What is a 'Franchise'

A franchise is a type of license that a party (franchisee) acquires to allow them to have access to a business's
(the franchiser) proprietary knowledge, processes and trademarks in order to allow the party to sell a product or
provide a service under the business's name. In exchange for gaining the franchise, the franchisee usually pays
the franchisor initial start-up and annual licensing fees.

BREAKING DOWN 'Franchise'

Franchises are a very popular method for people to start a business, especially for those who wish to operate in
a highly competitive industry like the fast-food industry. One of the biggest advantages of purchasing a franchise
is that you have access to an established company's brand name; meaning that you do not need to spend
further resources to get your name and product out to customers.
History of the Franchise
The United States is the world leader in franchise businesses and has a storied history with the franchise business model.
The concept of the franchise dates back to the mid-19th century, the most famous example of which is Isaac Singer.
Singer, who invented the sewing machine, created franchises to successfully distribute his trademarked sewing machines
to larger areas. In the 1930s, Howard Johnson Restaurants skyrocketed in popularity, paving the way for restaurant
chains and the subsequent franchises that would define the unprecedented rise of the American fast-food industry.

To this day, franchises account for a large percentage of U.S. businesses. The 2015 top 15 business franchises include
McDonalds (MCD), Subway, Pizza Hut (YUM), Dennys (DENN), Jimmy Johns Gourmet Sandwiches and Jack in the Box
(JACK). Other popular franchises include the chain hotel industry such as Hampton by Hilton (HLT) and Days Inn (WYN),
as well as 7-Eleven Inc. and Dunkin Donuts (DNKY).

Franchise Basics & Regulations

Franchise contracts are complex and vary for each franchiser. Typically, a franchise contract agreement includes three
categories of payment that the franchisee must pay the franchiser. First, the franchisee must purchase the controlled
rights, or trademark, to the franchiser business in the form of an upfront fee; second, the franchiser often receives
payment for training, equipment, or business advisory services from the franchisee; and lastly, the franchiser receives
ongoing royalties or a percentage of the business sales.

It is important to note that a franchise contract is temporary, akin to a lease or rental of a business, and does not signify
business ownership by the franchisee. Depending on the franchise contract, franchise agreements typically last from five
to 30 years, with serious penalties or consequences if a franchisee violates or prematurely terminates the contract.

In the U.S., franchises are regulated by law at the state level. However, there is one federal regulation established in 1979
by the Federal Trade Commission (FTC). The Franchise Rule is a legal disclosure given to a prospective purchaser of a
franchise from the franchiser that outlines all the relevant information in order to fully inform the prospective purchaser of
any risks, benefits, or limits of such an investment. Such information specifically stipulates full disclosure of fees and
expenses, any litigation history, a list of suppliers or approved business vendors, even estimated financial performance
expectations, and more. This law has gone through various iterations, and has previously been known as the Uniform
Franchise Offering Circular (UFOC), before it was renamed in 2007 as the current Franchise Disclosure Document.

Pros & Cons

There are many advantages to investing in a franchise, and there are also drawbacks. Widely recognized benefits to
buying a franchise include a ready-made business operation. A franchise comes with a built-in business formula including
products, services, even employee uniforms and well-established brand recognition such as that of McDonalds.
Depending on the franchise, the franchisor company may offer support in training and financial planning, or even with
approved suppliers. Whether this is a formula for success is no guarantee.

Disadvantages include heavy start-up costs as well as ongoing royalty costs. To take the McDonalds example further, the
estimated total amount of money it costs to start a McDonalds franchise ranges from $500,000 to $1.6 million.
Franchises, by definition, have ongoing costs to the franchiser company in the form of a percentage of sales or revenue.
This percentage can range from 4 8%. Other disadvantages include lack of territory control or creativity with your own
business, as well as a notable dearth of financing options from the franchiser. Other factors that affect all businesses,
such as poor location or management, are also possibilities.
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HOW TO INVEST IN THE RIGHT FRANCHISE

What is franchising?
Franchising refers to the method of practicing and using anothers perfected business concept. In a franchise relationship, the franchisee
is granted the right to market a product or a service under a marketing plan or a system that uses the trademark, name, logo and
advertising owned by the franchisor.

What are the different types of franchising?

Product franchising, also known as trade name franchising, is that type of franchising wherein a manufacturer grants a franchisee the right
to sell its products, but with no method of doing business. Examples of this type of franchising are car dealerships and service stations.

The business format franchising, also identified as a name and process franchise, features a broader and ongoing relationship between
the franchisor and the franchisee, wherein aside from granting the right to use the name and market the products and services of the
franchisor, the franchisee is also provided a complete plan for managing and operating the business a transfer of the proven way of
doing business that has been developed by the franchisor. This plan often includes a full range of services, including site selection,
training, product supply, marketing plans and even assistance in obtaining financing. All of the franchisors operating systems, technical
expertise, marketing systems, training systems, management methods and essentially all relevant information, are transferred to the
franchisee.

With the means of distributing goods and services perfected, rapid expansion of a successful business concept occur more quickly.
Modern day franchising is primarily in the business format mode, accounting for around 90% of franchise businesses worldwide. PFA is an
association of franchisors who are into business format franchising.

What are the advantages and challenges of franchising?

Advantages
High success rate
A franchise is a business model based on proven ideas and implementation. As opposed to having to build a new business from scratch, a
franchise business comes with a reduced calculated risk.
Recognized brand and trademark
A franchise offers a product or a service that has become a household name. The powerful brand names that your franchise carry will
guarantee your success.
You are not alone
Franchisors discover and perfect operating and management efficiencies that they pass on to their franchisees. These powerful and
superior training and coaching system offered by the franchisors are designed either to help a franchisee overcome his lack of experience
in running a business, or polish an acquired business sense.
Ease in financing / Re-saleability of the franchise
Financial help for businesses with established good reputation come easy. Businesses with high success rates get nods for loans from
banks and financial institutions. Moreover, a good franchise is an appreciating asset, thus maintaining its re-saleability at all times.
Huge profit
Through the franchisors, obtaining lower-cost materials and supplies is possible. This benefit, coupled with the right marketing strategy,
brand positioning, and growth of the customer base, could only translate to increase in sales and immense profit.

Challenges

Control
As franchising involves the use of a proven business expertise, trademark, knowledge and training, the franchisee is required to follow the
system. Some franchisors impose on a certain degree of control that makes following the system difficult.
On-going costs
Aside from the franchise fee and royalty, franchisees pay a certain percentage of their franchises revenues to the franchisor each month.
Additional fees for services provided, such as advertising costs, are also charged regularly to franchisees.
Failed expectations
Conflict may arise in a franchisor-franchisee relationship due to incompetence. Franchisors can destroy its franchisees by failing to give
ample support or by squeezing them too aggressively for profits. On the other hand, franchisees who tend to be lax in adhering to
franchise agreements create dents on the established system, later on creating damage to the business or the brand.

What is a good franchise business?

Unique. A fresh or unique concept that has the potential to expand nationally, and even internationally.
Profitability. The business must be consistently profitable.
Systematized. The business operating systems should be polished and efficient. These systems and procedures should be in manual
form.
Training. The transfer of knowledge through training should be relatively easy for others.
Excellent margins. The profit margins built into the concept should be viable enough that every franchisee who adheres to the franchise
system can realize an attractive Return on Investment.

Are you franchisee material?

A good franchisee is an important part of a successful franchise chain. Evaluate your ability to be a good franchisee with these qualities:
Avid learner. Someone eager to learn will be receptive to the training and knowledge a franchisor will impart.
Effective communicator. A franchisee with good communication skills will be effective in conveying their thoughts and ideas to different
individuals in their course of work.
Ample experience. General business skills, such as marketing, sales or administrative expertise, will come in handy for a franchisee.
Financially capable. Financial capability is essential in making a franchise fruitful. The required money should be complemented with
proper financial planning to run the business till it breaks even.
Awareness of the brand. A prospective franchisees ample knowledge about the product or a service indicates whether he is really
serious in getting a franchise or not.
Open to new ideas. A good franchisee must be open to new ideas in order to make it easy for the franchisor to introduce changes in the
system that can be beneficial for both of them.
Ready to follow. A franchisee must be ready to follow the prescribed set of rules and regulations contained in the franchise agreement.
This is important in maintaining the proven business system developed by the franchisor.
Original thinkers. Though its necessary that a franchisee be a good follower, he should also be able to think for himself. However, it
must be made clear that franchisors are to be consulted first at every stage of introducing a new change in the system.

What should I consider before buying a franchise?

1. Ask yourself why you want to own a franchise.
2. Begin the search. Look for opportunities that are in harmony with you and that greatly interests you.
3. Do your own research:
Have a complete understanding of the business.
Check on the business experience and track record of the franchisor.
Check your personal resources experience in running the business; the hours and personal commitment to run the franchise; and, how
much money is to be invested.
Determine the terms and conditions of the franchise agreement.
Get information on the franchise by visiting stores and interviewing existing franchisees.
Check on necessary government and other related permits.
3. Concept Look into the product or service and discern what makes it stand out among other businesses.
4. Location, location, location Ask about the territory rights. Make sure that you get a good site selection.

The Franchise Agreement

The Franchise Agreement (FA) is the legal document which details the rights and obligations of the franchisor and the franchisee, including
the length of term, the start and end periods of the agreement, the renewal provisions and the end of the contract.

What is included in the Franchise Agreement?

Terms of Agreement - The FA carries a contract explanation detailing the type of relationship a franchisee is entering into with the
franchisor. Since a franchise relationship is temporary in nature, the FA should specify how long the agreement will last. At the end of that
appointed period, the franchise is considered null and void.

Renewal - Renewal period grants the franchisor the chance to review the FA thus enabling him to decide whether to renew the agreement
or not. The franchisees good performance is the most common of all criteria. However, a renewal does not guarantee the retention of
the original terms and conditions of the agreement. If applicable, a renewal fee is also charged by the franchisor.

Investment Amount and Fees - This part of the FA explains the total investment cost and its inclusions, as well as the date a franchisor is to
be paid. Included in these are:
Franchise fees - The initial franchise fee, which may be non-refundable, is paid at the start of a franchise relationship thus giving the
franchisee the right to engage in the business using the franchisors name and business system.
Royalties - Royalties are usually a percentage of the franchisees sales and are typically paid weekly, biweekly or monthly.
Marketing contribution - System-wide marketing contributions are also based on the percentage of franchisees sales.

Training and Support The FA should state the kind of training and support the franchisor will provide.

Purchase of Products - Products and supplies used in the franchise system should maintain consistency. Hence the FA specifies that the
franchisee may only buy from suppliers accredited by the franchisor. A detailed list of approved suppliers is also provided in the
Operations Manual.

Territory- The Territory determines the geographical boundaries a franchisee may operate, or within which no other unit of the
franchisors businesses may compete.

Termination - The FA carries in it the grounds for termination of the contract. In some cases, violations of such conditions may still be
remedied, however if repeated over time or failure to act on them will still lead to termination of the contract.

Agencies to go to for help in Franchise Business:

1. Philippine Franchise Association (PFA)

Unit 701 OMM-Citra Building
San Miguel Avenue, Ortigas Center, Pasig City
Tel. Nos.: 687-0365 to 67; 798-2543; 579-4841
Mobile: 0917-8320732 ; 0999-8833732 ; 0932-8792732
Fax No.: 687-0635
E-mail: pfa@pfa.org.ph
URL: www.pfa.org.ph

2. Bureau of Trade Regulation and Consumer Protection (BTRCP)

2/F Trade and Industry Building
361 Sen. Gil Puyat Avenue, Makati City
Tel. Nos.: 751-0384 loc. 2221-2229
Fax No.: 890-4949
E-mail: btrcp@dti.gov.ph

3. Securities and Exchange Commission (SEC)

SEC Building, EDSA, Greenhills, Mandaluyong City
Tel. Nos.: 726-0931 to 39
Fax No.: 725-5293

Advantages and Challenges of Franchising

THE ADVANTAGES

Advantage #1 - The Experience of the Franchisor

When an individual buys a franchise, he purchases the years of experience and the proven methods of the franchise system, also known
as the franchisor. One franchisee expressed it this way: What I have learned from the franchisor was worth ten times what I paid for the
franchise. In any new business, much time and money are spent in trial and error. A proven franchise may eliminate many of the start-up
problems. This reason permits one to open a franchise business with little or no previous experience in a given industry.

Advantage #2 Training
A franchise system will provide training for the new franchisee. This is usually done at the home office and at the franchisees place of
business. This training should prepare the new owner in all facets of the business.

Advantage #3 Buying and Advertising

Most small-business people cannot afford inventory products in bulk or extensive advertising. The franchisee buys this advantage when
he or she purchases the right to use the franchise systems purchasing power and advertising. Most system provide advertising. Most
systems provide advertising help and direction. Furthermore, as the number of franchisees increases, so does public awareness of the
franchise. This can be tremendous advertising advantage. Also, franchisees that are located near one another can advertise together thus
reducing cost.

Advantage #4 Ongoing Advise, Research and Development

Franchisees needs assistance throughout the term of their business endeavors. The franchise systems staff of experts can give this
needed help in all aspects of the business. The franchisor is also in a position to provide on-going research and development. Thus, new
products and services will be brought to the attention of the franchisee.

Advantage #5 Business Synergy

The word synergy refers to the idea that the sum of the whole is greater than the separate parts. This principle can be applied to
franchising. Those who buy a franchise become a part of a family where all members work together for the good of the whole. Indeed,
there can be support and assistance in a franchise organization that assists everyone in becoming successful. Often, some of the most
effective ideas come from franchisees who in turn share their ideas with the corporate office and with other franchisees.

THE CHALLENGES

Challenge #1 Working Within the System

People who have difficulty following directions or who dislike working within a system may find franchising extremely frustrating.
Conformity to the franchise system is critical if consistency among franchises is to be maintained. However, there are as such as marketing
where a franchisee can be creative.

Challenge #2 The Risk

While it is true that purchasing a franchise has less risk than starting an independent business, there still are risks. Because you own the
business, you, to a great extent, determine the success of your venture. The franchisor may have a great program and a respected name,
but in the final analysis much of the risk is in your hands.

Challenge #3 Working With the Franchise System

Buying a franchise can be closely compared to entering into a marriage. Both are legally binding relationships that can last for a long time.
Your relationship with the franchisee system and its staff will extremely important. Get to know the franchise system through the
following methods.

A. Visit the corporate headquarters. Seek to get a feel for the staff and how smoothly the operations runs.
B. Talk to other franchisees. Ask what their relationship with the franchisor like.
C. Read as much about franchise as possible.

Challenge #4 False Expectations

Some people enter franchising expecting instant success. Perhaps the reason some expect this is the tremendous success achieved by
some franchisees. However, this success did not come without hard work and great effort. Franchising, like any other business, requires
tremendous time, initiative and industry. Obtain from the franchisor as realistic a picture as possible as to what is required in operating
that particular franchise.

Challenge #5 Managing the Business

Some individuals are more prepared to manage a business than others. They have some business experience and have learned to get
along well with people. Other individuals may find that managing a franchise is a tremendous burden. You must honestly assess your
preparation to run a business. If you find that you have little or no experience, you may want to seek special assistance from the
franchisor in the business management.

Tips and Traps

Franchising in the Philippines has never been bigger. Year on year, the industry grows exponentially. This is probably the reason why more
and more people are investing in franchises rather than setting up new businesses that they start from the ground up.

Statistics indicate that the success rate in franchising is 90%. Traditional businesses, on the other hand, will give you a 25% chance of
survival. While this points to the obvious that franchising is your best option in your dive into the ocean of entrepreneurship, you still here
accounts of people that fail in their endeavors.
This is the 10% that is hardly spoken about. This is the 10% that shatters dreams. This is the 10% that leads to disillusionment. Do we now
join the ranks of franchisings naysayers and avoid the industry like a plague? Or do we arm ourselves with knowledge that will lead us to
a point where we get to an informed decision with regard to franchising?
This article will be about the second option. We need to know what franchisings obstacles are and how to hurdle them. Better yet, we
will show you what they are so that you can avoid them altogether. Well point out the traps. Well give you the tips. Hopefully all of us
will be wiser because of this.

TRAP # 1 Franchising is easy.

Most people will think that getting a franchise is easy. All you have to do is pay the fees, go through training and voila!, you have an
instant business. While it is true that you get a head start in whatever business you got into because of the systems that your franchisor
already has in place, this doesnt mean that its going to be a walk in the park. Your brand needs commitment. And this means hard work
on your part.
To illustrate what I mean, take employment, for example. You go to work Monday to Friday, 9 to 5. You get to keep your weekends for
yourself. Just do your job properly and perform, youll be getting your salary every 15th and 30th of the month, guaranteed.
When you get into franchising, your concerns for your business now become 24/7 concerns. Youll have to put in longer hours. You cannot
just shut down and come back the following day. You have to give your business its due attention. You have to be hands-on. And while all
of these are happening, youre not quite sure if youll be getting anything in the form of salaries since youre just starting your business.

TIP: Do a self-assessment.
Do a self-check when considering getting a franchise. Can you work well into the night? Do you have energy for this endeavor? Are you
willing to go 24/7 for your business?
You have to answer these questions and it has to be very clear to you that you are ready and committed to running a business.

TRAP # 2 Franchising means instant success.

Nothing could be further from the truth! A lot of us will think that just because we see a lot of outlets of a particular brand, getting a
franchise and operating the outlet will get you tons of money. Sure, you see these branches serving lots of customers, churning out huge
sales and basically doing good business. You might have gone to the outlet during peak hours and ended up thinking that that was how
they performed for the whole day. On this, you have to go beyond that initial impression.
We mentioned earlier that franchising is a lot of work. What people sometimes fail to realize is that it also takes time to make a concept
work. You have to put in the hours, be hands-on and mindful of your operations.

TIP: Study the concept.

Go around and visit the stores. If at all possible, talk to existing franchisees. Visit during different times of the day to see how well they sell
at that particular time. Youll get a clearer picture of your intended business if you do it this way.
It will also get you grounded to the reality that peak hours do not last the whole day. Thats fine, all business operate that way. But it
would be to your advantage if you are clear on this from the very beginning.

TRAP # 3 I can operate my franchise anywhere.

We see restaurant outlets all over the city. We even see them in the provinces. The same thing goes for other retail and service concepts.
But what might have gotten you interested in franchising are the small carts or kiosks. Lets discuss this a bit more as this a great example
why some concepts cannot just be opened anywhere and everywhere.
As an example, lets say you got interested in a cart concept that serves cold mixed drinks. This was a couple of months back at the start of
summer season. The franchisor was able to expand very fast due to the high demand for their products. Stores were opening left and
right.
Having seen this, you applied for a franchise thinking that you would do good business in front of your house. You wont be paying rent for
the space and you wouldnt have to hire anyone since your siblings can operate the store while they are on summer break. But you failed
to do any feasibility analysis. Youll be saving a lot on operating expenses for sure, but do you have enough people in your area who will
buy your product? Are you in a high traffic densely populated area?

TIP: Do a market study.

Check your demographics. Check if there are enough possible customers in the area. Know the busiest times of the day. Verify if your
target customers can afford your products. Get these done and youll have a better feel for your brand.

TRAP # 4 I have to sign up right away.

Ive seen a few franchisors get creative with their franchise sales. They offer huge discounts on franchise fees if you sign up with them
right away. On your end, it may seem harmless. Youll get a huge amount in savings and will get a business right away.
Theres nothing wrong with that per se but in this situation, you might be getting the short end of the stick. Why? By signing right away,
you might have not gotten the chance to review the business properly. You may get to sign the franchise agreement without having gone
through all of the provisions. What could these result in?
A bad investment, for starters. A discount upfront does not necessarily mean you got a good deal. You may have saved on the franchise
fee but since you didnt get to review the business, you failed to notice that youre products have very short expiry periods. Or that your
rent is too high. You might end up owning a business with very high costs with very slim margins.
In addition to this, by signing up right away, you may have inadvertently agreed to some provisions in the franchise agreement that you
are totally opposed to. Not having the time to review the document may be a source of conflict in the future.

TIP: Take your time and review, review, review.

Dont be in a rush to get a franchise. Dont base it solely on the promise of good discounts. Do your numbers. Read the franchise
agreement. Consult a lawyer if you have to. The point Im making here is that you should be cautious while you are searching for the best
franchise for you. In the end, youll end up happy knowing that you made the right decision.
These are just some realities people go through in their search for their dream franchise. There may be more but the points discussed
above, I believe, are the most important and relevant issues that everyone should tackle in their franchise search.
I encourage everyone to shop around for your desired franchise. Dont rush. Do your research and review all materials and documents. Go
through this exercise and youll be on your way to getting the best franchise for you.
Federal Trade Commissions Consumer Guide to Buying A Franchise

Many people dream of being an entrepreneur. By purchasing a franchise, you can sell goods and services that have instant recognition
and can obtain training and ongoing support to help you succeed. But be cautious. Like any investment, purchasing a franchise does not
guarantee success.

To help evaluate whether owning a franchise is right for you, the following information will help you understand your obligations as a
franchise owner, how to shop for franchise opportunities, and how to ask for the right questions before you invest.

The Benefits And Responsibilities of Franchise Ownership

A franchise typically enables you, the investor or franchisee to operate business. By paying a franchise fee, which may cost several
thousand dollars, you are given a format or system developed by the company (franchisor), the right to use the franchisors name for a
limited time, and assistance. For example, the franchisor may help you find a location for your outlet; provide initial training and an
operating manual; and advise you on management, marketing and personnel. Some franchisors offer ongoing support such as monthly
newsletters, a toll free 800 telephone number for technical assistance, and periodic workshops or seminars.

While buying a franchise may reduce your investment risk by enabling you to associate with an established company, it can be costly. You
also may be required to relinquish significant control over your business, while taking on contractual obligations with the franchisor.
Below is an outline of several components of a typical franchise system. Consider each carefully.

1. THE COST
In exchange for obtaining the right use the franchisors name and its assistance, you may pay some or all of the following fees.

Initial Franchise Fee and Other Expenses

Your initial franchise fee, which may be non-refundable, may cost several thousand to several hundred thousand dollars. You may also
incur significant costs to rent, build, and equip an outlet and to purchase initial inventory. Other costs include operating licenses and
insurance. You also may required to pay a grand opening fee to the franchisor to promote your new outlet.

Continuing Royalty Payments

You may have to pay the franchisor royalties based on the percentage of your weekly or monthly gross income. You often must pay
royalties even if your outlet has not earned significant income during that time. In addition, royalties usually are paid for the right to use
the franchisors name. So even if the franchisor fails to provide promised support services, you still may have to pay royalties for the
duration of your franchise agreement.

Advertising Fees
You may have to pay into the advertising fund. Some portion of the advertising fees may go for national advertising or to attract new
franchise owners, but not to target your particular outlet.

II. CONTROLS
To ensure uniformity, franchisors typically control how franchisees conduct business. These controls may significantly restrict your ability
to exercise your business judgment. The following are typical examples of such controls.

Site Approval
Many franchisors pre-approve sites for outlets. This may increase the likelihood that your outlet will attract customers. The franchisor,
however, may not approve the site you want.

Design or Appearance Standards

Franchisors may impose design or appearance standards to ensure customers receive the same quality of goods or services in each outlet.
Some franchisors require periodic renovations or seasonal design changes. Complying with these standards may increase yours costs.

Restrictions on Goods and Services Offered for Sale

Franchisors may restrict the goods and services offered for sale. For example, as a restaurant franchise owner, you may not be able to add
to your menu popular items or delete items that are unpopular. Similarly, as an automobile transmission repair franchise owner, you
might not be able to perform other types of automotive work, such as brake or electrical system repairs.

Restrictions on Method of Operations

Franchisors may require you to operate in a particular manner, during certain hours, use only pre-approved signs, employee uniforms,
and advertisements, or abide by certain accounting or bookkeeping procedures. These restrictions may impede you from operating your
outlets as you deem best. The franchisor also may require you to purchase supplies only from an approved supplier, even if you can buy
similar goods elsewhere at a lower cost.
Restrictions of Sales Area
Franchisors may limit your business to a specific territory. While these territorial restrictions may ensure that other franchisees will not
compete with you for the same customers, they could impede your ability to open additional outlets or move to a profitable location.

III. TERMINATION AND RENEWAL

You can lose the right to your franchise if you breach the franchise contract. In addition, the franchise contract is for a limited time; there
is no guarantee that you will be able to renew it.

Franchise Terminations
A franchisor can end your agreement if, for example, you fail to pay the royalties or abide by performance standards and sales
restrictions. If your franchise is terminated, you may lose your investment.

Renewals
Franchise agreements typically run for 15 to 20 years. After that time, the franchisor may decline to renew your contract. Also be aware
that renewals need not provide the original terms and conditions. The franchisor may raise the royalty payments, or impose new design
standards and sales restrictions. Your previous territory may be reduced, possibly resulting in more competition from company-owned
outlets or other franchisees.

IV. BEFORE SELECTING A FRANCHISE SYSTEM

Before investing in a particular franchise system, carefully consider how much money you have to invest, your abilities and goals. The
following checklist may help you make your decision:
Your Investment
How much money do you have to invest?
How much money can you afford to lose?
Will you purchase the franchise by yourself or with partners?
Will you need financing and, if so, where can you obtain it?
DO you have a favorable credit rating?
DO you have savings or additional income to live on while starting your franchise?
Your Abilities
Does the franchise require technical experience or relevant education, such as auto repair, home and office decorating, or tax
preparation?
 What skills do you have? Do you have computer, bookkeeping,or other technical skills?
What specialized knowledge or talents can you bring to a business?
Have you ever owned or managed a business?
Your Goals
What are your goals?
Do you require a specific level of annual income?
Are you interested in pursuing a particular field?
Are you interested in retail sales or performing a service?
How many hours are you willing to work?
Do you want to operate the business yourself or hire a manager?
Will franchise ownership be your primary source of income or supplement your current income?
Would you be happy operating the business for the next 20 years
Would you like to own several outlets or only one?
Selecting a Franchise
Like any other investment, purchasing a franchise is a risk. When selecting a franchise, carefully consider a number of factors, such as the
demand for the products or services, likely competition, the franchisors background, and the level of support you will receive.

Demand
Is there a demand for the franchisors products or services in your community? Is the demand seasonal? For example, lawn and garden
care or swimming pool maintenance may be profitable only the spring or summer. Is there likely to be a continuing demand for the
products or services in the future? Is the demand likely to be temporary, such as selling a fad food item? Does the product or service
generate repeat business?

Competition
What is the level of competition, nationally and in your community? How many franchised and company-owned outlets does the
franchisor have in your area? How many competing companies sell the same or similar products or services? Are these competing
companies well establishes, with wide name recognition in your community? Do they offer the same goods and services at the same or
lower prices?

Your Ability To Operate A Business

Sometimes, franchise systems fail. Will you be able to operate your outlet even of the franchisor goes out of business? Will you need a
franchisors ongoing training, advertising, or other assistance to succeed? Will you have access to the same or other suppliers? Could you
conduct the business alone if you must lay off personnel to cut costs?

Name Recognition
A primary reason for purchasing a franchise is the right to associate with the companys name. The more recognized the name, the more
likely it will draw customers to know its products or services. Therefore, before purchasing a franchise, consider:
The companys name and how widely recognized it is;
If it has a registered trademark;
How long the franchisor has been in operation;
If the company has a reputation for a quality products or service; and
If consumers have filed complaints against the franchise with the Better Business Bureau or a local consumer protection agency.

Training and Support

Another reason for purchasing a franchise is to obtain support from the franchisor. What training and ongoing support does the franchisor
provide? How does their training compare with the training for typical workers in the industry? Could you compete with others who have
more formal training? What backgrounds do the current franchise owners have? Do they have prior technical backgrounds or special
training that helps them succeed? Do you have a similar background?

Franchisors Experience
Many franchisors operate well-established companies with years of experience both in selling goods or services and in managing a
franchise system. Some franchisors started by operating their own business. There is no guarantee, however, that a successful
entrepreneur can successfully manage a franchise system. Carefully consider how long the franchisor has managed a franchise system. Do
you feel comfortable with the franchisors expertise? If franchisors have little experience in managing a chain of franchises, their promises
of guidance, training and other support may be unreliable.
Growth
A growing franchise system increases the franchisors name recognition and may enable you to attract customers. Growth alone does not
ensure successful franchisees; a company that grows too quickly may not be able to support its franchisees with all the promised support
activities. Make sure the franchisor has sufficient financial assets and staff to support the franchisees.

Shopping At A Franchise Exposition

Attending a franchise exposition allows you to view and compare a variety of franchise possibilities. Keep in mind that exhibitors at the
exposition primarily want to sell their franchise systems. Be cautious of salespersons who are interested in selling a franchise that you are
not interested in. Before you attend, research what type of franchise best suits your investment limitations, experience, and goals. When
you attend, comparison shop for the opportunity that best suits your needs and ask questions.

Know How Much You can Invest

An exhibitor may tell you how much you can afford to invest or that you cant afford to pass up this opportunity. Before beginning to
explore investment options, consider the amount you feel comfortable investing and the maximum amount you can afford.

Know What Type of Business Is Right For You

An exhibitor may attempt to convince you that an opportunity is perfect for you. Only you can make the determination. Consider the
industry that interests you before selecting a specific franchise system. Ask yourself the following questions: Have you considered working
in that industry before? Can you see yourself engaged in that line of work for the next twenty years? Do you have the necessary
background or skills? If the industry does not appeal to you or you are not suited to work in that industry, do not allow an exhibitor to
convince you otherwise. Spend your time focusing on those industries that offer a more realistic opportunity.

Comparison Shop
Visit several franchise exhibitors engaged in the type of industry that appeals to you. Listen to the exhibitors presentations and
discussions with other interested consumers. Get answers to the following questions: How long has the franchisor been in business? How
many franchised outlets currently exist? Where are they located? How much is the initial franchise fee and any additional start-up costs?
Are there any continuing royalty payments? How much? What management, technical and ongoing assistance does the franchisor offer?
What controls does the franchisor impose?
Exhibitors may offer you prizes, free samples or free dinners if you attend a promotional meeting later that day over the next week to
discuss the franchise in greater detail. Do not feel compelled t o attend. Rather, consider these meetings as one way to acquire more
information and to ask additional questions. Be prepared to walk away from any promotion if the franchise does not suit your needs.

Get Substantiation For Any Earnings Representations

Some franchisors may tell you how much you earn if you invest in their franchise system or how current franchisees in their system are
performing. Be careful. The FTC requires that franchisors who make such claims provide you with written substantiation. Make sure you
ask for and obtain written substantiation for any income projections, or income or profit claims. If the franchisor does not have the
required substantiation, or refuses to provide it to you, consider its claims to be suspect.
Take Notes
It may be difficult to remember each franchise exhibit. Bring a pad and a pen to take notes. Get promotional literature that you can
review. Take the exhibitors business cards so you can contact them later with any additional questions.

Avoid High Pressure Sales Tactics

You may be told that the franchisors offering is limited, that there is only one territory left, or that this is a one-time reduced franchise
sales price. Do not feel pressured to make any commitment. Legitimate franchisors expect you to comparison shop and to investigate
their offering. A good deal today should be available tomorrow.

Study The Franchisors Offering

Do not sign any contract or make any payment until you have the opportunity to investigate the franchisors offering thoroughly. As will
be explained further in the next section, the FTCs Franchise Rule requires the franchisor to provide you with a disclosure document
containing important information about the franchise system. Study the disclosure agreement. Take time to speak with current and
former franchisees about their experiences. Because investing in a franchise can entail a significant investment, you should have an
attorney review the disclosure document and franchise contract and have an accountant review the companys financial disclosures.

Investigating Franchise Offerings

Before investing in any franchise system, be sure to get a copy of the franchisors disclosure document. Sometimes this document is called
a Franchise Offering Circular. Under the FTCs Franchise Rule, you must receive the document at least 10 business days before you are
asked to sign any contract or pay any money to the franchisor. You should read the entire disclosure agreement. Make sure you
understand all the provisions. The following outline will help you to understand key provisions of typical disclosure documents. It also will
help you ask questions about the disclosures. Get a clarification or answer to your concerns before you invest.

Business Background
The disclosure document identifies the executives of the franchise system and describes their prior experience. Consider not only their
general business background, but their experience in managing a franchise system. Also consider how long they have been with the
company. Investing with an inexperienced franchisor may be riskier than investing with an experienced one.

Litigation History
The disclosure document helps you assess the background of the franchisor and its executives by requiring the disclosure of prior
litigation. The disclosure documents tells you if the franchisor, or any of its executive officers, has been convicted of felonies involving, for
example, fraud, any violation of franchise law or unfair or deceptive practices law, or are subject to any state or federal injunctions
involving similar misconduct. It also will tell you if the franchisor or any of its executives has been held liable or settled a civil action
involving the franchise relationship. A number of claims against the franchisor may indicate that it has not performed according to its
agreements, or, at the very least, that franchisees have been dissatisfied with the franchisors performance.

Note to the Editors: The FTC Consumer Guide to Buying A Franchise is included in IFAs Franchise Opportunities Guide, a directory of
hundreds of franchise companies that provides information to educate prospective franchisees. News media representatives may get a
free copy of the guide by sending a request on company letterhead or by contacting IFA Media Relations at 202-628-8000. Visit the
associations Web site at www.franchise.org to view the IFAs Franchise Opportunities Guide Online.

EDITORS RESOURCE:
News Media Contact: Laura FENWICK or TERRY HILL, 628-8000

Buying a franchise is investing in your future. Because the International Franchise Association wants tomorrows business owners to make
educated decisions about their futures, it is providing the following information from the Federal Trade Commissions (FTC) Consumer
Guide To Buying A Franchise. IFA recommends enlisting the help of an attorney, business consultant and accountant when investigating
franchise systems before investing. For this and other information about franchising, visit IFAs Web site at www.franchise.org.

Successful Franchise Management Requires Proven Profitability Strategies

Profit Mastery for Franchisors
For successful franchise management, you need to develop profitability strategies that are specific to your business. Learn how to improve
cash flow, financial control, bankability and profitability through effective training and development with Profit Mastery.

A primary goal for all business owners is to improve your business units profitability and performance. Making more profit, improving cash flow
management, developing a comprehensive understanding of financial control and financial management to achieve your objectives are all
important and necessary business activities and they all start with smart money management.

An area that Profit Mastery specializes in is working with franchisees and franchisors especially for those new to either the franchise or the
business world. The demands on franchisors are significant in addition to developing new products, providing marketing and operations
training, tools and support, and delivering all the services, manuals, templates and operating processes and procedures franchisors need to
provide financial management guidance at the business unit or individual franchise level. To do all of this effectively it is necessary to create
an organizational structure at both the franchisee and the franchisor level.

Developing field staff advisory skills needs to be a priority as they become the front-line support for the individual franchise owners. We can
help you with that staff development particularly from a financial control and management perspective but also with a focus on all elements
of the business that benefit from strong profitability strategies and overall franchise management development.

Our Profit Mastery process is proven and effective: we are experienced at assisting franchisees improve profitability and cash flow management
while supporting the franchise network overall. Our process includes training and education, benchmarking and access to peer performance
information and groups, and financial analysis and management planning tools. We deliver the information you need in a clear and consistent
format you build your knowledge in a step-by-step approach that enables you to better understand, and manage, the finances, human
resources, operations, and marketing functions of your business.

Typically, we will start the Profit Mastery journey through the delivery of an overview session (90 minutes) and a subsequent action-oriented
workshop (90 minutes) to all franchisees (often at a national or regional conference). From there we can develop direct one-on-one training
and consulting or group sessions that will build on the foundation of the overview and workshop. Our sessions are designed to inform, motivate
and engage in a supportive and knowledge-centered environment. Our presenters receive excellent feedback at all conferences that we
attend we are typically top-rated. We are focused on motivating you and building excitement and interest in the numbers topic that is so
important to all businesses.

Contact me to find out more about what Profit Mastery can do to help
your franchise management success! Tom Lewis

What is Profit Mastery?

Your companys success can be supported through Profit Masterys financial performance system it can be the differentiator that separates
your business from all the others.
Our financial management and business planning program has delivered resources and education to many businesses, franchises, banks,
associations, and universities. We offer more than a training program; we focus on your business performance and development. We provide
you with the tools and resources to continuously improve your performance. Of course, we believe in what we say so learning outcomes are
measurable and sustainable.

https://profitmastery.ca/franchise-management.htm

Analysis of efficiency and profitability of franchise services

Abstract
The present study analyses the relative efficiency of franchise services and characterises the best companies,
confirming the relationship between efficiency and profit. These companies are from the trade and other
services sector', the main group of service-providing companies in the Spanish economy. The methodology calls
for first comparing the relative efficiency of franchisers and ownership enterprises. Second, the focus turns to the
most efficient franchise services, using a super-efficiency model to rank them. The paper then goes on to cover
the analysis of the main characteristics of the best franchise enterprises, the number of own establishments in a
franchise business and the profitability of the company. This paper presents arguments as to why companies
from the trade and other services sector are included. The main conclusion is that, whilst the number of
establishments is irrelevant in achieving greater efficiency, many of the most efficient enterprises have high
returns.

http://www.tandfonline.com/doi/abs/10.1080/02642069.2014.905921

Identifying Risky Franchises

The probability of success for franchisee investors in U.S. franchise systems varies greatly by system. Drawing
from information and data available in the Uniform Franchise Offering Circular documents from 239 franchise
systems registered in Indiana and Virginia, this study constructs an investment risk index of franchise systems
using 10 risk variables. The results of the study show that only 3% of the franchised systems can be considered
high-risk investments, with another 25% identified at an elevated-risk investment level. The majority of systems
in the study are viewed as guarded or low-risk investments. Six risk factors seemed particularly critical to
determining the risk level of a franchise purchase decision.

Efficiency analysis of small franchise enterprises through a

DEA metafrontier model
Spain has over 1000 franchises with more than 65,700 establishments in a wide range of economic sectors and
a global turnover of over 19,000 million (2011). These figures confirm the importance of franchises in the
Spanish economy. Consequently, an understanding of the economic and technical efficiency of franchises can
help managers to optimise resources and take correct decisions. Traditional efficiency models require that the
units being assessed operate with the same technology. As franchises reach many different sectors (travel
agencies, catering companies, fashion firms, etc.) their relative efficiency is analysed using a non-concave
metafrontier approach, which is based on data envelopment analysis. This methodology enables a comparison
between different groups and takes into account any heterogeneity between the franchise firms of several
sectors.
Data envelopment analysis (DEA) is a nonparametric method in operations research and economics for the estimation of production
frontiers[clarification needed]. It is used to empirically measure productive efficiency of decision making units (or DMUs). Although DEA has a strong
link to production theory in economics, the tool is also used for benchmarking in operations management, where a set of measures is
selected to benchmark the performance of manufacturing and service operations. In the circumstance of benchmarking, the efficient DMUs,
as defined by DEA, may not necessarily form a production frontier, but rather lead to a best-practice frontier (Cook, Tone and Zhu,
2014). DEA is referred to as "balanced benchmarking" by Sherman and Zhu (2013). Non-parametric approaches have the benefit of not
assuming a particular functional form/shape for the frontier, however they do not provide a general relationship (equation) relating output
and input. There are also parametricapproaches which are used for the estimation of production frontiers (see Lovell & Schmidt 1988 for an
early survey). These require that the shape of the frontier be guessed beforehand by specifying a particular function relating output to input.
One can also combine the relative strengths from each of these approaches in a hybrid method (Tofallis, 2001) where the frontier units are
first identified by DEA and then a smooth surface is fitted to these. This allows a best-practice relationship between multiple outputs and
multiple inputs to be estimated.
"The framework has been adapted from multi-input, multi-output production functions and applied in many industries. DEA develops a
function whose form is determined by the most efficient producers. This method differs from the Ordinary Least Squares (OLS) statistical
technique that bases comparisons relative to an average producer. Like Stochastic Frontier Analysis (SFA), DEA identifies a "frontier"
which are characterized as an extreme point method that assumes that if a firm can produce a certain level of output utilizing specific input
levels, another firm of equal scale should be capable of doing the same. The most efficient producers can form a 'composite producer',
allowing the computation of an efficient solution for every level of input or output. Where there is no actual corresponding firm, 'virtual
producers' are identified to make comparisons" (Berg 2010).
Attempts to synthesize DEA and SFA, improving upon their drawbacks, were also made in the literature, via proposing various versions of
non-parametric SFA [1] and Stochastic DEA.[2]

History[edit]
In microeconomic production theory a firm's input and output combinations are depicted using a production function. Using such a function
one can show the maximum output which can be achieved with any possible combination of inputs, that is, one can construct a production
technology frontier (Sieford & Thrall 1990).[3] Some 30 years ago DEA (and frontier techniques in general) set out to answer the question of
how to use this principle in empirical applications while overcoming the problem that for actual firms (or other DMUs) one can never
observe all the possible input-output combinations.
Building on the ideas of Farrell (1957), the seminal work "Measuring the efficiency of decision making units"
by Charnes, Cooper & Rhodes (1978) applies linear programming to estimate an empirical production technology frontier for the first time.
In Germany, the procedure was used earlier to estimate the marginal productivity of R&D and other factors of production (Brockhoff 1970).
Since then, there have been a large number of books and journal articles written on DEA or applying DEA on various sets of problems.
Other than comparing efficiency across DMUs within an organization, DEA has also been used to compare efficiency across firms. There
are several types of DEA with the most basic being CCR based on Charnes, Cooper & Rhodes, however there are also DEA which address
varying returns to scale, either CRS (constant returns to scale) or VRS (variable). The main developments of DEA in the 1970s and 1980s
are documented by Seiford & Thrall (1990).

Techniques[edit]
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Data envelopment analysis (DEA) is a linear programming methodology to measure the efficiency of multiple decision-making units (DMUs)
when the production process presents a structure of multiple inputs and outputs.[4]
"DEA has been used for both production and cost data. Utilizing the selected variables, such as unit cost and output, DEA software
searches for the points with the lowest unit cost for any given output, connecting those points to form the efficiency frontier. Any company
not on the frontier is considered inefficient. A numerical coefficient is given to each firm, defining its relative efficiency. Different variables
that could be used to establish the efficiency frontier are: number of employees, service quality, environmental safety, and fuel
consumption. An early survey of studies of electricity distribution companies identified more than thirty DEA analysesindicating
widespread application of this technique to that network industry. (Jamasb, T. J., Pollitt, M. G. 2001). A number of studies using this
technique have been published for water utilities. The main advantage to this method is its ability to accommodate a multiplicity of inputs
and outputs. It is also useful because it takes into consideration returns to scale in calculating efficiency, allowing for the concept of
increasing or decreasing efficiency based on size and output levels. A drawback of this technique is that model specification and
inclusion/exclusion of variables can affect the results." (Berg 2010)
Under general DEA benchmarking, for example, "if one benchmarks the performance of computers, it is natural to consider different
features (screen size and resolution, memory size, process speed, hard disk size, and others). One would then have to classify these
features into inputs and outputs in order to apply a proper DEA analysis. However, these features may not actually represent inputs and
outputs at all, in the standard notion of production. In fact, if one examines the benchmarking literature, other terms, such as indicators,
outcomes, and metrics, are used. The issue now becomes one of how to classify these performance measures into inputs and outputs,
for use in DEA." (Cook, Tone, and Zhu, 2014)
Some of the advantages of DEA are:

no need to explicitly specify a mathematical form for the production function

proven to be useful in uncovering relationships that remain hidden for other methodologies
capable of handling multiple inputs and outputs
capable of being used with any input-output measurement
the sources of inefficiency can be analysed and quantified for every evaluated unit
Some of the disadvantages of DEA are:

results are sensitive to the selection of inputs and outputs (Berg 2010).
you cannot test for the best specification (Berg 2010).
the number of efficient firms on the frontier tends to increase with the number of inputs and output variables (Berg 2010).
A desire to Improve upon DEA, by reducing its disadvantages or strengthening its advantages has been a major cause for many
discoveries in the recent literature. The currently most often DEA-based method to obtain unique efficiency rankings is called cross-
efficiency. Originally developed by Sexton et al. in 1986[5], it found widespread application ever since Doyle and Green's 1994 publication[6].
Cross-efficiency is based on the original DEA results, but implents a secondary objective where each DMU peer-appraises all other DMU's
with its own factor weights. The average of these peer-appraisal scores is then used to calculate a DMU's cross-efficiency score. This
approach avoids DEA's disadvantages of having multiple efficient DMUs and potentially non-unique weights[7]. Another approach to remedy
some of DEA's drawbacks is Stochastic DEA, which makes a synthesises of DEA and SFA.[2]

Sample Applications[edit]
DEA is commonly applied in the electric utilities sector. For instance a government authority can choose Data Envelopment Analysis as
their measuring tool to design an individualized regulatory rate for each firm based on their comparative efficiency. The input components
would include man-hours, losses, capital (lines and transformers only), and goods and services. The output variables would include number
of customers, energy delivered, length of lines, and degree of coastal exposure. (Berg 2010)
DEA is also regularly used to assess the efficiency of public and not-for-profit organizations, e.g. hospitals (Kuntz, Scholtes & Vera 2007;
Kuntz & Vera 2007; Vera & Kuntz 2007) or police forces (Thanassoulis 1995; Sun 2002; Aristovnik et al. 2013, 2014).

Examples[edit]
In the DEA methodology, formally developed by Charnes, Cooper and Rhodes (1978), efficiency is defined as a ratio of weighted sum of
outputs to a weighted sum of inputs, where the weights structure is calculated by means of mathematical programming and constant
returns to scale (CRS) are assumed. In 1984, Banker, Charnes and Cooper developed a model with variable returns to scale (VRS).
Assume that we have the following data:

Unit 1 produces 100 items per day, and the inputs per item are 10 dollars for materials and 2 labour-hours
Unit 2 produces 80 items per day, and the inputs are 8 dollars for materials and 4 labour-hours
Unit 3 produces 120 items per day, and the inputs are 12 dollars for materials and 1.5 labour-hours
To calculate the efficiency of unit 1, we define the objective function as

maximize efficiency = (u1 * 100) / (v1 * 10 + v2 * 2)

which is subject to all efficiency of other units (efficiency cannot be larger than 1):

subject to the efficiency of unit 1: (u1 * 100) / (v1 * 10 + v2 * 2) 1

subject to the efficiency of unit 2: (u1 * 80) / (v1 * 8 + v2 * 4) 1
subject to the efficiency of unit 3: (u1 * 120) / (v1 * 12 + v2 * 1.5) 1
and non-negativity:

all u and v 0.
But since linear programming cannot handle fraction, we need to transform the formulation, such that we limit the denominator of the
objective function and only allow the linear programming to maximize the numerator.
So the new formulation would be:

maximize Efficiency = u1 * 100

subject to the efficiency of unit 1: (u1 * 100) - (v1 * 10 + v2 * 2) 0
subject to the efficiency of unit 2: (u1 * 80) - (v1 * 8 + v2 * 4) 0
subject to the efficiency of unit 3: (u1 * 120) - (v1 * 12 + v2 * 1.5) 0
subject to v1 * 10 + v2 * 2 = 1
all u and v 0.

Inefficiency measuring[edit]
Data Envelopment Analysis (DEA) has been recognized as a valuable analytical research instrument and a practical decision support tool.
DEA has been credited for not requiring a complete specification for the functional form of the production frontier nor the distribution of
inefficient deviations from the frontier. Rather, DEA requires general production and distribution assumptions only. However, if those
assumptions are too weak, inefficiency levels may be systematically underestimated in small samples. In addition, erroneous assumptions
may cause inconsistency with a bias over the frontier. Therefore, the ability to alter, test and select production assumptions is essential in
conducting DEA-based research. However, the DEA models currently available offer a limited variety of alternative production assumptions
only.