How to Find and Analyze the Right Franchise Opportunity
A Franchise System can be a very effective way to open and operate a small business, especially for those who do not have much experience in owning and operating their own business. There are many advantages to using a Franchise System, such as turnkey operations, marketing and business planning; extensive business 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; vendor and vendor discounts; among others. However, successful franchise systems are expensive. Fees/costs consist of a franchise fee, royalty fees, and start-up costs. Therefore, it is very important to have a robust due diligence process in place to determine if a particular Franchise Opportunity is right for you and if the costs to establish and manage the franchise match the effectiveness of the Franchisor’s Package Offer.
TYPES OF FRANCHISE SYSTEMS
Franchises of products/services and brands
This is an agreement in which the franchisee is granted the right to sell a well-recognized brand. Most franchisees focus on a franchisor’s product/service line, identifying their business with the franchise. Examples include: car dealerships, gas stations, soft drink bottlers, etc. The franchisor exercises little control over the franchisee’s business, with the integrity of the product/service being the franchisor’s greatest concern.
– Structure and Responsibilities
— The franchise provides a standardized product
— Franchisee pays franchise fees and responsibilities include:
* Marketing
* Training
* Control system
* OS
* Accounting system
* Building, Equipment, Signaling
Commercial format franchises
The franchisee is granted the right to use a turnkey marketing system, with substantial assistance and guidance from the franchisor. Franchise types include restaurants, retail, hotels, business services; automotive products, parts and services; Convenience stores; Entertainment centers, etc.
– Structure and Responsibilities
— The franchise provides:
* Construction plans
* Equipment and Signage
* Marketing System
* Business plan
* OS
* Personal training
* Accounting system
* Control systems
— The franchisee provides:
* Fees
* Compliance
* Reports
HOW TO DETERMINE IF A FRANCHISE IS RIGHT FOR YOU
Follow a Franchise Analysis Checklist
— About the franchise
– Has your lawyer approved the franchise agreement?
– What legal gray areas have been identified?
– Will it have exclusive territory?
– Does the franchisor work with any other franchise that handles similar products and services?
– What are the penalties for termination of the Franchise Agreement?
– If you sell your franchise, will you be compensated for the goodwill?
— The franchisor
– What is the number one focus of the franchisor?
– How have franchises had problems in the past? Difficulties?
– What franchise skills do you need the most?
– How are conflicts resolved?
– Request the biographies of Senior Management. Do they have a business background?
– Do the franchisor’s earnings claims differ from their Franchisor Disclosure (FDD)?
– Has the franchisor performed detailed due diligence on your qualifications?
– How many years has the Franchisor been operating?
– Does the franchisor have a reputation among franchisees, competitors, and the business world for honesty, integrity, responsibility, and fair dealing?
– Has the franchisor shown you the certified and audited financials of the franchisees in your region and area that you can validate?
– Does the franchisor offer Training Programs for Personnel and Executive Management?
– Does the franchisor contribute any Capital or Credit?
– What merchandising and training programs does the franchise offer?
– Will the franchisor help with the location of the site?
– Does the franchisor have adequate financing to implement its Franchisee Plan?
– Does the Franchisor have a highly trained and experienced management team?
– What can the Franchisor bring to the table that you cannot skillfully do yourself?
– Has the franchisor complied with state laws in the past? What state laws exist regarding franchise sales?
— The franchisee
– How much share capital will you need to:
– Buy the franchise?
– Operate until the Break-Even Point?
-Where will the Social Capital come from?
– Are you willing to give up a certain independence for the advantages offered by the Franchisor?
– Do you think you have the qualifications to be successful as a franchisee? What other staff resources can you provide?
– Are you prepared to spend most of your business life with this franchisor?
— The market
– Is there a suitable market in your area?
– Will the market support the price level of the franchisor’s products and services?
– What are the demographic trends of the population of your territory in the next 5 years?
– What will be the demand for your product and service in 5 years?
– What is the competition from non-franchised and related franchises in your territory and region?
REVIEW FRANCHISE OPPORTUNITIES CAREFULLY
– Determine which franchises are growing the fastest.
– Investigate the growth possibilities of the market.
– Check out Entrepreneur Magazine for their complete Franchise 500 listings.
– Use the US Department of Commerce Franchise Opportunity Manual, which is published annually.
– Contact the International Franchise Association for help.
Determine what the franchise can do for you
TYPICAL FRANCHISE SERVICES
– Start-up help, including market analysis, site location, financial advice; design and purchase of buildings and equipment.
– Successful Operating System.
– Accounting and Cost Control System.
– Support of monthly operating results; standard performance; financial audit; Comparative financial analysis of the franchisee.
– Financial assistance: land, buildings, equipment, inventory and working capital.
– Assistance in purchasing the website.
– Standardized Construction, Design and Signage.
– Training programs.
– National and Regional Advertising Program.
– Promotion of Brand Recognition.
– Standards and Customer Service Program.
– Ability to respond to market changes.
– Supplier discount through large volume orders.
DUE DILIGENCE DEDUCTIBLE
Browse more than one franchise and compare/contrast via a standardized checklist (see section above). Research franchises in the same line of business.
TALK TO EXISTING FRANCHISEES
– Get in touch with several franchise owners listed in the FDD, as well as, not mentioned by the Franchisor to request their experiences.
– Look for franchises that have been in business for more than 5 years.
– Talk to experienced franchisees about what to expect during the first year of operation, the typical make-or-break period for a franchise.
– Ask franchisees to share their Business Plan with you. This gives you an inside track on the planning and operating expectations for a typical franchise, along with the keys to success.
– Ask the franchisees what the Franchisor does to justify all the fees charged.
– Determine how well prepared the franchisees were at the time of opening the franchise. surprises? Franchise weaknesses?
– How effective are the Marketing, Promotion, Branding and Advertising Programs? Do they bring the right customer to the franchisees?
– Determine the real financial numbers. How much to open a franchise? How quickly did a franchise start making money? Get the real story and compare it to the franchisor’s disclosure to determine credibility.
– Do your research and do your homework before meeting with franchisees so you don’t waste their time and appear serious.
– Give a good professional impression to franchisees, as they will often report their impressions to the franchisor.
-Understand where the franchisee is coming from: that is, someone close to your territory may give you misinformation if they feel competitively threatened. However, a franchisee may exaggerate his success.
– If allowed by the FDD, consider a joint venture with an experienced franchisee. An 80/20 ratio can make a lot of sense for both new and experienced franchisees in a nearby region or area.
– Try to spend a whole day with each Franchisee. This is the only way to truly fall in love with the franchise and determine why the franchisee is successful (or, conversely, why they are fuming). Build a relationship with franchisees and you will be more apt to receive honest, thoughtful and detailed feedback.
– Ask franchisees if the franchisor encourages the franchisee to share feedback, ideas, successes, failures, and if these experiences are incorporated into the field.
– Is the franchise happy with its life after the opening of the franchise? Is the business nice?
– For more ways to get a franchisee to open up to you, visit Entrepreneur.com
SEEK PROFESSIONAL ADVICE
– Franchise Lawyer and Accountant
– Franchise consultant
– Business consultant
– Financial consulting
UNDERSTAND YOUR LEGAL AND ETHICAL RESPONSIBILITIES
– The International Franchise Association serves Franchisors in more than 50 countries and has a Code of Ethics and Obligations of Franchisors towards Franchisees.
– Franchisor members agree to comply with all laws and make full, accurate and non-misleading disclosure statements and documents.
– Franchising members agree to accept only franchisees who meet the prescribed requirements.
– Understand your rights if the franchisor tries to buy back the franchise.
– Topics to explore:
— Captive Supplier Pricing
— Inadequate service
— Cutting support services
— Fraud
— City and state laws and regulations regarding franchises