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:
* Marketing
* Training
* Control System
* Operating System
* Accounting System
* 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:
* Building Plans
* Equipment & Signage
* Marketing System
* Business Plan
* Operating System
* Training Personnel
* Accounting System
* Control Systems
– Franchisee provides:
* Fees
* Compliance
* Reporting
HOW TO DETERMINE IF A FRANCHISE IS RIGHT FOR YOU
Follow a Franchise Analysis Checklist
– About The Franchise
- Has your attorney approved the franchise contract?
- What legal grey areas have been identified?
- Will you have exclusive territory?
- Does the franchiser work with any other franchise handling similar products and services?
- What are the Franchise Contract termination penalties?
- If you sell your franchise, will you be compensated for goodwill?
– The Franchiser
- What is the franchiser’s number one focus?
- How have franchisees in the past run into trouble? Difficulties?
- What skills franchisees need most?
- How are conflicts resolved?
- Request the bios of Top Management. Do they have entrepreneurial backgrounds?
- Do the franchiser’s earnings claims differ from their Franchiser Disclosure (FDD)?
- Has the Franchiser executed detailed due diligence on your qualifications?
- How many years has the Franchiser been operating?
- Does the franchiser have a reputation among the franchisees, competitors and business world for honesty, integrity, accountability and fair dealing?
- Has the franchiser shown you certified and audited financials on franchisees in your region and area which you can validate?
- Does the franchiser provide Executive Management and Personnel Training Programs?
- Does the franchiser provide any Capital or Credit?
- What merchandising Programs and Training does the franchise offer?
- Will the franchiser assist with site location?
- Does the franchiser have adequate financing to implement its Franchisee Plan?
- Does the Franchiser have a highly trained and experienced management team?
- What can the Franchiser bring to the table which you can’t adeptly do yourself?
- Has the franchiser complied with State Laws in the past? What State Laws are in place regarding Franchise Sales?
– The Franchisee
- How much Equity Capital will you need to:
- Purchase the Franchise?
- Operate until Break-Even?
-Where will you get the Equity Capital?
- Are you prepared to give up some independence for the advantages offered by the Franchiser?
- Do you believe you have the qualifications to succeed as a franchisee? What other Personnel resources can you provide?
- Are you prepared to spend a majority of your business life with this franchiser?
– The Market
- Does an adequate market exist in your area?
- Will the market support the price level of the franchiser’s products and services?
- What are the population demographic trends for your territory over the next 5 years?
- What will be the demand for your product and service in 5 years?
- What is the non-franchise and related franchise competition in your territory and region?
EXAMINE FRANCHISE OPPORTUNITIES CLOSELY
- Determine which franchises are growing fastest.
- Research market growth possibilities.
- Consult Entrepreneur Magazine for its comprehensive Franchise 500 Listings.
- Utilize the U.S. Commerce Department’s Franchise Opportunity Handbook, which is published annually.
- Contact the International Franchise Association for assistance.
Determine What the Franchise Can Do for You
TYPICAL FRANCHISER SERVICES
- Start-up help, to include market analysis, site location, financial advice; building and equipment design and purchase.
- Successful Operational System.
- Accounting and Cost Control System.
- Monthly operating results support; performance standards; financial auditing; franchisee financial comparative analysis.
- Financial Assistance: land, building, equipment, inventory and working capital.
- Site purchase assistance.
- Standardized Construction, Design and Signage.
- Training Programs.
- National and Regional Advertising Program.
- Brand Recognition Promotion.
- Customer Services Standards and Program.
- Responsiveness to market changes.
- 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
- Contact several franchise owners listed in the FDD, as well as, not referenced by the Franchiser to solicit their experiences.
- Seek out franchisees that have been in the business over 5 years.
- Talk with experienced franchisees about what to expect during the first year of operation- the typical success or failure period for a franchise.
- 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.
- Ask franchisees what the Franchiser does to justify all the fees charged.
- Determine how well prepared franchisees were when opening the franchise. Surprises? Franchiser weaknesses?
- How effective are the Marketing, Promotion, Branding and Advertising Programs? Do they bring the right customer to franchisees?
- 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.
- Do your research and homework prior to meeting with Franchisees so you don’t waste their time and you appear serious.
- Make a good, professional impression on franchisees as they often will report their impressions to the Franchiser.
-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.
- 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.
- 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.
- Ask franchisees if the franchiser encourages the franchisee to share feedback, ideas, successes, failures and whether these experiences get incorporated in the field.
- Is the franchisee happy with their life post franchise opening? Is the business enjoyable?
- For more ways to get a franchisee to open up to you, visit Entrepreneur.com
SEEK PROFESSIONAL ADVICE
- Franchise Attorney and Accountant
- Franchising Consultant
- Business Consultant
- Finance Consultant
UNDERSTAND YOUR LEGAL AND EHTICAL RESPONSIBILITIES
- The International Franchise Association serves Franchisers in more than 50 countries and has a code of Franchisers’ Ethics and Obligations to Franchisees.
- Franchiser members pledge to comply with all laws and make complete, accurate, non-misleading disclosure statements and documents.
- Franchiser members pledge to only accept franchisees that meet prescribed qualifications.
- Understand your rights if the Franchiser attempts to buy back the franchise.
- Issues to explore:
– Captive Supplier Pricing
– Inadequate Service
– Slashing Support Services
– Fraud
– City and State Laws & Regulations regarding Franchises
