FranchisesRead....."And God Created the Franchise" by Jim Blasingame Read.....The History of Franchising
Read.....Series of Self Tests
Read.....Small Business Entrepreneur's Checklist
Read.....The Franchise Alternative by © 2001 Elena Fawkner
Read.....Get a handle on the terms before you invest in any opportunity by Jeff Elgin, January 14, 2002
Read .....The Dos and Don'ts of Buying a Franchise: Checklist to Buying a Franchise by Bill Bradley
Is franchising the "right" way for you to go to become an entrepreneur?
How do you choose the franchise? These, and many other questions, will be answered below!
What Is a Franchise?
The definition offered by The Merriam-Webster Dictionary is as follows:
1 : freedom or immunity from some burden or restriction vested in a person or group
2 a : a special privilege granted to an individual or group; especially : the right
to be and exercise the powers of a corporation b : a constitutional or statutory
right or privilege; especially : the right to vote c (1) : the right or license
granted to an individual or group to market a company's goods or services in a
particular territory; also : a business granted such a right or license
(2) : the territory involved in such a right
3 a : the right of membership in a professional sports league b : a
team and its operating organization having such membership
Which definition is appropriate for our discussion?
Technically number 2 is what we are talking about; but, definition 1,
The freedom and immunity from having someone else make your decisions
for you, as well as the freedom from the often daunting task of building
a new business from the ground up is essential to franchising.
Essentially franchising is a very specific method or way of distributing
goods and services. It has been around in one form or another since man
first began to engage in commercial enterprise. It has evolved from a
simple grant of a right or privilege in the middle ages to the
sophisticated business format franchise concept of today.
Franchising is a form of business in which the owner, or franchiser,
gives license to distribute products, services or methods of business
to affiliated dealers, franchisees. In many cases franchisees are given
exclusive access to a particular geographical area. The franchiser
usually mandates uniform symbols, trademarks and standardized services.
A franchise is a legal and commercial relationship between the owner
of a trademark, service mark, trade name or advertising symbol and an
individual or group seeking the right to use that identification in a
business. The franchise governs the method of conducting business
between the two parties. Generally, a franchisee sells goods or
services supplied by the franchisor or sells goods or services that
meet the franchisor's quality standards. Franchising is based on
mutual trust between the franchisor and franchisee. The franchisor
provides the business expertise (i.e., marketing plans, management
guidance, financing assistance, site location, training etc.) that
otherwise would not be available to the franchisee. The franchisee
brings to the franchise operation the entrepreneurial spirit and
drive necessary to make the franchise a success.
While forms of franchising have been in use since the Civil War, enormous
growth has occurred in franchising only recently. By the end of 1985,
500,000 establishments in 50 industries achieved gross sales of over half
a trillion dollars and employed 5.6 million full and part-time employees.
Franchising created 18,500 new businesses in 1991 and approximately 108,000
new jobs to the economy. Business format franchises experienced sales growth
of 8.9 percent from $213.2 billion in 1990 to 232.2 billion in 1991.
Industries that rely on franchised businesses to distribute their products
and services touch every aspect of life from automobile sales and real
estate to fast foods and tax preparation. Thus, we can see that franchising
can be is a viable, lucrative business alternative.
Franchise opportunities vary in quite a few ways:
1-type of industry, i.e., food, clothing, printing, Internet to name just
a few different types.
2-cost to set up, you can choose franchises that cost over a $1,000,000,000
or some as low as $500.00
3-location from which you run the franchise, i.e. they vary from a home based,
to a store front to building an establishment from scratch.
4-rules and regulations covering your franchise, each franchiser has different
rules, regulations and monthly/yearly costs involved in operating a franchise.
Business Services Franchising accounts for more than 40% of U.S. retail sales.
Some examples are:postal, printing, signs, staffing and more.
Home-Based Franchise Businesses:
In 2002, analysts estimated that franchises accounted for $1 trillion in annual
U.S. retail sales. There are primarily two forms of franchising: product/trade
name franchising and business format franchising.
In the simplest form, a franchisor owns the right to the name or trademark and
sells that right to a franchisee. This is known as "product/trade name franchising."
This type developed early on. The product franchise means that a manufacturer
granted a franchisee the right to sell it's products, i.e. car dealerships and
service stations.
Another type of franchise, and more complex, that developed in the U.S. was the
"business format franchising" also known as, name and process franchise, a
broader and ongoing relationship exists between the two parties. Business
format franchises often provide a full range of services, including site
selection, training, product supply, marketing plans and even assistance in
obtaining financing. This format allows the franchisee to use a special process,
or recipe and to use the franchiser's name. Originally Kentucky Fried Chicken
was structured this way as was One Hour Martinizing.
Modern day franchising is primarily in the business format mode. This type
franchising not only grants the right to use the name and sell the products
or services of the franchiser but it also involves the transfer of the total
way of doing business that has been developed by the franchiser. Specifically
the franchiser transfers all its operating systems, technical expertise, marketing
systems, training systems, management methods and essentially all relevant
information, to the new franchisee. The franchiser also trains the new franchisee
extensively up front and provides ongoing training and support throughout the life
of the franchise agreement. Business format franchising is what franchising is all
about today and is essentially why franchising is the most successful method of
distributing goods and services in the economic history of the planet Earth.
McDonald's best epitomizes the incredible power of franchising. Over time
McDonald's learned how to absolutely maximize the sales potential of a fast food
outlet. Their concept is one with a very high degree of systemization. McDonald's
has a idiot proof system for every aspect of their business from exactly how many
seconds the french fries are cooked to the exact words the employees use when
addressing the customers. McDonald's leaves nothing to chance or employee discretion,
there is a McDonald's way for everything and everything is done the McDonald's way.
The core of their business is the strict adherence to QSC, or Quality, Service and
Cleanliness. Over time McDonald's developed a superb training program which
absolutely insured that every franchisee would implement their systems 100% of the
time. Further they developed a unique relationship with the franchisees which is
based on the fact that McDonald's owns the land and building for all the franchise
units. They in essence rent the business to the franchisee for a per cent of the
gross sales of the unit. The beauty of this concept is that the interest of the
franchisee and McDonald's are absolutely intertwined, the better the franchisee does,
the better McDonald's does. McDonald's doesn't sell anything directly to the
franchisees. All McDonald's products are sold by specified vendors. This way
there is never a conflict of interest, whatever is good for one is good for the
other. Further, McDonald's has a very strong franchise agreement which is biased
in favor of McDonald's, which is as it must be. If a franchisee doesn't adhere
to McDonald's high standards, McDonald's has the contractual power to force the
franchisee out of the system. McDonald's has never hesitated to do this if a
franchisee has failed to bring it's unit up to the high standards of QSC
required after being duly warned to do so.
McDonald's is incredibly successful because it has implemented the business format
franchise model to near perfection. This is franchising in essence, the perfection
of a business concept and the transfer of the knowledge acquired through the process
of reaching that perfection and a follow up mechanism that insures that the systems
and procedures are properly executed over time.
Thirty years ago franchising was a revolutionary new technology - a new and better
way to retail goods, food products and services to the consumers. What was the
reaction? Some of the media ran articles deploring franchises as scams. Despite
the fact that many major fortune 500 companies were getting involved in franchising
they did not allow their names to be affiliated with the franhises.
Incredible as this may seem, the franchising concept actually came within 11 votes
of being outlawed by the United States Congress. Currently, franchising has turned
into an $800 billion a year business; and experts estimate that as much as one
third of the goods and services in the U.S. are sold through franchising.
One highly coveted factor is that essentially a franchise provides a tested formula
for starting a business that has worked for others. It can save you from making
costly errors, shorten your learning curve and help you make a profit more quickly.
Most franchisers offer thorough training and often do not require previous experience
or education in the field.
However, start-up costs are high and you are required to follow the
company's specific procedures.
The average franchise costs $85,000 to get started! -- and that normally
does not include the costs of leasing your space, remodeling it, buying the
equipment, paying for inventory. For many people franchising has been the
opportunity to make really big money, however, for the majority it is simply
a license to work seven days a week, 12 to 14 hours a day managing a crew
of minimum wage employees.
And after all that, according to Bryant Quinn, business writer for Newsweek,
"One third of all franchisees lose their shirts, one third break-even and one
third make a profit." Many people feel that buying a franchise is buying a job.
Others who have had bad experiences with franchising suggest that the third
that loses, often ends up losing their shirts.
The downside to any business venture is the following statistic: In general
80% of all small businesses fail in their first two years, 80% of those that
remain in business will not make it past five years. 80% of those who do make
it through five years will not make it through ten years. This statistic is
actually one impetus for people to choose a franchise over starting a business
from scratch.
A popular motto of the franchise industry is, "Be in business for yourself;
not by yourself." This simply and succinctly sums up the benefits of owning
a franchise. All the pluses of owning your own business, without the
imposing feeling of being alone as you build your enterprise.
Going into business for yourself is a great adventure, opening up whole
new worlds of possibility and experience to you. Like an early explorer
setting off to find new lands of opportunity...but even the best explorer
needs maps to sail by and a clear destination.
We, at Modern Opportunity, hope to be your roadmap on your journey.
The History of Franchising
The word Franchise comes from old French meaning privilege or freedom. In the
middle ages a franchise was a privilege or a right. In those days, the local
sovereign or lord would grant the right to hold markets or fairs, to operate
the local ferry or to hunt on his land. This concept extended to the Kings
granting a franchise for all manner of commercial activities such as building
roads and the brewing of ale. In essence the king was giving someone the right
to a monopoly for a certain type of commercial activity. Over time the
regulations governing franchises became a part of European Common Law.
Over the centuries the franchising concept has evolved as the economies of the
nations of the world have evolved. In the 1840's in Germany certain major ale
brewers granted franchises to certain taverns, giving those taverns the exclusive
right to sell their ale. This was the beginning of the concept of franchising
as we know it today. In 1851, the Singer Sewing Machine Company began granting
distribution franchises for their sewing machines. Singer had written franchise
contracts which were the forerunners of modern franchise agreements. In the
1880's cities began to grant monopoly franchises to street car companies
and utilities for water, sewerage, gas and later electricity.
Around the turn of the century, the oil refinery companies and the automobile
manufacturers began to grant the right to sell their products. At this stage
in the evolution of franchising it was essentially just the granting of the
right to distribute and sell a manufacturers products.
Business format franchising, which is the dominant mode of franchising today
came onto the economic scene after World War II with the return of the millions
of US servicemen and women and the subsequent baby boom. The baby boom is still
driving the economy and will continue to do so into the next century. There was
an overwhelming need for all types of products and services, and franchising
was the ideal business model for the rapid expansion of the hotel/motel and
fast food industries. During the explosion of the 60's and 70's there were many
abuses in franchising. There will always be the unscrupulous con men/women among
us, ready to prey on the uninformed and gullible. There were a number of totally
fraudulent franchise companies which literally took peoples money and ran, and
there were a number of companies that were undercapitalized and poorly managed
which went bankrupt, leaving a trail of failed franchisees who lost everything.
It became clear that the franchise industry had to change in order to remain a
viable business concept. On the industry side, The International Franchise Association
was created with the specific intent of uplifting the entire industry. The IFA holds
training in all aspects of franchising which greatly enhances the professionalism of
the industry. Members of the IFA are required to adhere to the IFA's Code of Ethics
which sets a high standard. The IFA works closely with the US Congress and the
Federal Trade Commission on improving how the industry relates to the franchisees.
On the government regulatory side, the Federal Trade Commission, in 1978, required
that all franchisers submit to all potential franchisees a document called the Uniform
Offering Circular or UFOC, before receiving money. The UFOC provides very detailed
information on the franchise company, such as its history, information about the
officers, litigation history, audited financial statements, the franchise agreement,
which is the contract between the franchiser and franchisee and a current list of
franchises with owners names and telephone numbers. The intent of the UFOC is that it
provide enough information so that the prospective franchisee can make an informed
decision. The FTC doesn't actually review the UFOCs unless there is a complaint and it
decides to conduct an investigation.
Also there are a number of states called registration states which have their own
requirements that must be met before a franchiser is allowed to sell franchises in
their states. In some cases these requirements are more stringent than the FTC's.
There are several franchisee associations which work to protect the interests of
franchisees.
Today, franchising is a highly regulated industry which offers a great opportunity
to those individuals who truly want to realize their dream and go into business for themselves.
Why Buy a Franchise
In a sense, franchising is a business model whose primary purpose is risk
minimization. Every study ever done on the success rate of new(non-franchise)
business startups concludes the same thing. Starting up a new business is very
risky. Most studies show that over 90% fail within three years. The primary
reason that the failure rate is so high is because the owners have to go through
the learning curve of operating that specific type business. Unfortunately, the
market place is not very tolerant of the inexperienced neophyte trying to learn
how to operate a new business. If you can't compete in the market place, you get
eaten by the sharks very quickly, you go bust, you lose money, your credit, your
home, your reputation and sometimes even your family. Failing in business can be
a horrible experience. Unfortunately this happens to thousands of poor souls every
year in the U.S., and it is so unnecessary. Unless you have considerable experience
in the specific type business that you are considering going into, it is very probable
that you will fail.
Business format franchising is as close as you are going to come in todays market place
to a guarantee of success. All the studies done have found that franchise new business
startups rarely fail and when they do it is typically because the franchisee did not
stick to the franchisers systems. In all human endeavor there is involved a learning
process . This learning process requires going through a series of trial and error
encounters wherein knowledge is gained by trying and failing, trying and failing again
and again and eventually trying and succeeding. This process is generally called the
learning curve. In the context of franchising, the franchiser has already gone through
the learning curve and has learned the secrets of success for the specific business.
In business format franchising all that has been learned by going through the curve
is transferred to the franchisee. This is fundamentally why you buy a franchise, to
minimize risk and give yourself the best possible chance to succeed.
Another reason why it is prudent to buy a franchise is that a franchise investment
can be thoroughly researched before any significant expenditures are made. With
a new business startup(non-franchise) you are always operating in the dark. No
matter how much research you do it is very difficult to get a handle on so many
aspects of the new business. With a franchise the franchiser is a wealth of
information about the business from how to prepare a pro forma to the best
personality traits for the business. But the most important information comes
from the existing franchisees. With a good systematic approach you can get
answers to nearly all the really key questions. Such as, Do you feel that you
were properly trained, how long did it take before you reached break even, what
is your annual return on investment, how do you feel about the day to day
duties of the business and if you had it to do over, would you do it again?
You can in a very real sense try the business on before you buy to make sure
it is a good fit for you.
Another very important reason to buy a franchise is intertwined into it's basic
nature. Franchising inherently leads to rapid growth, because the franchisees
provide the expansion capital. There are few restraints to growth in franchising.
As a franchise system expands into hundreds of units many positive things begin
to happen. The name begins to become well known because people see it everywhere.
Most people associate size with success. The bigger the franchise the better it
must be. The large number of units enables the franchise to advertise heavily,
which tends to increase sales. A synergy begins to be created in which success
begets success. The franchise begins to squeeze out competition through it's sheer
size. The franchise can buy products in large quantity at significant discounts
which it passes on to the franchisees. The synergy just grows and grows.
A recent Gallup Poll of franchisees found that over 94% considered themselves
successful and that over 75% would buy their franchise again if they had it to
do over. The same poll also found that the average pre-tax gross income was $
124,290. As Mr. Spock of the original STAR TREK would say regarding franchising,
" The Logic is Inescapable".
In summary, the primary reason you should buy a franchise as opposed to
starting up a non-franchise new business, is to minimize risk and enhance your chances of success.
How to Select a Franchise
This is a very big subject so we will try to be as laser like as possible
and give you the essence of the information you need in order to properly select a franchise.
First, you must ask yourself certain questions and be very objective. Why
do you want to own a franchise? If it's to get rich or to get on easy street
and not have to work, then franchising will probably not meet your expectations.
If you are like many people who have the dream of owning your own business,
being your own boss and having control of your life, then franchising may be for you.
The truth about franchising is that it's very rare that franchisees get rich.
It's also true that as a franchisee you generally work long hours, especially the
first year. A franchise business is like nearly all businesses, it's hands on,
you have to be there to make it happen. You have to literally keep your hands on
it. Generally, a franchise is going to involve longer hours and more stress than
would a job where you just put in your time and then go home and forget about it
until the next day. However, franchising gives you the chance to do something really
significant, and that's to be in business for yourself, be your own boss and control
your own destiny. This is the chance to realize the dream. It's been said that
the truly happy people among us are those who are living their dreams.
After evaluating yourself, the next step is to begin the search. Look through the
information here at the FranInfo site. The critical thing at this point is that you
must be realistic and look at opportunities that are in harmony with you, how you think
and what your interests are. Imagine yourself operating the franchises that look
interesting. Can you see yourself happy in that environment, day after day, possibly for years.
If you are interested in any specific companies, send us an email. We will see that
you are contacted. The least you will receive is a letter and a brochure and from some
of the more progressive companies you will get a video. Examine these materials
carefully, they are generally very revealing. After you narrow your search down to
one or two franchises it's time to visit a operating unit if you haven't already. Ask
the franchise sales rep where the nearest unit is located and arrange to be met there
by a owner or manager who can answer your questions. Spend as much time at the unit
as you possibly can, be there at different times of the day, during peak hours and
during slow times. Talk to the employees, customers and the owner or manager. If you
do this thoroughly you should get a good read on the viability of the concept.
If at this point you want to continue, the next step is to visit the home office. Here you
will get a guided tour of the offices, meet key people, usually including the President,
and generally you will visit a flagship unit, either company owned or a franchise unit.
After the tour you will sit down with a franchise sales person and be given the sales
presentation, which is of course designed to sell you. You will be given a Uniform Offering
Circular (UFOC) to take with you. This is a compilation of a great deal of information on
the company and the opportunity. The Federal Trade Commission requires that you be given a
UFOC at the first personal meeting. It will have information on the history of the company,
backgrounds on the officers, financial statements on the company, a copy of the franchise
agreement, a list of current franchises, franchises that have closed and litigation history.
This information is critical to evaluating a franchise opportunity.
Analyzing the UFOC is tricky and professional help at this point can prove invaluable. You want
to pay close attention to the history of the company, the backgrounds of the officers, the
financial statements and the litigation history.
The following are the steps you should take upon returning home.
1. Analyze the UFOC (Professional help recommended) In the UFOC you want to see strong financial
statements, highly experienced people in the key positions, a company that has been in business
for 3 years or more, the longer the better, has a large number of units and has few closed or bought back.
2. Closely examine the franchise agreement. This is the contract between you and the company.
Franchise agreements are always biased in favor of the franchisor, that's just the way it is.
This can be good and bad. The company can be unfair in it's dealings with you and the
franchise agreement may allow this, on the other hand you should want a strong franchisor.
For example, McDonalds is so successful because it is very tough on franchisees who do not
maintain McDonalds high standards of product quality, good service and cleanliness. This
strict compliance is only possible through a strong franchise agreement.
3. Call as many franchisees as possible. Call at least 10. Find out how they are doing.
The key question is "Would you buy this franchise again?"
4. Visit personally as many operating units as possible. At least three. Often the owner
or manager will be more forthcoming in person than over the phone.
5. If everything still looks good, then contact the sales rep and get as much definitive
sales information as possible. Most franchisors will not make earnings claims but they
will provide information with which you may extrapolate gross sales.
6. If everything still looks good then go for it.
Future of Franchising
The growth of franchising is inevitable, because of the inescapable logic of the
underlying concept. Franchising clearly offers aspiring, new business owners the best
possible chance of succeeding with the least risk. Within a decade or less, franchising
will comprise over 50% of the retail economy, will employ millions of people, and
will enable hundreds of thousands to realize the American dream of successful business
ownership. Approximately 1 out of 12 U.S. retail businesses is a franchise.
As the U.S. and world economies grow with the ever increasing populations, and the move
toward free market economies, new franchise concepts will come on the scene and the solid,
well managed existing franchise companies will continue to grow.
There is a move toward better protection of franchisee rights and over time this will
push more franchisors towards structuring their relationships with their franchisees
in a totally win/win manner. Franchising is evolving, it's getting better conceptually
and in reality. There are greater opportunities for wealth creation among both franchisees
and franchisors today then ever before.
The future of franchising is as bright as the sun and if you want to take the big step
and go into business for yourself or if you have an existing business that you want to
optimize, then you should look closely at franchising as the vehicle to take you to where
you want to be in the 21st century.
Self Test#1: to Determine if you are compatible
with franchise ownership
The purpose of this test is to give you a good read on your suitability to own a franchise.
Be upbeat when answering, avoid being hypercritical and preventing yourself from ever
purchasing a franchise. Just be honest with yourself. You will really know if
franchising is right for you.
1) Why specifically do you want to own a franchise? Is it to get rich, or is it to
get on easy street and not have to work hard or work long hours? Is it to be your own
boss and control your own destiny? Is it because you just can't stand what you're doing now?
2) Are you money motivated? Do you have to make more money? Do you feel that you are
at a dead end where you are now?
3) Do you fit in the corporate environment? Do you like working for someone? Have you
ever been called a misfit, a maverick, or a malcontent?
4) Do you really enjoy working hard, even if there is no immediate reward?
5) How self reliant are you? Do you wait for others to take the initiative? Do you
need the approval of others and considerable support before you make a decision,
start a task, or move in a new direction?
6) Are you a risk taker? Are you willing to place your time, energy, and money
into a venture that has the possibility of failing?
7) Do you take real pleasure in being the boss, or having the authority and
responsibility for the success or failure of a new venture?
8) Are you a positive person?
9) Do you have good people skills? Can you interact with people effectively?
Do you like people?
10) Can you stick to the franchisor's system, or do you have to do
everything your way?
11) Do you like to teach? Do you enjoy training people in new tasks?
12) Can you handle multitasking? Can you cope with the multiple demands
of operating a business?
13) Are you willing to accept the help of others?
14) Do you have the determination to get what you want and go for it 100 % ?
Self Test#2: - Best Type of Franchise
The purpose of this test is to help you look at certain realities that may
have a significant impact on your probability of success in franchising.
It is only an aid. After considerable research and thought, you will
know the best franchise for you.
1)What is your educational background? What is your work experience?
What do you really know how to do well?
2) What do you absolutely love doing? What are your hobbies?
3) Do you really like people? Do you have good "people skills?"
4) Are you introverted or extroverted?
5)Are you the hands on or hands off type?
6) Are you willing to work long hours, six to seven days a week?
7) Are you a risk taker? Are you willing to bet on a new unproven
concept or would you be more comfortable with a well-established,
proven, franchise concept?
8) Do you like to sell?
9) Does the idea of really becoming part of a community appeal to you?
10)If a particular type of franchise looks attractive, can you see
yourself spending your days for the next 5-10 years in that specific type of business?
Deciding whether or not to go into business is a very important
step in the business start-up process for new and potential small
business owners. Each year, thousands of entrepreneurs and potential
entrepreneurs are faced with this difficult decision. Because of the
risk and the amount of work involved in starting a new business,
many new and potential small business owners choose franchising as
an alternative to starting a new, independent business.
Although the success rate for franchise-owned businesses is significantly
better than the success rate for many independent businesses, there is
no formula to guarantee success. One of the biggest mistakes you can
make is to be in a hurry to get into business. That's why it's
important to understand your reasons for going into business, and
to determine if owning a business is right for you.
If you are concerned about the risk involved in a new, independent
business venture, then franchising may be the best business option
for you. Remember, however, that hard work, dedication and
sacrifice are key elements in the success of any business
venture, including franchising.
Test#3: Some self analysis activities
to assist you in making this important decision:
1-List at least three reasons for going into business.
2-Identify the type of business you are interested or may be
interested in operating.
3-Evaluate Your Skills and Experience
1-Identify Your Reasons
As a first and often overlooked step, ask yourself why you want
to purchase a franchise. This question, although basic, is an
excellent way of evaluating your reasons for going into business.
List every reason you identify no matter how farfetched it may
seem. Divide your list into two separate components. Separate
the viable reasons from the trivial reasons and categorize them
accordingly. It isn't unusual for reasons to range from the desire
to be your own boss to the desire to be a billionaire. Whatever your
reasons, remember that your future is at stake so try to be objective.
Your checklist should include reasons such as these; check each that apply to you.
YES
Freedom from the 9-5 daily work routine
Being your own boss
Doing what you want when you want to do it
Improving your standard of living
Bored with your present job
Have a product or service for which there is a demand
Some reasons are better than others, none are wrong; however, be
aware of tradeoffs. For example, you can escape the 9-5 daily routine,
but you may replace it with a 6 a.m. to 10 p.m. routine.
After assessing your reasons for going into business, next conduct a
self analysis to determine if you possess the personal characteristics
needed to be a successful franchise owner. Consider questions such as:
Personal Characteristics
Are you a leader?
Do you like to make your own decisions?
Do others turn to you for help in making decisions?
Are you willing to accept managerial assistance from the franchisor?
Are you willing to comply with the provisions outlined in the franchise contract?
Do you enjoy competition?
Do you have will power and self discipline?
Do you plan ahead?
Do you like people?
Do you get along well with others?
Personal Conditions
These questions cover the physical, emotional and financial strains
you will encounter operating a franchise.
Are you aware that running your own franchise will require working
12-16 hours a day, six days a week, and maybe even on Sundays and holidays?
Do you have the physical stamina to handle the work load and schedule?
Do you have the emotional strength to withstand the strain?
Are you prepared, if needed, to temporarily lower you standard of
living until your franchise is firmly established?
Is your family willing to go along with the strains they,too, must bear?
Are your prepared to invest, and possibly lose your savings?
Answering yes to any of these questions means that you have some of
the skills needed to operate a successful franchise; a negative
answer means that you may have to acquire these skills or hire personnel to supply them.
Experience
Certain skills and experience are critical to the success of a business.
Since it is unlikely that you possess all the skills and experience needed,
you'll need to hire personnel to supply those you lack. There are some
basic and special skills you will need for the particular franchise you
purchase. By answering the following questions, you can identify the
skills you possess and those you lack (i.e., your strengths and weaknesses).
Do you know what basic skills you will need to operate a successful franchise?
Do you possess those skills?
When hiring personnel, will you be able to determine if the applicants'
skills meet the requirements for the positions you are filling?
Have you ever worked in a managerial or supervisory capacity?
Have you ever worked in a business similar to the franchise you want to purchase?
Have you had any business training in school?
If you discover that you don't have the basic skills needed for your
franchise will you be willing to delay your plans until you've
acquired the necessary skills?
When you complete your self analysis, discuss your results with
your family and financial advisor. Their feedback can help you make
the right decision. If you all agree that you have most of the
skills needed to operate a successful franchise, then you should
feel comfortable preceding with you plans. If, however, they feel
you lack most of these skills, then you may need to consider
delaying your plans until you are better prepared. Above all,
be honest and objective with yourself; after all it is your future.
There are many different, more in-depth checklists on the Internet or
at the library designed to assist you in determining what you actually know about operating a business, and the skills you
will need to do so. Review them carefully before deciding whether or not to purchase a franchise or to go into business.
If you discover that you lack many of the skills needed to operate a successful franchise, you may need to take some
training courses or hire personnel to compensate for these deficiencies.
Once you are certain that your reasons for going into business and
the franchise you've selected are viable, gather the information that you will need to make an informed decision from sources,
such as:
1) a directory of franchises, e.g., the Franchise Opportunities Handbook (published by the U.S. Department of Commerce)
2) the disclosure document
3) current franchisees
4) other references, such as U.S. Small Business Administration (SBA), Federal Trade Commission (FTC), Better Business Bureau, local Chambers of Commerce
5) Small Business Administration Franchise Dep't
6)professional advisors.
Many new small business owners choose franchising over starting a new
business because it provides easy access to an established product, reduces many of the risks involved in opening a
new business, provides access to proven marketing methods and in some instances provides assistance in obtaining start-up capital
from financing sources.
Franchising can be advantageous as well as disadvantageous to both the
franchisee and franchisor. A few of the advantages and disadvantages are listed below. Study these factors carefully before
choosing the franchise option.
FRANCHISEE Advantages
- established product or service
- technical & managerial assistance
- quality control standards
- less operating capital
- opportunities for growth
- right of subfranchisees
FRANCHISEE Disadvantages
- failed expectations
- service costs
- overdependence
- restrictions on freedom of ownership
- termination of agreement
-territorial franchisee
- performance of other franchisees
FRANCHISOR Advantages
- expansion
- limited risk
- limited capital
- equity investment
- motivation
- franchisee highly motivated
- operation of non-union business
- bulk purchasing
- cooperative advertising
FRANCHISOR Disadvantages
- company-owned vsfranchised units
- problems with recruitment
- communication
- freedom
Determine if franchising is for you by listing at least five reasons
why you should choose franchising over starting a new, independent business.
List sources where you can gather information to help you make an
informed decision on choosing franchising as an alternative to starting a new business.
Determine if you have the skills needed to own and operate a successful franchise.
IDENTIFYING THE FRANCHISOR'S RESPONSIBILITIES
An important step in making an informed decision about purchasing
a franchise is to know the responsibilities the franchisor is
legally obligated to fulfill. One of the toughest decisions any
entrepreneur faces is whether or not to purchase a franchise.
And while buying a franchise means obtaining a complete system
of doing business, there is no guarantee for success.
Being aware of the franchisor's responsibilities takes some
of the guess work out of the decision making process. Learn
as much as you can about the franchise and the franchisor's
obligations before entering a purchase agreement, or even
before meeting with the franchisor or his or her representative
to discuss the possibility of purchasing a franchise.
Fourteen states have franchise disclosure or registration laws
that require the franchisor to prepare documents for submission
to state authorities. The FTC requires in all states that a
lengthy disclosure document, as well as financial statements
be given to franchisees before purchasing the franchise.
In addition to state filing fees, printing and accounting
and legal expenses, the franchisor must develop internal
controls and policies to ensure ongoing compliance with regulations.
Franchisors are obligated to:
Give you a copy of the Uniform Franchise Offering Circular (UFCO)
at least ten days before you sign the agreement. If you meet face
to face with the franchisor's representative and have serious
discussions concerning the purchase of the franchise, the UFCO
also must be given to you at this time.
Give you a copy of the franchise agreement, other contracts and
the franchisor's financial statements. The franchisor, however,
cannot, under federal law, make claims concerning the amount of
money you will make. The UFCO will disclose estimates of all
initial start-up costs.
Provide one week of training to you, the franchisee, and your
manager in one of the parent stores, the operational manual and
ongoing support and assistance to you and other franchisees.
Provide guidelines on audits and assignment procedures and any extra
franchisor criteria for approving an assignment (e.g., ownership
rights - franchisee rights to sell the franchise if it becomes successful).
Provide information on franchisee's initial fees and other costs (e.g.,
royalties, promotional fees).
Franchisors should:
Provide a marketing plan, promotional materials and area site
selection assistance to franchisees.
Provide adequate insurance coverage for franchises. Insurance coverage generally includes:
fire insurance
inventory insurance
burglary insurance
workmen's compensation
accident and health insurance
use and occupancy insurance
general liability insurance
automobile insurance (may be optional depending on franchise type)
Provide a trademark or service mark that is known, or will be known
through advertising in the geographic area of use.
Provide guidelines on the purchase of inventory and equipment,
requirements on restrictions on goods sold and the terms of agreement and renewal.
Most of these responsibilities are or should be included in the
UFOC document, but since there are no uniform regulations
governing the operation of franchises in any given state,
make sure the UFOC document complies with the FTC's
regulations, and the regulations of the state in which
you plan to purchase the franchise. Review the UFOC document
carefully with your attorney before signing the purchase agreement.
Identify issues you need to be aware of as a franchisee.
DETERMINING WHAT THE FRANCHISE PACKAGE CONTAINS
After gathering all the information you will need to make
an informed purchase decision, carefully examine this
information with your attorney, accountant or business
advisor ensuring that it is addressed in the franchise contract.
Think carefully about the level of independence you will maintain
as a franchisee and how comprehensive the operating controls will be.
Be very clear about the cost of purchasing the franchise and the
documents that make up the franchise package.
You can obtain information on franchising from: 1) a directory
of franchises, 2) the disclosure document, 3) current franchisees,
4) other references, such as SBA, FTC, Better Business Bureau, local
Chambers of Commerce, 5) professional advisors and 6) reference
materials on franchises from the local library.
Your franchise package should contain the
following information.
The full initial costs, and what it covers.
Licensing fees.
Land purchase or lease.
Building construction or renovation.
Equipment.
Training.
Starting inventory.
Promotional fees.
Use of operations manuals.
Continuing costs related to the franchisor.
Royalties.
Ongoing training.
Cooperative Advertising fees.
Insurance.
Interest on financing.
Requirements regarding purchasing supplies from the franchisor,
and if the prices are competitive with other suppliers.
Restrictions as they apply to competition with other franchisees.
Terms covering renewal rights and resell of the franchise.
In reviewing the franchise contract with your attorney, familiarize
yourself with the language. Be aware of terms such as hold harmless
clauses, integration clauses and choice of venue or choice of law
provisions. These terms may favor the franchisor over you if
improprieties arise during or after the settlement process.
Hold harmless clauses - may require that you release the
franchisor from specific acts or violations of state laws.
Integration clauses - may prevent you from successfully suing
for any deceptions preceding the signing of the contract.
Choice of venue or choice by law provisions - are especially
important if the franchisor has headquarters in another state.
These clauses may dictate that you settle all disputes in your
franchisor's state of residence, and settle your claim under
laws favorable to the franchisor.
Other important clauses to consider deal with severance, renewal
and transfer of the franchise.
Again, use professional help when examining the franchise contract.
And, remember some of the contract terms may be negotiable.
Find out which terms are negotiable before you sign; otherwise,
it will be too late.
UNDERSTANDING THE FRANCHISE CONTRACT
The franchise contract like the UFOC is a very important document.
The contract is probably the most important document the in
transaction process. It is a legal commitment which is binding
on both the franchisor and franchisee. In the franchise contract,
the franchisor's promises have to be presented to the franchisee
in writing and subjected to careful scrutiny. During this stage of
the buy/sell process, the franchisee must have competent legal
advice regarding the meaning and effect of the contract.
When reviewing the contract, you and your attorney will need to
determine if the it confirms what you have been told. If you find
improprieties in the contract, at this point, you may decide to withdraw
from the transaction before committing your time, energy and money to an
agreement that may not be beneficial for you. If, however, you choose to
continue with the process, you may be able to negotiate favorable terms,
but remember by signing the contract, you are legally bound by the
provisions of the agreement.
The franchise contract consist of two main parts: 1) the purchase agreement
and 2) the franchise or license agreement. For convenience, occasionally
the franchise transaction is split into two stages. When this happens,
some franchise companies have two contracts, for each stage, rather
than a single contract. While it isn't necessary to have two contracts,
it can be the better method where there is a comprehensive equipment
and initial services package.
The purchase agreement of the contract covers:
the franchise package
the price
the services to be provided.
The franchise or license agreement covers:
the rights granted to the franchisee
the obligations undertaken by the franchisor
the obligations imposed upon the franchisee
trade restrictions imposed upon the franchisee
assignment/death of franchisee
termination provisions.
A brief explanation of each agreement follows.
PURCHASE AGREEMENT
The franchise package. Consists of an equipment or inventory list. This
list must contain all the items the franchisee has been told to expect.
Some franchise companies regard this list as being confidential and
stipulate in the contract that it must be so treated.
The Price. The price and the manner of payment will be specified. This
may be cash on signature, although rare. More often a deposit is required
on signature with payment of the balance to follow on delivery of the
equipment or at other stages of the transaction.
The services to be provided. This section outlines or lists the franchisor's
responsibilities to the franchisee. Those services the franchisor is required
to provide the franchisee before he or she is ready to open for business are
called the initial services. Those services the franchisor provides
periodically are called continuous services. A more detailed explanation
of the services provided by the franchisor are included in the next
section on the license agreement.
FRANCHISE OR LICENSE AGREEMENT
The rights granted to the franchisee. The franchisee will be given
the right as it applies to particular circumstances. As a franchisee
there are certain rights that are extended to you.
Your rights include:
use of trademarks, trade names and patents of the franchisor.
use of the brand image and the design and decor of the premises
developed by the franchisor.
use of the franchisor's secret methods.
use of the franchisor's copyright materials.
use of recipes, formulae, specifications and processes and methods of
manufacture developed by the franchisor.
conducting the franchised business upon or from the agreed premises
strictly in accordance with the franchisor's methods and subject to
the franchisor's directions.
guidelines established by the franchisor regarding exclusive territorial rights.
rights to obtain suppliers from nominated suppliers at special prices.
The obligation undertaken by the franchisor. This item in the contract
tells prospective franchisees what the franchisor will do for them
both before and after start-up. That is why this item frequently refers
to specific contractual obligations detailed in the franchise agreement,
which is attached to the UFOC.
The obligations imposed upon the franchisee.
Certain obligations are required of you by the franchisor. These obligations include:
to carry on the business franchised and no other business upon the
approved and nominated premises.
to observe certain minimum operating hours.
to pay a franchise fee.
to follow the accounting system laid down by the franchisor.
not to advertise without prior approval of the advertisements
by the franchisor.
to use and display such point of sale advertising materials
as the franchisor stipulates.
to maintain the premises in good, clean sanitary condition and
to redecorate when required to do so by the franchisor.
to maintain the widest possible insurance coverage.
to permit the franchisor's staff to enter the premises to inspect
and see if the franchisor's standards are being maintained.
to purchase goods or products from the franchisor or his designated suppliers.
to train your staff in the franchisor's methods to ensure that
they are neatly and appropriately clothed.
not to assign the franchise contract without the franchisor's consent.
Trade restrictions.
The restrictions imposed upon a franchisee may prohibit him or her
from carrying on a similar business except under franchise from the
franchisor, taking staff away from other franchisees, carrying on a
similar business in close proximity to other franchised businesses
within that chain, and continuing after termination of the franchise
contract to use any of the franchisor's trade names, secrets, and so forth.
Assignment/death of the franchisee. The franchisee should ensure that in
the event of death his personal representative or dependent will be able
to keep the business going until one of them can qualify as a franchisee,
and that arrangements can be made to keep the business going until a
suitable assignee can be found at a proper price.
Termination provisions. The termination of a franchise is an event heavily
regulated by the franchise laws of 17 states. Franchise relationship laws
in many states specify the conditions under which a franchisor may
terminate or refuse to renew the franchise, imposing a standard of
"good cause," "reasonable cause," or "just cause" as defined by those
laws. Minimum advance notice usually has an opportunity to cure the
default and avoid termination; notice ranges from five days to 90 days.
Many states also specify circumstances under which the standard notice
and cure requirements need not be met.
In view of the close working relationship that must exist between the
franchisee and franchisor all provisions must be stated clearly in the
contract. In this transaction, no small print should exist. Make sure,
if possible, the franchise contract contains provisions that are
favorable for both you and the franchisor.
SMALL BUSINESS ENTREPRENEURS CHECKLIST
A. Business Planning and Management Limitations
B. Market Analysis
C. Marketing Strategy
D. Financial Controls
E. Personnel Function
F. Operation, Organization and Special Areas
A. Business Planning and Management Limitations
1. Do you know your own personal management assets and liabilities?
yes partially no
2. Do you have a written small business plan covering 1 to 5 years?
yes partially no
3. Can you concretely define what product or service franchise you are in?
yes partially no
4. Can you describe in writing what business franchise you are in?
yes partially no
B. Market Analysis
5. Do you know
in detail what factual market conditions and government requirements impact on your franchise?
yes partially no
6. Do you know your specific geographic and demographic market areas?
yes partially no
7. Do you know your market area business and franchise competitor
by name, organization, size and gross sales?
yes partially no
8. Can you describe in writing the strengths and weaknesses of
competitors in your defined market areas?
yes partially no
C. Marketing Strategy
9. Can you identify in a written business plan what advantages
your franchise's products or services have over specific competitors?
yes partially no
10. Based on the guidelines from the franchisor, can you
describe in writing how your products and services are distributed or sold?
yes partially no
11. Based on the guidelines from the franchisor, do you know
what sources of supplies and costs are required to operate your franchise?
yes partially no
D. Financial Controls
12. Can you detail the specific monthly cash and credit requirements of your franchise?
yes partially no
13. Do you maintain a file of and stay aware of the advantages
of small business computer planning, accounting, financial management and marketing controls?
yes partially no
14. Do you use Standard Financial Industry Ratios as a guide
to measure your franchise's annual performance?
yes partially no
15. Do you maintain written costs of sales, breakeven analyses,
profit and loss statements and appropriate accounting journals?
yes partially no
E. Personnel Function
16. Do you know how much personnel money your franchise spends
on human resource development as compared to competitors?
yes partially no
17. Do you know exactly what employee benefits cost your
franchise? Do you know the impact when compared with industry standards?
yes partially no
18. Based on guidelines from the franchisor, do you have a
detailed personnel plan for the management staff, clerical
and specific labor (i.e., part-time, union) required to operate your franchise?
yes partially no
F. Operation, Organization, and Special Areas
19. Based on guidelines from the franchisor, do you have a detailed building
or facility plan which documents the space required to operate the business?
yes partially no
20. Do you know why your business is a franchise and the legal limitations
or advantages of this business form?
yes partially no
21. Do you use specialized consultants on a pre-planned basis for accounting,
legal, tax, insurance, employee benefits and other critical business operational areas?
yes partially no
Franchise Terminology
Get a handle on the terms before you invest in any opportunity.By Jeff Elgin, January 14, 2002
Related Articles:
Buying an Existing Franchise, Part 2
Secrets to Avoiding Employee Hassles in Your Franchise
What a Franchisor Wants
How To Guides:
How to Research and Buy a Franchise
Also see these topics:
First Steps to Franchise Ownership
Evaluating a Franchise Expert Archive
Franchise Agreement & UFOC
Q: I'm looking to buy a franchise, but I'm not sure what
some of the terms mean. What's a UFOC? How is a master
agreement different from an ADA? What are all these
waiting periods for? Why do the feds restrict franchise
companies from answering my questions about profit? Please advise.
A: Just like most industries, the franchising business has
developed some communication shortcuts that can be confusing
if you don't know what they mean. Some of the more common ones are listed below.
The FTC. This stands for the Federal Trade Commission, the
federal agency that sets many of the rules of conduct for
franchise companies during the process of recruiting new franchisees.
UFOC. This document, the Uniform Franchise Offering Circular,
contains information that the franchisor must disclose to you
before you buy a franchise. The FTC regulates the subject matter
and format of this document to try to make the information as
useful and comparable as possible.
Franchise agreement. This is the contract that governs the
relationship between you and the franchisor concerning the
conduct of your business. The franchisor typically provides
a brand, an operating system and support services to you and,
in exchange, you pay the franchisor both initial and ongoing
fees. The ongoing fees you pay a franchisor are often referred
to as "royalty fees."
Next Step...
Need a simple breakdown of the ins and outs of franchising?
Try Franchising for Dummies by Michael Seid and Dave Thomas.
Sub-franchisor and master license agreements. Some franchisors
contract with entities to accept some or all of the franchisor's
responsibilities for setting up and providing ongoing service
to other franchisees. An entity that accepts this responsibility
from the franchisor is usually referred to as either a sub-franchisor
or a master licensee. These entities are typically paid a
percentage of both the initial and ongoing fees in exchange for performing these duties.
Area development agreements (ADAs) or multiple unit packages. These are
development agreements that a franchisor executes for a multiunit
development by a single franchisee. They typically cover a specified
geographical territory and have a development schedule requiring a
certain number of units be opened by the franchisee within specified time periods.
Mandated waiting periods. A franchisor is required to provide a prospective
franchisee with a UFOC document at least 10 working days before they can
legally sell them a franchise. (You will always be asked to sign a receipt
stating the date you received the UFOC for just this reason.) A franchisor
is required to provide a prospective franchisee with a final form franchise
agreement document at least five working days before they can legally sell
them a franchise. This is to ensure that you have sufficient time to
review these documents before making up your mind about the franchise.
Earnings claims. The FTC defines an earnings claim by a franchisor to be
any specific information about sales, expenses, profits, income, cash flows,
etc. In a nutshell, the franchisor is forbidden from making any earnings claims
to you unless it is in writing in the UFOC. If the franchisor does make an
earnings claim in this manner, they are also allowed, under some circumstances,
to make supplemental earnings claims as well to clarify or provide additional
specific data to you. This rule was put in place in an attempt to protect consumers.
This gives you some general terms that you will hear all the time when you start
investigating franchises. Always feel free to ask questions whenever you hear
a term that isn't clear to you. Good quality franchisors will not have any
problem answering your questions in detail and making sure that you fully
understand what is going on with the franchise before you decide whether to buy it.
Jeff Elgin has almost 20 years of experience in franchising, both as a franchisee
and senior franchise company executive. He is currently the CEO of FranChoice Inc.,
a company that provides free consulting to consumers looking for a franchise that
best matches their needs. He can be reached at jelgin@FranChoice.com.
The Franchise Alternative © 2001 Elena Fawkner
ANY new business involves risk. The proportion of new
businesses that fail within their first two years of
operation is much higher than those that succeed. Whether
you can afford the risk of your business failing depends
on your own individual circumstances. If you are continuing
in full-time paid employment and your business is something
you start in your spare time for a little extra cash to see
how it goes before quitting your job, then you are more
likely to be able to afford the risk of that business
ultimately not succeeding.
But what if you've lost your job, taken a package, and are
looking for a business in which to invest the proceeds of your
package? All of a sudden the risk of your new business failing
looms very large indeed.
One way of reducing that risk is to consider buying a
franchised business.
WHAT IS A FRANCHISE?
Simply put, franchising involves the owner of the business
which is being franchised ("the franchisor") granting to the
person who wants to offer the products and services of the
franchisor ("the franchisee") rights to use its trademarks,
business names, associated intellectual property, know-how,
business systems, training systems and operating manuals in
exchange for monetary payment in the form of an initial
franchise fee/purchase price and/or ongoing royalty payments
which are typically calculated as a percentage of the
franchisee's turnover.
ADVANTAGES OF A FRANCHISE
- Proven system
The franchisor has already done the work of establishing a
system for the business being offered for franchise. This
system provides you, the franchisee, with a roadmap to
follow, hopefully to success. The franchisor has already
tested and refined all aspects of the business and has
created a "business success formula" for the franchisee to
follow. This means that you are spared the trial and error
of working out what works and what doesn't and are therefore
freed to focus on "working the system", hopefully generating
profits within a short period of time.
- Avoid many start-up problems
Starting a business from the ground up requires a lot of
time and effort just getting the basics in place. These
include major undertakings such as developing a reputation
in the market place, obtaining finance to fund the new
venture and overcoming competitive threats, as well as the
more mundane such as what business licenses to obtain and
what insurance cover to purchase. The franchisor will have
already done a lot of this work. For example, the
franchisor will already have developed a reputation for the
business in the market place, will have identified competitive
threats and opportunities, incorporating ways of meeting them
within the franchise system and will usually have already
established relationships with service providers such as
financiers.
- Existing name and reputation
As stated above, you do not need to invest significant time
and effort into getting your business known in the
marketplace as the franchisor will already have done this
for the benefit of the group as a whole.
- Support when needed
You are not on your own when things go wrong. Got a
business problem? Contact your franchisor for assistance.
The franchisor will have employed many different specialists
within its organization who are there just to assist
franchisees successfully operate their businesses. In my
14 years of experience in franchising, the most successful
franchisees were those who were not afraid to ask for help
when needed. The most unsuccessful were those who thought
they knew it all or, for whatever reason, refused to ask for
help when they needed it.
- Group buying power
Depending on the size of the franchise network, the group
should benefit from being able to negotiate favorable buying
prices because of their ability to generate volume sales for
the supplier.
- Group advertising
By contributing advertising fees into a group fund,
individual franchisees are able to benefit from much greater
advertising exposure than they could afford if each
franchisee had to market their business on an individual
basis.
- Greater knowledge base
The franchisor is likely to have invested in market
research for the benefit of the group as a whole. This
means the group has a much greater knowledge of their
market(s) than does the local "independent" competitor.
The results of this market research can be put to good use
in the group's advertising and marketing programs.
DISADVANTAGES OF A FRANCHISE
- Restrictions on autonomy
Because you're buying the rights to participate in a proven
"system", the franchisor will be concerned that all
franchisees adhere to the system and not operate outside it.
After all, if franchisees are free to adhere to the system or
not as they see fit, there is no point in buying into a
franchise at all. For this reason, for the benefit of the
system as a whole, franchisors will generally impose strict
controls on things such as the quality and types of products
and services that you may offer for sale, the types of local
advertising you may undertake, methods of dealing with
customers, ethical conduct and the like.
Although I've categorized this factor as a "negative", it can
equally be viewed as a positive. As a franchisee, you want
to know that your franchisor is not going to allow its franchisees
to damage the reputation of the system in which you've invested
your hard-earned dollars.
- Pay initial franchise fee and purchase price
There may be an initial investment ranging from a few hundred
to tens of thousands of dollars to buy into a franchise.
- Pay ongoing royalties
In addition to the initial franchise fee and purchase price,
most franchisors will also charge an ongoing royalty for the
rights to use the franchised system. These royalties are
usually calculated as a percentage of turnover but various
other fee structures exist.
- Restrictions on ability to sell business
Some franchise agreements can restrict quite severely your
rights to sell your business to another franchisee. They may
impose strict criteria for proposed purchasers and you may
find it difficult to find buyers who meet this criteria.
- May not be able to realize value for business on
termination
Some franchise agreements state that upon the expiration or
termination of the franchise agreement, the goodwill of the
business reverts to the franchisor. This means you may have
operated and developed a business over many years and yet,
when the franchise agreement expires, you effectively walk
away from the business with no further financial compensation.
Under this type of arrangement you must understand going in
that you are expected to derive your financial return during
the term of the franchise agreement by way of annual profits,
not by way of a capital gain at the end of the franchise term.
WHAT TO LOOK FOR IN A FRANCHISE
- An established franchise system with a good reputation.
- Comprehensive training systems for both your own
management team and other employees.
- A relatively harmonious relationship between franchisor
and franchisees. Some friction from time to time is
inevitable in any long-term business relationship but a
constant atmosphere of hostility, mistrust and long-running
disputes can be a warning sign of an unstable system.
On the other hand, if you're looking at a franchise system of any
significant size, a completely harmonious relationship between
franchisor and franchisee can be a signal that the management
of the franchisor is weak. Although a weak management team
on the franchisor side may translate into short-term personal
benefits for franchisees, in the long-term it undermines the
stability and foundation of the franchise system itself and,
ultimately, the value of your investment.
- Ethical business practices both by franchisor and
existing franchisees.
- An inclusive "partnership" approach on the part of both
franchisor and franchisees. This does not mean that the
franchisor should not impose controls on the system but you
should look for a spirit of goodwill and cooperation,
willingness to listen to others' ideas and a climate of open
communication at all levels throughout the organization.
- Exclusive territories - although not crucial, exclusivity
of territory (where the franchisor grants you a limited but
exclusive territory which is yours alone) can in some cases
be a relevant factor to the competitiveness of the business.
It would be fair to say that it does not benefit the franchise
system if franchisees are forced to compete with each other
for limited business.
These are just a few of the major factors you should take
into consideration when deciding whether a franchise is
for you. Although franchising minimizes the risks of
business failure, it cannot not eliminate them entirely and
any decision to proceed with a franchised business should
only be made after a thorough reading of the franchise
agreement and accompanying disclosure documentation and
obtaining the professional advice of both your lawyer and your
accountant.
Elena Fawkner is editor of A Home-Based Business Online ...
practical home business ideas for the work-from-home
entrepreneur.
http://www.ahbbo.com
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