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:
* 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:
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
— City and State Laws & Regulations regarding Franchises