Chapter 14: Investigating Franchising -
Reading Between the Lines and Listening
Learning Objectives:
1.
Understand franchising’s impact on
the economy, employment, and our
daily lives
2.
Explore franchising as an alternative
doorway into business ownership
3.
Gain an overview of how the
franchise system works
4.
Evaluate the pros and cons of being
a franchisee
5.
Review what the franchisor and
franchisee receives
6.
Develop techniques for examining
franchises and performing due
diligence
7.
Understand the purchasing process
8.
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Learn how to evaluate the franchise
disclosure document
Understand risk – reward factors in
buying into a “ground floor” opportunity
or an established franchise for sale
Review and recognize why franchising
may be the right doorway for some and
absolutely the wrong doorway for others
Recognize the advantages of owning
multiple locations and explore the
opportunities to enter the franchise
market with smaller locations
Realize why the true entrepreneur is
always the franchisor.
Explore multilevel marketing
Franchising’s Reach
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Franchising is big and includes many industries
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More than 3,000 franchisors in the US
Over 300 lines of businesses and 750,000 franchisees
Over 200 new firms offered franchises during the past year
Almost $800 billion of economic output in 2012
Half of franchise employment is in restaurants
Proceed with caution
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Less than 20% of franchisers last 20 years
25% of 200 new franchise systems established each
year fail
Ask yourself if it the right fit for you
Franchising Information & Courses
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Start your research with the SBA’s “Consumer Guide
to Buying a Franchise”
IFA’s Franchising Basics Course:
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How franchising works and questions to ask
Laws and regulations & Pros and cons
Companies & types of businesses available
Additional resources & information
AAFD “Roadmap to Selecting a Franchise”
Contact your local SBA/SCORE for formal workshops
Action Step 57:
Explore Franchising on the Web
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Take an online franchising quiz at FranchiseHELP
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Jump start your search with other sources
Check out articles on what interests you
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What are your results? Do you agree or disagree?
Which franchises are hot?
Which ones are growing the fastest?
Where are the happy and profitable franchises?
Do not get lost – keep a list of goods ideas
Find a few franchises you are interested in and explore
additional resources
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What did you learn? What surprised you?
Exploring the Third Doorway
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Determine if you are franchisee material
You are buying a business and a lifestyle
Review your financial goals
Do not invest more than 25 – 50% of your net worth
Franchising Basics:
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Start with answers to frequently asked questions
Acquire some of the specialized vocabulary
Check out the FTC’s website for unbiased information
Franchising is a very litigious business
Attend a franchise exposition
Global Village: A Franchise Overseas?
Action Step 58:
Franchise Information Packet
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Request info from franchisors that fit your needs
Some packets are available online
Some franchisors prequalify potential buyers
before sending packets
Study your desired franchise and their main
competitors
Summarize what you have learned
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Focus on the need for the product & its uniqueness
What are the advantages of the franchise format?
Beware of fads – look forward 5 to 10 years
Start to formulate questions
Action Step 59:
Visit a Franchise Exposition
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Look online for expos in your area
Go to the expo and talk with exhibitors
Learn what you can from sales presentations
Attend free workshops
Collect literature and select franchises worth a
second look
Usually small and new franchisors exhibit at shows
Salespeople work on commission – do not be
persuaded; you are not yet ready to buy
Beware of Scams as You
Begin Your Search
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The Rented Rolls-Royce Syndrome
The Hustle
The Cash-Only Transaction
The Boast
The Big-Money Claim
The Couch Potato’s Dream
Location, Location, Location
The Disclosure Dance
The Registration Ruse
The Thinly Capitalized Franchisor
What the Franchisee May Receive
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Brand-name recognition & Brand-loyal customers
Support, Training, Money, Planning & Bargains
Psychological handholding & field visits
Assistance in site selection & layout and design
Standardized & pretested products
Promotional materials, Operations manuals & Software
Area or master franchises & Territory protection
Assistance of a store-opening specialist
Sales and marketing assistance & Advertising
What the Franchisor Receives
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Initial nonrefundable franchise fee
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Royalty fees
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Average fees are 3-6% of gross sales
Advertising & Promotion fees
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Ranges from $3,000 to well over $1.5 million
Usually covers 5-10 and up to 20 years
Payable even if you are not profitable
2-5% of gross sales
May profit on items sold to franchisees
May make additional income from training materials,
computer systems & fees for training classes
Additional Franchise Issues & Concerns
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Intense competition & oversaturated markets that cause
encroachment
Multilevel distributorships & pyramid sales schemes
Best opportunities are seldom offered to outsiders
Termination clauses may be ambiguous
May be many disgruntled or unprofitable franchisees
Litigation should be looked at closely
Brokers have the franchisor’s best interest in the forefront
Legal recourse against the franchisor may be difficult
Royalties are based on gross sales, not net profits –
franchisor imposed specials can be financially challenging
Additional Franchise Issues and Concerns
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Franchisor may discourage association among franchisees
Non-compete clauses may be part of your contract
In most states franchisees must go to the government if
the franchisor violates FTC rules
Beware of “ground floor” opportunities – it is risky to be
an early franchisee
Many services and product to not transfer easily to other
parts of the country
Voluntary chains may be more desirable as there are no
royalty or franchise fees
Management and owners should be thoroughly
investigated
Action Step 60:
Investigate Franchisors and Franchisees
Franchisors – interview at least
three:
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What is included in the franchise
fee? Terms of the agreement?
Top performers vs. lower
performers? Failing franchisees?
Long-term goals and plans?
Social media? Training & services?
Royalty fees & assessments?
Terminated franchisees?
Territories?
Turnover rate? Major changes?
Advertising & Promotion?
Skills needs? Opportunities to own
multiple franchises?
Franchisees – as many as possible and
a variety of types:
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What do you wish you had known before
you purchased? Major problems?
Happy with support & training?
Helpfulness of franchisor?
What would you change if you could?
Territory issues? Strongest competitors?
Employees? Turnover?
How many hours a week do you work –
first year and now?
What does it take to be successful?
Start-up costs? Time to profitability?
Is income what you anticipated?
Would you do it again?
Process Involved in Purchasing
a Franchise
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Complete your Due Diligence
Try to read between the lines
Ask questions
Work with the franchisor to find the
best spot
Get the advice of your accountant,
attorney, other franchisees & banker
Negotiate to complete the sale
Action Step 61:
Summarize Your Insights & Research
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What do you like about franchising?
What do you dislike about franchising?
What additional information do you need?
Which franchise if for you? Why?
Can you make the money you desire from one
franchise? If not, could multiple locations provide it?
What will you like most & least about owning this
franchise?
Can you raise the funds you need?
Will you like running the business? Are you still in
love with the idea of being your own boss?
Action Step 61:
Summarize Your Insights & Research
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Where do you see this franchisor in five years?
Where do you see yourself and this franchise
in five years?
Will you be able to easily sell this business?
Which franchise if for you? Why?
Will you be able to hire a manager if desired?
Can you grow in this business?
How responsive has the franchisor been to changes
in the marketplace?
Are you creating wealth or just replacing your job?
What questions still remain?
Buying An Existing Franchise or
Buying into a New One
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Existing Franchise
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Likely a new agreement – approval may be required
Expect a transfer & possible training fees
Upgrades may be required – find out in advance
Shorter time to full operations and no opening expenses
Positive cash flow could come much sooner
Existing employees may be a positive or a negative
Buying into a New Franchise
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Consider a system less than two years old very carefully
Return on investment may be longer
Training and support may not be effective or in place
The Other Side of Franchising:
Reasons for Not Purchasing
1.
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8.
I know the business as well as they do
My name is as well known as theirs
Why pay a franchise fee?
Why pay a royalty fee and advertising fee?
My individuality would be stifled
I don’t want others to tell how to run my
business
I don’t want a ground-floor opportunity were I’d
be the guinea pig
It felt like I would have been committed for the
rest of my life
The Other Side of Franchising:
Reasons for Not Purchasing
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14.
There were restrictions on selling out
If I didn’t do as I was told, I would lose my
franchise
The specified hours of business did not suit my
location or desires
The franchisor’s promotions and products did
not fit my customers’ needs or tastes
I don’t want a ground-floor opportunity were I’d
be the guinea pig
I would not be in control of my business
Can You Franchise Your Idea
and Become the Franchisor?
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The odds do not favor success
Fewer than 1% of franchise ideas get off the ground
Ask yourself these questions:
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Can someone learn to operate your business in three
months or less?
How profitable are you? To attract high-quality
franchisees need to generate $500,000 in annual
revenues and at least 15% income to owner
Not all ideas are transferable to other locations
Former Marine and Army Reservist Change Path
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Home Instead Senior Care
Franchising Trends and
Final Franchising Thoughts
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The best opportunity may be a young
franchise that has proven its concept
Does the franchisor change & update the
product to meet the changing marketplace?
Explore the possibility of an area franchise
Consider multiple franchises under one roof
Major legal changes may be forthcoming
Another alternative may be network
marketing
Network Marketers: Pros or Cons?
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Several successful companies exist but Internet
growth has led to an increase in pyramid schemes
Low entry cost encourages scam artists:
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Make sure there is a solid product or service
Confirm that commissions are supported by sales
Don’t pay more than $500 in initial buy-in costs
Beware of high earnings claims
Don’t participate unless the company is willing to buy
back inventory
Find out if the marketer has a DSA number & how long
the company has been in business
Do your due diligence
Think Points for Success
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Avoid ground-floor opportunities.
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Talk to franchisees, especially those who have left the system.
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Franchisees may receive a finder’s fee and not be totally honest.
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You are purchasing a job, and you have to do it their way, not yours.
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The franchisor always gets a percentage of gross sales.
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Consider if you really need the security blanket of a franchise.
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Read the proposed agreements carefully. They are air-tight, favor
the franchisor, and are usually nonnegotiable.
Can you be comfortable relinquishing your independence?
If you like to break rules, be creative, and stretch things to the limit,
do not buy a franchise – you will very likely end up in court.