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Questions to ask yourself
What is your net worth?
How much do you wish to invest?
Do you require a specific level of annual income?
In what environment do you see yourself – retail, mobile or office?Are you interested in pursuing a particular field?
Do you want a part-time or fulltime opportunity
How many hours are you willing to work? When do you want to work – hours, days of the week?
Do you want to have employees?
Do you want to have inventory?
Do you prefer a cash business as opposed to one that must carry accounts receivable?
Will franchise ownership be your primary source of income or will it supplement your current income?
Would you like to own several outlets or only one?
Have you considered master franchising?
Questions to ask a Franchisor Questions to ask Franchisees Is Franchising right for you? What do I typically get when I become a Franchisee?
Steps to becoming a Franchisee Advantages to buying a Franchise Franchise Disclosure Document Explained
What assistance does the franchisor provide? Do they assist with training, store design, construction, site selection?
Do they have access to demographic data to get an understanding of the audience within the market area?
What types of support will the franchisor provide once your franchise has opened its doors?
After the initial investment, will there be additional financial obligations requiring working capital?
Does the franchisor offer any form of financing?
Ask the franchisor how many franchises have been sold in the state you will be operating in during the last 12 months, and how many have been opened for business?
What types of territorial restrictions and protections have been set up by the franchisor?
Is the franchisor planning on expanding within your state? Are they focusing on any specific locations?
What arrangements are established through the franchisor in terms of product supply?
Ask to see a current price sheet.
Ask if the franchisor has been forced to terminate any of its franchisees and if so, can they detail the reasons for this decision. Have any franchisees failed or gone bankrupt?
Are there any current lawsuits pending or past judgments against the franchisor?
What steps are taken to settle disputes between the franchisor and franchisees?
How long have you owned your franchise?
Is your franchise profitable?
In which month did you reach your breakeven point?
Have you made approximately the same profit that was forecast in the disclosure document?
Were your opening costs consistent with the original projections in the disclosure document?
Are you satisfied with the franchisor's support?
Are you satisfied with the product or service?
Is the operations manual, clear, up-to-date and adequate?
Are you satisfied with the marketing and promotional assistance provided by the franchisor?
Was the initial training and ongoing support sufficient for you to operate your business?
What was your background prior to buying your franchise?
Are deliveries of goods provided by the franchisor timely and competitively priced?
Is the franchisor fair and friendly to work with?
Does the franchisor listen and help you with your concerns?
Have any franchisees had disputes with the franchisor? What was their nature? Were they resolved fairly?
Do you know of any disputes between the franchisor and the government?
Do you know of any disputes with competitors?
Who are the major competitors?
What is the company's biggest competitive advantage?
What is the company's biggest competitive disadvantage?
Can you follow somebody else’s rules, even when you think you have a better way?
Do you think you can change the franchisor’s system after you are on board?
Do you think that your local market is different from all others in the system and that the franchisor is willing modify the system just to suit your needs?
Can you trust that your franchisor is working for the benefit of the entire system – even when his or her decisions do not necessarily go your way?
Are you willing to share financial information and provide required reports each month?
Are you prepared to accept coaching and advice on business practices from your franchisor’s field staff?
A Proven Business Model
A Product or a Service to Offer
High Quality Customer Service System
A Method of Doing Business
Accounting and Finance Systems
Forecasting Methods
Strategic Planning
Analysis of Market Trends
Marketing, Advertising and Promotion
Sales Techniques
Product Research & Development
Quality Control Methods
Training in Operations, Sales and Administration
Customer Relationship Building Tools
Pricing Strategies
Real Estate Assistance
Human Resource Methods
Construction and Design Assistance
Equipment Specifications
Legal Support
Analyze Your Personal Needs
Analyze Your Business Goals
Determine Type of Business For You
Research Applicable Franchisees
Obtain Franchise Packet
Submit Request for Consideration Forms, Financials, and Resume
Obtain and Review FDD
Speak in-depth with Franchise
Interview Existing Franchisees
Second Interview with Franchise
Visit Franchise Headquarters
Consult with Your Attorney & Accountant
Enter Into A Franchise Agreement
Obtain Real Estate
Initial Training
Complete Construction
In Store Training
Open For Business
On-Going Support
The business model has already been proven successful.
The franchisor utilizes collective buying power and passes on the discounts to you.
Local and national advertising for the franchise operation as a whole is supplied by the franchisor.
Supervision, training programs and consulting are readily available from the franchisor.
Managerial, operational and accounting systems are in place to facilitate your success.
Franchisors insist that you are adequately capitalized.
Ongoing research and development is provided by the franchisor.
Location! Location! Location!
Franchises have a vested interest in your success..
In a franchise you are in a business for yourself, not by yourself.
This document is for your protection and an important tool when evalutaing a franchise. The Federal Trade Commission is the governing body that regulates franchises in the United States. Each franchisor is required to answer 23 very specific questions in order to inform prospective buyers about the business opportunity that they offer. The following are the elements of the FDD:
1. Description of the franchisor, predecessors and affiliates
2. Identity and business experience of officers and directors
3. Litigation history
4. Bankruptcy history
5. Initial franchise fee
6. Additional costs and fees
7. Initial investment
8. Restrictions on sources of products & services
9. Franchisee’s Obligations
10. Financing arrangements for franchisees
11. Franchisor’s obligations
12. Territorial protection
13. Trademarks, service marks and trade names
14. Patents, copyrights & proprietary information
15. Franchisee requirement to operate the business
16. Restrictions on sale of goods and services
17. Renewal, termination, transfer and dispute resolution of the franchise
18. Endorsements by public figures
19. Earnings claims
20. Names, addresses, and telephone numbers of current and former franchisees
21. Financial statements
22. Contracts and agreements
23. Receipt
Exhibits or Addenda may include:
Franchise Agreement
Equipment Lease
Premise Lease
Loan Agreement
others
Common Franchise Terms
Acknowledgement Of Receipt: The last page of the FDD, signed to indicate you received the documents on a certain date.
Advertising Fee: An annual fee paid by the franchisee to the franchisor for corporate advertising expenditures; It is often less then three percent of the franchisee's annual sales and typically paid in addition to the royalty fee.
Capital Required: The amount of cash you are required to have available.
Earnings Claims: Representations made by franchise companies that their franchisees have achieved specific levels of sales or profitability.
Exclusive Territory: The "territory" granted to you by a franchise company, which restricts the franchisor from establishing any other location within your area.
Federal Trade Commission (FTC): The federal agency in Washington, DC that regulates various trade practices including the franchise industry.
Franchise Agreement: An official document that sets forth the expectations and requirements of the franchisor. It describes the franchisor's commitment to the franchisee, and includes information about territorial rights of the franchisee, location requirements, training schedule, fees, general obligations of the franchisee, and general obligations of the franchisor.
Franchisee: The owner of one or more franchises.
Franchise Fee: The initial fee you pay to a franchisor to acquire a franchise.
Franchising: Neither an industry nor a business, but a method of doing business within a given industry. At least two parties are involved in franchising: the franchisor and the franchisee.
Franchisor: The person or company that owns or controls the right to grant franchises for a specific "brand".
FTC Rule 436: The law passed in 1979 that regulates the franchise industry. It set forth "disclosure" requirements and prohibited franchisors from making undocumented earnings claims.
Initial Investment: Generally, the initial cash investment required of you to buy and open a franchise. This can include the franchise fee and other initial start-up costs and expenses you may incur, but may not be reflective of your total investment.
Liquid Capital: Also known as, liquid assets, quick assets, and realizable assets. Assets held in cash or in something that can be readily turned into cash.
Net Worth: Total assets, once you've subtracted your total liabilities.
Non-Compete Clause: Upon termination, non-renewal, or other sale or transfer, some franchise agreements prohibit you from competing in any way with the franchised company.
Offer: An oral or written proposal to sell a franchise to a prospective franchisee upon understood general terms and conditions.
Protected Territory: A designated area or geographic boundary granted to the franchisee by the terms of a franchise agreement. The franchisor promises not to open another franchised or company-owned business of a similar nature within the franchisee's protected territory.
Qualification Questionnaire: A document prepared by the franchisor to be completed by the prospective franchisee, which provides initial information to the franchisor in order to assist in determining whether or not the prospect is capable and motivated enough to own a franchise. Often a financial statement is included in the questionnaire format.
Registration: A requirement in several states that specific information be submitted and approved by state regulatory authorities before franchises may be offered in that state. It is quite extensive in the information required and may ask for: a bond, fingerprints and pictures.
Start Up Costs: The required amount of money the franchisor will request that a new franchisee have to invest in the new franchise unit in its earliest stages of development.
Total Investment: The amount of money estimated for complete set up of a franchisee's business, including the initial investment, the working capital, and any additions to inventory and equipment deemed necessary for a fully operational and profitable business.
Franchise Disclosure Document: Provides background information in over 20 categories as well as a copy of the proposed franchise agreement.
The Franchise Company Investigation Process
Preface
The first thing you need to keep in mind in your investigation is that it is a process of mutual elimination for both you and the franchisor. Therefore both of you are trying to determine if the fit seems right from the beginning. If either party comes to the realization that this is not the right match, they simply inform the other party and move on.
Step 1 - General Information Step 2 - The Franchise Disclosure Document
The franchisor will begin by providing you with overview information on the company (typically a brochure and video package). They will then ask you to provide them with additional information on you (by filling out a questionnaire) to determine if you have the general characteristics that they are looking for. Assuming that each party is still interested, based on this information exchange, you will proceed to the next step.
This document, previously referred to as the UFOC, is the F.T.C. mandated disclosure document that gives you a wealth of information about the franchisor. The form and composition of the document is standard with any franchisor and must include information on a variety of topics of interest to you. The major subject areas include:
A few franchisors also include an earnings claim in the FDD document. Though they are not required to do so, this can be a real time saver for you if it is included. Even if it is included in the FDD, it is still imperative that you discuss this subject with franchisees during your fact-finding calls and visits.
You will carefully review the FDD document and note any questions or issues that the material raises for further discussion with the franchisor. You may also choose to involve outside advisors to review material you are not familiar with.
Step 3 - Franchisee Calls and Visits Though you want to find the overwhelming majority of franchisees to be happy and supportive of the franchisor, it is important to try to find an unhappy franchisee during your investigation. When you do, not only listen to the complaints but also try to determine what makes this franchisee different from the rest. If you find you identify with the positive ones and feel the negative franchisee is not at all like you, then you should be fine. If you find that you are more like the person who is unhappy however, this is probably not the right franchise for you.
The most valuable source of information on any franchise system is the existing franchisees. You need to plan on calling or visiting a number of the existing franchisees during your investigation. It sounds almost trite, but whatever you find the prevailing attitude of the existing franchisees on any issue to be, it will almost certainly be your attitude on the issue as well if you decide to become a franchisee. Visit with a sufficient number of the existing franchisees to ensure you have a sense of the prevailing attitudes of the group.
The following list covers the principle areas you want to investigate during these calls:
It is always a good idea to bring up the subject of earnings as the last point in your franchisee visits. Most people are reluctant to discuss their income with strangers and you will find the franchisees are more willing to cover this subject after you have spent some time visiting with them. At that point they know you're not a competitor trying to get information but rather a serious prospective franchisee who will need the information to proceed. They were all in your position at some point in the past.
Step 4 - Review the System Documentation Step 5 - Meet the Franchisor
A strong franchise company will have documented their systems, operations and marketing programs in a concise and easy to use format for the reference of franchisees. Make sure that such documentation exists. The franchisor will probably not give you a copy of their actual manuals, but they can certainly provide you with the table of contents or index of every support manual they have. This will enable you to confirm that the documentation exists and will show the scope of the coverage of all their major business factors.
At some point in the process of investigation, you will want to have personal meetings with key personnel of the franchise company. This might be possible in your local market or you may need to travel to the headquarters of the franchisor. Many franchisors facilitate this need by holding what are referred to as "Discovery Days". These are structured events where you can go to a specified location and know that all of the key people from the franchisor will be available.
Be sure to get to know those people you will be working most closely with as you build your business. We would expect the President of the company to be an impressive person, but that's not who will be answering your call when you have a problem. Find out who will be providing the operational support and training directly to you and form an opinion about their competence. Make sure that any remaining questions or issues you may have are addressed at this meeting.
Step 6 - Make a Decision
If you have been diligent, the entire process outlined above will take about three to five weeks to complete. You now have all the information you need to determine if this franchise is right for you. It either is or it isn't, and you'll know which it is. In either case, it is time to make a decision. The franchisors only want the best in its ranks and only want a fully committed partner. Whether you are in or out there are no hard feelings at this point, however you do not want to waste the franchisor’s time and hang on for weeks while trying to make a decision. They will withdraw the offer after a short period of time, because cannot hold the franchise in reserve for any length of time. Discuss your thoughts with your consultant; he may have some very helpful insights that you should have the benefit of considering.
Ways to Finance Your
First Franchise Purchase
From WSJ.COM Start Up Journal
By JULIE BENNETT
"Money, money everywhere and not a cent for me," would have been the mantra for any prospective franchisee who attended the recent Restaurant Finance and Development Conference in Las Vegas, sponsored by the Restaurant Finance Monitor newsletter.
The annual event drew 1,100 people -- mostly men in suits -- to the Rio Hotel, where the nation's top lenders tossed around terms like "sale/leaseback" and "mezzanine financing" as casually as dealers threw cards in nearby casinos. Franchisers and multi-unit franchisees in the buttoned-down audience came close to cheering when a financial adviser announced that there are "droves of private-equity firms ready to invest $20 million to $400 million into expanding franchise companies." And when Andy Gunkler, vice president of franchise development for a restaurant chain called Quaker State & Lube in Sharon, Pa., announced he needed $5 million in additional capital, he was mobbed by investment bankers.
But no one was there cheering on prospective franchisees, who need far less capital to simply get started. "Once you're established, lenders jump all over you," said conference panelist Brad Gilbert, national franchise manager for Comerica Bank in Austin, Texas. "But it's as difficult as ever to get start-up financing, and the hardest money of all to raise is in the under-$100,000 range. Those loans take banks just as long to process as big ones, and there's no profit in them."
Of course, new franchises are opening every day, and that money has to come from somewhere. Since leaving Vegas (somewhat poorer), I've contacted conference speakers, pored through franchise publications and called franchise systems at random to investigate sources of start-up capital. And just like hitting triple sevens on a slot machine, it isn't easy.
Financing On Your Own
Most new franchisees raise capital by refinancing their homes or taking out home-equity loans. This is fine if the franchise you choose is so inexpensive that you can cover the franchise fee and total investment (rent, equipment, supplies, employee salaries, your own living expenses, advertising, etc.) yourself. But should you need to borrow money later, your lender will want you to put up collateral, and a fully mortgaged house doesn't qualify. Finance experts suggest you borrow only a portion of the available equity, and leave at least 25% of your home's value intact.
Downsized executives often use their severance packages or savings to get started. San Antonio residents Mike Robillard, 60, and his wife, Robin, 48, were looking for something to do after he retired from SBC Communications when an opportunity, Mr. Robillard says, "fell into my lap." Literally. He needed a haircut and found a coupon for Sport Clips, a guys-only hair salon that advertises as "no perms, colors or acrylic-nail smells." Just testosterone and big-screen TV's tuned in to sports. Mr. Robillard, who has a bachelor's degree in business and a master's in telecommunications management, loved the concept and used the funds in his Bell Systems savings plan to buy two stores from Sport Clips, which is based in Georgetown, Texas.
Retirees without separate savings can tap into their Individual Retirement Accounts or 401(k) plans without tax penalty through a vehicle called the Entrepreneur Rollover Stock Ownership Plan (ERSOP). As you can guess, the rules governing ERSOP's are really tricky, and they should not be attempted without play-by-play assistance from an accountant familiar with the workings of the Internal Revenue Service.
Financing Through a Loan
Prospective franchisees who qualify can borrow up to $2 million in start-up capital through a loan guaranteed by the U.S. Small Business Administration. In the past decade, the SBA has become franchise-savvy, so much so that 47% of the loan guarantees processed through its Chicago office in 2003 were for franchises, says Stephen Konkle, an economic-development specialist there.
To streamline the process, the SBA contracted with FRANdata, a subsidiary of National Cooperative Bank in Washington, D.C., to review franchise documents and to list eligible systems on the Franchise Registry, at saving applicants weeks of processing time. Registration costs a franchiser $2,500. So far, 286 are listed, with 12 more under review.
But, sadly, the SBA doesn't make loans, only guarantees up to 85% of a start-up business loan once it's been processed. You have to secure the funds through a bank or other lending institution, and too many lenders don't know much about franchising. Mr. Konkle says, "Every time I hold a banker-training seminar, I have to spend an hour and a half of it explaining franchise financing."
Some franchisers have done an end run around such confusion, by educating bankers about their concepts.
Ron Ericksen, vice president of market development for USA Baby in Elmhurst, Ill., for instance, invites area bankers to visit company headquarters, or, if they're not in Chicago, to tour local stores. (The strategy had an unexpected payoff when a lender in California was so impressed that he bought a franchise himself, Mr. Ericksen says.)
Once a bank has had good luck with a franchise loan, it tends to loan money to more franchisees from the same concept. Allied Houston Bank, for example, has financed 40 of the 142 Sports Clips franchises, including the two additional stores the Robillards opened this year.
Begin your financing search, Mr. Gilbert says, by talking to your potential franchiser about banking relationships and asking existing franchisees about where they obtained financing.
But if the system you choose has no strong lender ties, you'll have to "build a personal relationship with a local lender" -- a phrase heard again and again at the Finance Conference.
I didn't fully understand it until I talked to Kelly Reed, 41, of Haysville, Kan. Mr. Reed, who has a degree in computer-information systems, had been laid off from his job in February and was collecting unemployment when he discovered Computer Troubleshooters USA of Atlanta on the Internet. The Australia-based tech-support company has a franchise fee of $11,000 and total investment of less than $20,000. But, Mr. Reed says, "we didn't have any money to invest. My wife was working just to make ends meet."
When Chip Reaves, Computer Troubleshooters' national director, asked Mr. Reed if he had a relationship with a local banker, he thought of Brad Rucker, vice president of Home Bank & Trust Co. of Wichita.
"Brad had played on my brother's basketball team," he said, "and he'd approved the loan I took out a few years ago to buy a motorcycle." As a precaution, Mr. Reed's dad, a retired schoolteacher, moved some of his savings into Brad's bank.
"I asked for $50,000, so we'd have something to live on while the business got rolling," Mr. Reed says, "and Brad told me to come back with a business plan." Like many franchisers today, Computer Troubleshooters provides business-plan templates to prospective franchisees but it still took Mr. Reed and his wife, Shelli, 40, three weeks to finish theirs.
Mr. Rucker, 32, was impressed. "They covered all the basics -- why they wanted to start the business, what the competition is, and why they'll be successful. We don't make a lot of start-up business loans, and I've done only four SBA loans this year. But we have to take care of our customers." The SBA asked the Reeds to put up their house and the Harley as collateral, and Home Bank loaned them $45,000 in September. The Reeds still have $30,000 of that money left, by the way, and believe that by 2006 their franchise will be bringing in $100,000 a year, or twice as much as Mr. Reed earned before.
Friends and Family
If you have spotty credit, are dealing with a new franchise company with no earnings history, or don't own a house or even a Harley, it's unlikely a bank will loan you money, no matter how many pick-up games your brother plays with the institution's vice president. The last stop on your financing hunt is Mom, Dad, Uncle Dan and Jim, that high-school loser who make a killing in tech stocks.
Jeff Rosenfeld, founder of Kessev Finance in Minneapolis, who specializes in financing franchises, warns: "I've seen friendships and families torn apart over such transactions." To keep your relationships intact, he offers the following advice.
this article was originally published in wsj.com
