. This is highly suspicious.
Most franchisors have elected NOT to provide information about the earnings potential of the franchise, but if they do, the information must conform to certain standards. Be aware that average incomes can make the overall franchise look more successful than it is if a few very successful franchises are averaged into the figure. NET income figures should reveal more to you than gross sales figures that do not subtract rent and overhead expenses.
If any franchisee has gotten a lower franchise fee within the past year, it will be noted on the new format UFOC in Item 5. Remember that the franchise fees and other fees are NEGOTIABLE. Many items are negotiable. You may want to negotiate for a higher quality protected territory or for the right to purchase your supplies from a lower cost supplier than the one that the franchisor has designated. Include any verbal agreements in the final written agreement.
Product and supplier information is listed in the UFOC in item 9. Many franchisors require that you purchase supplies from special cooperatives or suppliers. There may also be standards for purchases. If you think you can get a better deal from another supplier you may want to negotiate for this.
OBLIGATIONS OF THE FRANCHISOR
The franchisor is required by contract to deliver the services listed in item 11, such as supervision, assistance and advertising. There may be restrictions on your advertising or a minimum that must be spent on local advertising. Its best to get as much money as possible for your local ads.
TRADEMARKS
Section 8 which covers trademark disclosure shows whether the trademark is registered. Check to see if you will have to be the one to defend any trademark action brought against a franchise owner -- you want the main company to handle suits such as these.
By law you must receive a copy of the UFOC at least 2 weeks (10 business days) before you put any money or deposits down and before any purchasing commitment is made. The UFOC may be delivered at the first personal meeting where you officially discuss the sale of the franchise. You may want to set up an appointment with your trusted business advisors prior to receiving the UFDD.
ATTACHMENTS TO THE UFDD
There are two important attachments to the UFOC. The UFOC contains copies of documents you will be required to sign for the FRANCHISE AGREEMENT. It is not written in plain English and should be reviewed by a good lawyer familiar with franchising and representing small business owners. The franchise agreement will tell your options in getting out of the agreement should the franchise fail. Review these statements with your lawyer carefully. The UFDD also contains the franchisor's three most recent annual AUDITED FINANCIAL STATEMENTS. You should be sure to check the franchisor's financial standing by reviewing its financial statements with an accountant and by checking its standing with the Better Business Bureau. It is better to discover complaints before you commit. If you do your homework using the UFOC, you will be much more likely to have a successful business in the future.
MARKETING AND OTHER SERVICES
Some franchisors will provide leads or you may be required to obtain them yourself. Your franchisor should provide a "profile" of the typical sales prospects. Samples of national advertising should be given to you. Make sure the local advertising program is an outgrowth of the national one. Ask to see a sample kit of plans for your grand opening.
Other items the franchisor should supply:
Ad materials,
Radio scripts,
TV commercials,
Sample media programs,
Direct mail programs,
Point of purchase material,
Sample publicity releases and accompanying photographs.
Look for titles of service departments such as:
Finance and accounting,
Advertising and promotion,
Sales and marketing,
Research and development,
Real estate,
Construction,
Personnel, training & manufacturing operations.
Look for sound business experience in the franchise operation in the board of directors and your advisors. Be sure you ask questions about field support, that is, exactly what is done, who does it and how often it is done.
FRANCHISE FRAUD
Unfortunately there are some disreputable franchisors. If a franchisor cannot provide you with the disclosure document (UFDD), rushes you in any way, or wants money before the disclosure document is presented, you should be alert to fraud.
It is also suspicious if the franchisor:
Tells you other buyers are waiting to buy your territory.
Makes earnings claims that are not noted in the disclosure document is suspect--ALL earnings claims should be in writing.
Suggests that the business could be run for less than the disclosure document states.
Suggests that you do not have the qualifications to run the franchise, (using "reverse psychology to manipulate you into buying).
If the franchisor has trouble providing a list of its current franchisees or pressures you to talk to certain franchisees and not others, you should be suspicious of a cover-up. Con artists may be in franchising for a long time but new to this particular business.
Franchisors that talk to you not one-on-one, but with a team sales approach are suspect.
Ask yourself if the franchise trademark seems a little too similar to another franchise already in business. If the franchise name and trademark are not well known to the public, perhaps you should question the advantage of this business over one you start yourself. It's also a good idea to obtain a franchise that is based in your state--to address possible legal problems in your own home state, rather than traveling to another state to do so.
FINANCING YOUR FRANCHISE
After you prepare a business plan, you should investigate franchise companies that fit your interests, personal direction and financial resources. You will want to choose an ATTORNEY, BUSINESS ADVISOR or ACCOUNTANT who have had experience in representing franchisees.
Use your advisors to carefully discuss the:
Full initial cost,
Financing possibilities,
Licensing fees,
Land purchases,
Leases,
Building construction,
Equipment,
Training,
Start-up inventory,
Promotional fees,
Franchise operation manuals.
Evaluate CONTINUING COSTS related to the franchisor such as:
Insurance,
Interest on financing,
Cooperative advertising fees,
Continuing training, and royalties.
Are you required to purchase supplies from the franchisors? Are they more expensive than purchasing them elsewhere?
In addition:
What restrictions apply to competition from other franchises?
Check renewal rights and the process for reselling the franchise.
Further investigate these companies including their financial statements, and the financial and training assistance they offer. Look carefully at the success and track record of the franchisors, their financial condition, and how much initial capital is required. What is the long-term capital commitment, including facility and equipment lease obligations? What are you contractually obligated to do?
Is it better to reduce your own personal liabilities as much as possible, perhaps by forming an S corporation? The disclosure document (UFOC) should be obtained and read in detail. Research items such as renewal rights, franchisor control and quality control of the operation and enforcement policy.
When you begin to look for financing, keep in mind that any outside funding source is going to want proof that you have carefully planned your business. You can get a lot of guidance from your franchisor on this, but you need to do your research in addition.
Have an accurate idea of what your own assets are -- this could be real estate, retirement and savings accounts, vehicles, and other investments. If you have a large amount of assets, financing will be easier. If you borrow money, you will probably be asked to guarantee the loans you make.
DEBT VERSUS EQUITY FINANCING
You may also take on investors who buy shares in your business. This is called "equity financing" as opposed to "debt financing" or borrowing money. This means that you may lose complete control of the business. Some investors, however, may want little to do with the everyday tasks of the business. They are just looking for a place to invest their money. It's best to get your relationship with the investor down in writing before starting the business.
BUSINESS PLAN
Have a detailed business plan that analyzes cash flow and makes operation projections that are realistic. If you are constructing a building, you will need quotes from local contractors, insurance rates, taxes, and local labor costs. There may be advertising and promotional costs, continuing royalty payments, employee salaries and benefits and equipment leases.
For good background information, contact franchisees from other industries or locales to find out how they financed their businesses. Since you won't be in direct competition with them, they may be more open about discussing financing. Local and state development agencies can present good sources of information for women, veterans, and minorities. The Small Business Administration has several loan programs to assist you. Some franchisors will assist with financing, but that is generally left to the buyer.
Keep in mind that you should not allow yourself to be pressured into a franchise that is not right for you. Some franchises may be poorly managed, financially unstable, or offer little assistance. It's up to you to do your research to discover these facts. Take your time and use the advice of your advisors extensively.
FRANCHISING - To learn more about this author, visit Ken Hollowell's Website.
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John PowerJohn Power, founder of Biltmore Franchise Consulting, has extensive experience developing and marketing franchises and business opportunities. He has been in and around franchising for over twenty years. From 1980 through 1990 he conceptualized, organized, and developed the American Video Association. He grew AVA to 2,000 national members, before selling the company it 1990. It was later merged into another home video marketing company. From 2000 to 2005 he worked as a contract marketing and human resources consultant to several local and national companies. In 2005 Mr. Power began working as a franchise development consultant on a full-time basis. Since that time he has helped more than three dozen companies initiate and develop their franchising program. He notes that there are many companies interested in developing a franchise program, and who need his specialized assistance. Mr. Power is a hands-on franchise consultant. He said, I am the nuts and bolts person who tends to the details for my clients. Mr. Power holds a B.S. degree with a major in Marketing. See: www.biltmorefranchise.com You may contact Mr. Power at: jpower@biltmorefranchise.co - Visit John Power's Website |
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