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Finding the Right Franchise Opportunity

May 27, 2010 by Frank Goley, Business Consultant

A Franchise System can be a very effective way to open and operate a small business, especially for those without a lot of experience in operating and owning their own business.  There are many advantages in using a Franchise System, such as, turn-key operations, marketing and business planning; large corporate support; lower learning curve; established accounting, cost control and management systems; brand identification; training programs; national and regional advertising; customer service programs; market trend responsiveness; supplier and vendor discounts; among others.  However successful Franchise Systems are expensive. The fees / costs consist of a franchise fee, royalty fees and start-up costs.  So it is very important to have a solid due diligence process in place to determine if a particular Franchise Opportunity is right for you, and whether the costs to establish and run the franchise match the effectiveness of the Franchiser’s Package Offering.

Types of Franchising Systems

Product / Service and Trademark Franchising

This is an arrangement which the franchisee is granted the right to sell a well recognized brand.  Most franchisees concentrate on one franchiser’s product/ service line, identifying their business with the franchise.  Examples include:  Automobile Dealerships, Gas Stations, Soft Drink Bottlers, etc.  The franchiser exercises little control over the franchisee’s business, with the product/ service integrity being the biggest concern of the franchiser.

Structure and Responsibilities

– Franchiser provides a Standardized Product

– Franchisee Pays Franchise Fees and Responsibilities include:

ü  Marketing                   

ü  Training

ü  Control System

ü  Operating System

ü  Accounting System

ü  Building, Equipment, Signage

Business Format Franchising

Franchisee is granted the right to use a turn-key marketing system, with substantial assistance and guidance from the franchiser.  Types of franchises include Restaurants, Retail, Hotels, Business Services; Automotive Products, Parts and Services; Convenience Stores; Entertainment Centers and so on.

Structure and Responsibilities

– Franchiser provides:                                 

ü  Building Plans

ü  Equipment & Signage

ü  Marketing System

ü  Business Plan

ü  Operating System

ü  Training Personnel

ü  Accounting System

ü  Control Systems

– Franchisee provides:

ü  Fees

ü  Compliance

ü  Reporting

How to Determine if a Franchise Opportunity is Right for You

Franchise Analysis Checklist

Ø  About The Franchise

ü  Has your attorney approved the franchise contract?

ü  What legal grey areas have been identified?

ü  Will you have exclusive territory?

ü  Does the franchiser work with any other franchise handling similar products and services?

ü  What are the Franchise Contract termination penalties?

ü  If you sell your franchise, will you be compensated for goodwill?

Ø  The Franchiser

ü  What is the franchiser’s number one focus?

ü  How have franchisees in the past run into trouble?  Difficulties?

ü  What skills franchisees need most?

ü  How are conflicts resolved?

ü  Request the bios of Top Management.  Do they have entrepreneurial backgrounds?

ü  Do the franchiser’s earnings claims differ from their Franchiser Disclosure (FDD)?

ü  Has the Franchiser executed detailed due diligence on your qualifications?

ü  How many years has the Franchiser been operating?

ü  Does the franchiser have a reputation among the franchisees, competitors and business world for honesty, integrity, accountability and fair dealing?

ü  Has the franchiser shown you certified and audited financials on franchisees in your region and area which you can validate? 

ü  Does the franchiser provide Executive Management and Personnel Training Programs?

ü  Does the franchiser provide any Capital or Credit?

ü  What merchandising Programs and Training does the franchise offer?

ü  Will the franchiser assist with site location?

ü  Does the franchiser have adequate financing to implement its Franchisee Plan?

ü  Does the Franchiser have a highly trained and experienced management team?

ü  What can the Franchiser bring to the table which you can’t adeptly do yourself?

ü  Has the franchiser complied with State Laws in the past?  What State Laws are in place regarding Franchise Sales?

Ø  The Franchisee

ü  How much Equity Capital will you need to:

§  Purchase the Franchise?

§  Operate until Break-Even?

ü  Where will you get the Equity Capital?

Note:  Please see my Articles on Small Business Finance for extensive resources and information on obtaining business capital and commercial finance.

ü  Are you prepared to give up some independence for the advantages offered by the Franchiser?

ü  Do you believe you have the qualifications to succeed as a franchisee?  What other Personnel resources can you provide?

ü  Are you prepared to spend a majority of your business life with this franchiser?

Ø  The Market

ü  Does an adequate market exist in your area?

ü  Will the market support the price level of the franchiser’s products and services?

ü  What are the population demographic trends for your territory over the next 5 years?

ü  What will be the demand for your product and service in 5 years?

ü  What is the non-franchise and related franchise competition in your territory and region?

Examine Franchise Opportunities

v  Determine which franchises are growing fastest.

v  Research market growth possibilities.

v  Consult Entrepreneur Magazine for its comprehensive Franchise 500 Listings.

v  Utilize the U.S. Commerce Department’s Franchise Opportunity Handbook, which is published annually.

v  Contact the International Franchise Association for assistance.

Determine What the Franchise Can Do for You

Typical Franchiser Services

ü  Start-up help, to include market analysis, site location, financial advice; building and equipment design and purchase.

ü  Successful Operational System.

ü  Accounting and Cost Control System.

ü  Monthly operating results support; performance standards; financial auditing; franchisee financial comparative analysis.

ü  Financial Assistance:  land, building, equipment, inventory and working capital.

ü  Site purchase assistance.

ü  Standardized Construction, Design and Signage.

ü  Training Programs.

ü  National and Regional Advertising Program.

ü  Brand Recognition Promotion.

ü  Customer Services Standards and Program.

ü  Responsiveness to market changes.

ü  Supplier discounting via large volume ordering.

Franchise Due Diligence

Examine more than one franchise and compare / contrast through a standardized checklist (see previous section).  Investigate franchises in the same line of business.

Speak with Existing Franchisees

Ø  Contact several franchise owners listed in the FDD, as well as, not referenced by the Franchiser to solicit their experiences.

Ø  Seek out franchisees that have been in the business over 5 years.

Ø  Talk with experienced franchisees about what to expect during the first year of operation- the typical success or failure period for a franchise.

Ø  Ask franchisees to share their Business Plan with you.  This gives you an inside track on the operational and planning expectations for a typical franchise, along with keys to success.

Ø  Ask franchisees what the Franchiser does to justify all the fees charged.

Ø  Determine how well prepared franchisees were when opening the franchise.  Surprises?  Franchiser weaknesses?

Ø  How effective are the Marketing, Promotion, Branding and Advertising Programs?  Do they bring the right customer to franchisees?

Ø  Determine the real financial numbers.  How much to open a franchise?  How quickly a franchise started making money?  Get the real story and compare it to the Franchiser’s disclosure to determine credibility.

Ø  Do your research and homework prior to meeting with Franchisees so you don’t waste their time and you appear serious.

Ø  Make a good, professional impression on franchisees as they often will report their impressions to the Franchiser.

Ø  Understand where the franchisee is coming from:  i.e.  Someone close to your territory may give you faulty information if he feels competitively threatened.  Or, a franchisee may overstate his/ her success.

Ø  If allowed by the FDD, consider a Joint Venture with an experienced Franchisee.  An 80/20 relationship can make a lot of sense to both the new and experienced franchisees in a proximate region or area.

Ø  Try to spend an entire day with each Franchisee.  This is the only way to get a true fell for the franchise and determine why the franchisee is successful (or conversely, why he/ she is blowing smoke).  Build a relationship with franchisees, and you will be more apt to receive honest, diligent and detailed feedback.

Ø  Ask franchisees if the franchiser encourages the franchisee to share feedback, ideas, successes, failures and whether these experiences get incorporated in the field.

Ø  Is the franchisee happy with their life post franchise opening?  Is the business enjoyable?

Ø  For more ways to get a franchisee to open up to you, visit Entrepreneur.com

Seek Professional Advice

v  Franchise Attorney and Accountant

v  Franchising Consultant

v  Business Consultant

v  Finance Consultant

Understand your Legal and Ethical Rights

Ø  The International Franchise Association serves Franchisers in more than 50 countries and has a code of Franchisers’ Ethics and Obligations to Franchisees.

ü  Franchiser members pledge to comply with all laws and make complete, accurate, non-misleading disclosure statements and documents.

ü  Franchiser members pledge to only accept franchisees that meet prescribed qualifications.

Ø  Understand your rights if the Franchiser attempts to buy back the franchise.

Ø  Issues to explore:

ü  Captive Supplier Pricing

ü  Inadequate Service

ü  Slashing Support Services

ü  Fraud

ü  City and State Laws & Regulations regarding Franchises

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