Steps to Franchising

Unit Four: Individual Project

Brinn Fosse
Important Steps Required in Obtaining a
Franchise

Prepared for English 320

by Brinn E. Fosse

Distributed
December 3, 2010
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TABLE OF CONTENTS

List of Figures iii

Introduction 1

Step 1: Knowing Yourself 3

Step 2: Financial Position 5

Step 3: Choosing an Industry 7

Step 4: Research 9

Step 5: Making Your Decision 11

References 12
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List of Figures

Figure 1: Top 10 Franchises for 2010 2

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Introduction

According to WebFinance, Inc. (2010), a franchise is defined as a form of business

organization in which a firm which already has a successful product or service and enters into a

continuing contractual relationship with other businesses operating under the franchisor’s trade

name and usually with the franchisor’s guidance, in exchange for a fee. Essentially, franchising

is the practice of using another firm’s already successful business model. Franchises are

particularly popular due to the ease of startup and high success rates, and work best when the

businesses have a good track record of profitability and are easily duplicated.

Franchising started back in the 1850’s with the invention of the sewing machine by Isaac

Singer. Unable to appeal to a larger audience on his own, he allowed entrepreneurs around the

country to license his product and was able to successfully expand. According to the Census

Bureau (2010), franchises accounted for about 10.5 percent of businesses with paid employees in

the 295 industries that data was collected for in 2007.

There are two main payments that a franchisee must pay in order to control a franchise.

The first payment is a royalty for the trademark, which gives an exclusive right to sell or market

under that mark within a geographic area. The second includes reimbursement for training and

advisory services given to the franchisee. These are usually paid annually, and sometimes just as

a percentage of revenue.

Primarily, franchises revolve around service firms including, but not limited to, fast food,

restaurants, hotels, car repair, etc. The following table shows the listing of the early 2010

ranking of major and most successful franchises in the United States.

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Figure 1 (Entrepreneur, 2010)

Top 10 Franchises for 2010
Rank Name Startup Costs
(& description)
1 Subway $84,300 - $258,300
(Submarine sandwiches & salads)
2 McDonald’s $1,057,200 - $1,885,000
(Hamburgers, chicken salads)
3 7-Eleven Inc. $30,800 - $604,500
(Convenience store)
4 Hampton Hotels $3,716,000 - $13,148,800
(Mid-priced hotels)
5 Supercuts $112,550 - $243,200
(Hair salon)
6 H & R Block $34,438 - $110,033
(Tax preparation & electronic filing)
7 Dunkin’ Donuts $358,200 - $1,980,300
(Coffee, doughnuts, baked goods)
8 Jani-King $13,150 - $93,150
(Commercial cleaning)
9 Serpro $127,300 - $174,700
(Insurance/disaster restoration & cleaning)
10 Ampm $1,786,929 - $7,596,688
(Convenience store & gas station)

The remainder of this report will discuss the key steps you should know when buying a

franchise to ensure success. These steps include:

 Knowing yourself and what you hope to achieve

 Determining options you have available for financing

 Deciding which industry to enter into

 Researching companies within the industry chosen

 Making your decision

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Step 1: Knowing Yourself

One of the first things you need to consider before purchasing a franchise is what you

expect to achieve, and in contrast, what you are willing to sacrifice. To do this, you must

evaluate your skills, interests, and experience to determine not only the type of business you

want to operate, but which business you will most likely be successful with. Knowledge base

will also be a large contributor to the type of business you might want to manage, and you will

need to decide whether you will choose to do so independently or join another to form a

partnership.

When determining whether to partner with another or to franchise individually, many

things need to be taken into account. You must recognize your motives and commitment, since

they are the force behind your initial decisions, these will distinguish the actions you take.

Personal attributes will help guide the direction you want your business to go as well, five of

which are considered to be most important.

The first, conscientiousness, shows self-discipline and an aim for achievement. This trait

shows a preference for planned rather than spontaneous behavior. The second, extraversion, is

characterized by positive emotions, enthusiasm, and having social exuberance. Thirdly is the

trait agreeableness. This is the action of being cooperative, considerate, and willing to

compromise interests with others. Fourth is emotional stability, determined by reactions to

difficult or threatening situations and times of stress. The final trait is openness to experience,

which distinguishes imaginative people from those who are more conventional (Brown, 2010).

After evaluating yourself, you will need to decide whether you want to be a sole

proprietor or to partner. If you decide to partner, whether if it’s with one person or multiple
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people, you should look for those who are complimentary to you in knowledge, skills and

experience. This gives the advantage to expand your horizons and accomplish things you might

not have been able to on your own. Also, you will want people who are similar to you in

motivation and personal attributes. These similarities show they have close to the same goals

that you desire, and will move in the direction you do much more simply than those who are

different.
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Step 2: Financial Position

As stated in the introduction, there are many fees associated with start up costs to own a

franchise. These generally include royalties for the trademark, sales, marketing and advertising

fees. Once the business is in operation, you will be required to pay annual sales royalties as

reimbursement for training and advisement, usually averaging around five percent of your

company sales.

Referring to Figure 1, you can see that start-up costs differentiate greatly between

different forms of businesses. The International Franchise Association (2010) has reported that

the start-up costs can range from less than $5,000 to more than $500,000. One difficulty with

this is that many analysts agree that a three to five year period of hard work and dedication is

needed before the franchise business is profitable.

With our economy today, the only way to ensure you reach that opportunity to be

profitable is to have a clear idea of how much money will be available to you. By first knowing

your budget, you will be able to narrow your decisions to the type of franchise you will

realistically be able to afford. Things to consider are your current net worth, any liquid assets

you might have, and your credit score are attributes that will help you be able to finance your

franchise (Norman, 2010). You will want to make it clear that your business is to be taken

seriously, while doing so, there will be a substantial amount of personal investment, time, and

risk involved when getting your business up and running.

One mistake many people make when buying a franchise is using investors to supplement

the costs of the business. Since it is the franchisor who wholly owns the business, any outside

investor will be dependent on you and will be subject to any inconsistent or impulsive decisions
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the franchisor makes. Many choose to finance their franchise by loans from relatives, borrowed

money from the IRA or taking additional trust deeds on homes.

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Step 3: Choose an Industry

Choosing the right industry for you is critical for future career opportunities and finances.

Finding a business that suits you can help increase personal development and have higher returns

than others. You will want to focus on industry groups at first, rather than individual companies,

and determine which accompany the standards and traits you acknowledged in step one. If it

doesn’t match with those standards and traits, do not even consider it. Eventually you will

narrow your decision down to a list of possible industries to choose from.

Once you have your list, you will want to reveal which industry is the most attractive,

giving you the greatest potential for success (Norman, 2010). Below is a list of attributes that

you will want to look for while choosing an industry.

Attractive Industries

 Profit margins that are high & continue to increase

 Rapidly growing market & increasing market share

 Few competitors & high barriers to entry (difficult for competitors to enter industry)

 Many suppliers available

 Trends that provide for opportunity in growth & advancement

 Leader in technology & innovation

 Limited risk

 High competitive advantage

 Strong reputation & brand image

 Experienced with a successful track record

 Steady growth throughout the economic cycle

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Once you have gathered information about each industry, the most promising chance for

success is to choose the one with the most attractive qualities that compliments your personal

attributes. Once chosen, it is then time to research each company within that industry that you find

most favorable, based on steps one through three, to determine your franchise.
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Step 4: Research

Knowing everything about the company you’re interested is a vital role in the success of

your franchise. You will want to gather market research, including consumer demand, location,

competitors, the terms of the business, and the operations of the business itself. By knowing

everything there is to know about the franchise, chances for success will be much higher than

someone entering into one knowing only the basics.

Market research is important because it helps gather information about the market and its

customers, and is the key factor to gain a competitive advantage. It helps identify and asses the

needs of the consumer within that market. One important section to look at within this category

is the market trends. This will help you realize which company has a growing market &

increasing shares.

Researching consumer demand will help you discover what people want, and who your

potential customers could be. Every company has a target market, a group of people they target

their product/s to and intend to sell to. This is something you will need to decide on too; for

example, lower class individuals will most likely choose not to dine at a 5-star restaurant. These

factors you need to take into consideration when defining your target market and the business

you will buy.

Consumer demand and your target market directly relates to the location of your

franchise. You will want to build your franchise in the same geographic area as your target

market. If your target is profoundly large, you will want to place it where those consumers

dominate in the market. You want it somewhere that is well known, accessible, and safe to your

targeted customers. A good example to help you understand, is that you would not place a
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children’s playground near a heavy intersection, for fear of danger a child could be harmed. This

is the same concept you will want to use when choosing your location.

Most importantly, you need to research the company itself. This will help to be sure it’s

the kind of company you want to be in business with. Get the opinions of other franchise owners

on doing business with the company and learn any tips they might have to offer. By taking the

time to do this, you could prevent an obstacle that they have already encountered. Checking with

the Better Business Bureau to see if there are any customer complaints or negative reviews will

also give you an idea about the business. (Norman, 2010)

Once you have gathered outside research from the business, you will want to understand

all the terms of the franchise agreement. What they extent of the royalties are, the limitations the

company puts on its franchises, and if there are any specific requirements are a few good things

to look into. Once you sign the agreement, you are legally obligated to all the stipulations of the

contract. The duration of the agreement will be clearly stated, along with when it expires and if

the contract is renewable, all decisions made by the franchisor (Franchise Direct, 2010).
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Step 5: Making Your Decision

Once you have completed steps one through four, you should be ready to make your

decision based off those criteria. Once decided, you will need to complete and submit the legal

paperwork and wait for approval. As you prepare, you will want to assemble your team who will

be directly involved with the franchise. Once this is complete and after you’re approved, you

will officially be considered a business owner.

After gaining rights to the company, you will want to spread the word before it goes into

operation. Get on the internet and tell friends and family to help spread the word, this will help

generate excitement for the grand opening. The more anticipation there is, the higher your

chances of success will be opening day.

After reading and taking into consideration each of these steps to owning a franchise, I

hope you are able to get a better grasp on the subject. Each step plays a vital role in the

preparation of gaining access to a franchise, and excluding any steps would surely lead to

obstacles and difficulties. Knowing only the basics is no longer enough to becoming a

successful business owner. They must know the background of the company, the market, its

customers, and the economy in which it operates. These will be the elements that will help

ensure success.
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References

Better Business Bureau. (2010). Start With Trust. Retrieved from http://www.bbb.org/us/

Brown, P. (2010). NDSU Professor.

Entrepreneur. (2010). Top 10 Franchises for 2010. 2010 Franchise 500. Retrieved from

http://www.entrepreneur.com/franchise500/index.html

Entrepreneur. (2010). Franchise Zone. Retrieved from

http://www.entrepreneur.com/franchises/index.html

Franchise Direct. (2010). Completing and Signing a Franchise Agreement. Retrieved from

http://www.franchisedirect.com/information/guidetobuyingafranchise/thefranchiseagreem

ent/29/197/

International Franchise Association. (2010). Franchising. Retrieved from

http://www.franchise.org/

Norman, D. (December 6, 2010). Business Owner.

U.S. Census Bureau. (2010). Census Bureau's First Release of Comprehensive Franchise Data
Shows Franchises Make Up More Than 10 Percent of Employer Businesses. Retrieved
from http://www.census.gov/