Chapter 14: Investigating

Franchising Reading Between the Lines and

Listening
Learning
Objectives:
1.

2.

3.

4.

5.

6.

7.

Understand franchisings impact on

the economy, employment, and
our daily lives
Explore franchising as an
alternative doorway into business
ownership
Gain an overview of how the
franchise system works
Evaluate the pros and cons of
being a franchisee
Review what the franchisor and
franchisee receives
Develop techniques for examining
franchises and performing due
diligence
Understand the purchasing process

8.

9.

10.

11.

12.

13.

Learn how to evaluate the franchise

disclosure document
Understand risk reward factors in
buying into a ground floor opportunity
or an established franchise for sale
Review and recognize why franchising
may be the right doorway for some and
absolutely the wrong doorway for
others
Recognize the advantages of owning
multiple locations and explore the
opportunities to enter the franchise
market with smaller locations
Realize why the true entrepreneur is
always the franchisor.
Explore multilevel marketing

Franchisings Reach

Franchising is big and includes many industries

More than 3,000 franchisors in the US

Over 300 lines of businesses and 750,000 franchisees
Over 200 new firms offered franchises during the past
year
Almost $800 billion of economic output in 2012
Half of franchise employment is in restaurants

Proceed with caution

Less than 20% of franchisers last 20 years

25% of 200 new franchise systems established each
year fail
Ask yourself if it the right fit for you

Franchising Information & Courses

Start your research with the SBAs Consumer

Guide to Buying a Franchise
IFAs Franchising Basics Course:

How franchising works and questions to ask

Laws and regulations & Pros and cons
Companies & types of businesses available
Additional resources & information

AAFD Roadmap to Selecting a Franchise

Contact your local SBA/SCORE for formal
workshops

Action Step 57:

Explore Franchising on the Web

Take an online franchising quiz at FranchiseHELP

Jump start your search with other sources

Check out articles on what interests you

What are your results? Do you agree or disagree?

Which franchises are hot?

Which ones are growing the fastest?
Where are the happy and profitable franchises?
Do not get lost keep a list of goods ideas

Find a few franchises you are interested in and

explore additional resources

What did you learn? What surprised you?

Exploring the Third Doorway

Determine if you are franchisee material

You are buying a business and a lifestyle
Review your financial goals
Do not invest more than 25 50% of your net worth
Franchising Basics:

Start with answers to frequently asked questions

Acquire some of the specialized vocabulary
Check out the FTCs website for unbiased information
Franchising is a very litigious business
Attend a franchise exposition

Global Village: A Franchise Overseas?

Action Step 58:

Franchise Information Packet

Request info from franchisors that fit your needs

Some packets are available online
Some franchisors prequalify potential buyers
before sending packets
Study your desired franchise and their main
competitors
Summarize what you have learned

Focus on the need for the product & its uniqueness

What are the advantages of the franchise format?
Beware of fads look forward 5 to 10 years

Start to formulate questions

Action Step 59:

Visit a Franchise Exposition

Look online for expos in your area

Go to the expo and talk with exhibitors
Learn what you can from sales presentations
Attend free workshops
Collect literature and select franchises worth a
second look
Usually small and new franchisors exhibit at
shows
Salespeople work on commission do not be
persuaded; you are not yet ready to buy

Beware of Scams as You

Begin Your Search

1.

The Rented Rolls-Royce Syndrome

The Hustle
The Cash-Only Transaction
The Boast
The Big-Money Claim
The Couch Potatos Dream
Location, Location, Location
The Disclosure Dance
The Registration Ruse
The Thinly Capitalized Franchisor

What the Franchisee May Receive

Brand-name recognition & Brand-loyal customers

Support, Training, Money, Planning & Bargains
Psychological handholding & field visits
Assistance in site selection & layout and design
Standardized & pretested products
Promotional materials, Operations manuals & Software
Area or master franchises & Territory protection
Assistance of a store-opening specialist
Sales and marketing assistance & Advertising

Royalty fees

Average fees are 3-6% of gross sales

Advertising & Promotion fees

Ranges from $3,000 to well over $1.5 million

Usually covers 5-10 and up to 20 years

Payable even if you are not profitable

2-5% of gross sales

May profit on items sold to franchisees

May make additional income from training materials, computer systems & fees for training classes

What the Franchisor Receives

Initial nonrefundable franchise fee

Royalty fees

Average fees are 3-6% of gross sales

Advertising & Promotion fees

Ranges from $3,000 to well over $1.5 million

Usually covers 5-10 and up to 20 years

Payable even if you are not profitable

2-5% of gross sales

May profit on items sold to franchisees

May make additional income from training
materials, computer systems & fees for training
classes

Additional Franchise Issues &

Concerns

Intense competition & oversaturated markets that cause

encroachment
Multilevel distributorships & pyramid sales schemes
Best opportunities are seldom offered to outsiders
Termination clauses may be ambiguous
May be many disgruntled or unprofitable franchisees
Litigation should be looked at closely
Brokers have the franchisors best interest in the
forefront
Legal recourse against the franchisor may be difficult
Royalties are based on gross sales, not net profits
franchisor imposed specials can be financially
challenging

Additional Franchise Issues and

Concerns

Franchisor may discourage association among

franchisees
Non-compete clauses may be part of your contract
In most states franchisees must go to the government
if the franchisor violates FTC rules
Beware of ground floor opportunities it is risky to
be an early franchisee
Many services and product to not transfer easily to
other parts of the country
Voluntary chains may be more desirable as there are
no royalty or franchise fees
Management and owners should be thoroughly
investigated

Action Step 60:

Investigate Franchisors and
Franchisees
Franchisors interview at least
three:

What is included in the franchise

fee? Terms of the agreement?
Top performers vs. lower
performers? Failing franchisees?
Long-term goals and plans?
Social media? Training &
services?
Royalty fees & assessments?
Terminated franchisees?
Territories?
Turnover rate? Major changes?
Advertising & Promotion?
Skills needs? Opportunities to
own multiple franchises?

Franchisees as many as possible

and a variety of types:
What do you wish you had known
before you purchased? Major
problems?
Happy with support & training?
Helpfulness of franchisor?
What would you change if you could?
Territory issues? Strongest
competitors?
Employees? Turnover?
How many hours a week do you work
first year and now?
What does it take to be successful?
Start-up costs? Time to profitability?
Is income what you anticipated?
Would you do it again?

Process Involved in Purchasing

a Franchise

Complete your Due Diligence

Try to read between the lines
Ask questions
Work with the franchisor to find the
best spot
Get the advice of your accountant,
attorney, other franchisees & banker
Negotiate to complete the sale

Action Step 61:

Summarize Your Insights & Research

What do you like about franchising?

What do you dislike about franchising?
What additional information do you need?
Which franchise if for you? Why?
Can you make the money you desire from one
franchise? If not, could multiple locations provide
it?
What will you like most & least about owning this
franchise?
Can you raise the funds you need?
Will you like running the business? Are you still in
love with the idea of being your own boss?

Action Step 61:

Summarize Your Insights & Research

Where do you see this franchisor in five years?

Where do you see yourself and this franchise
in five years?
Will you be able to easily sell this business?
Which franchise if for you? Why?
Will you be able to hire a manager if desired?
Can you grow in this business?
How responsive has the franchisor been to
changes in the marketplace?
Are you creating wealth or just replacing your job?
What questions still remain?

Buying An Existing Franchise or

Buying into a New One

Existing Franchise

Likely a new agreement approval may be required

Expect a transfer & possible training fees
Upgrades may be required find out in advance
Shorter time to full operations and no opening expenses
Positive cash flow could come much sooner
Existing employees may be a positive or a negative

Buying into a New Franchise

Consider a system less than two years old very carefully

Return on investment may be longer
Training and support may not be effective or in place

The Other Side of Franchising:

Reasons for Not Purchasing
1.
2.
3.
4.
5.
6.

7.

8.

I know the business as well as they do

My name is as well known as theirs
Why pay a franchise fee?
Why pay a royalty fee and advertising fee?
My individuality would be stifled
I dont want others to tell how to run my
business
I dont want a ground-floor opportunity were
Id be the guinea pig
It felt like I would have been committed for
the rest of my life

The Other Side of Franchising:

Reasons for Not Purchasing
9.
10.

11.

12.

13.

14.

There were restrictions on selling out

If I didnt do as I was told, I would lose my
franchise
The specified hours of business did not
suit my location or desires
The franchisors promotions and products
did not fit my customers needs or tastes
I dont want a ground-floor opportunity
were Id be the guinea pig
I would not be in control of my business

Can You Franchise Your Idea

and Become the Franchisor?

The odds do not favor success

Fewer than 1% of franchise ideas get off the
ground
Ask yourself these questions:

Can someone learn to operate your business in

three months or less?
How profitable are you? To attract high-quality
franchisees need to generate $500,000 in annual
revenues and at least 15% income to owner

Not all ideas are transferable to other locations

Former Marine and Army Reservist Change Path

Home Instead Senior Care

Franchising Trends and

Final Franchising Thoughts

The best opportunity may be a young

franchise that has proven its concept
Does the franchisor change & update the
product to meet the changing marketplace?
Explore the possibility of an area franchise
Consider multiple franchises under one roof
Major legal changes may be forthcoming
Another alternative may be network
marketing

Network Marketers: Pros or Cons?

Several successful companies exist but Internet

growth has led to an increase in pyramid
schemes
Low entry cost encourages scam artists:

Make sure there is a solid product or service

Confirm that commissions are supported by sales
Dont pay more than $500 in initial buy-in costs
Beware of high earnings claims
Dont participate unless the company is willing to
buy back inventory
Find out if the marketer has a DSA number & how
long the company has been in business
Do your due diligence

Think Points for Success

Avoid ground-floor opportunities.

Talk to franchisees, especially those who have left the system.

Franchisees may receive a finders fee and not be totally honest.

You are purchasing a job, and you have to do it their way, not yours.

The franchisor always gets a percentage of gross sales.

Consider if you really need the security blanket of a franchise.

Read the proposed agreements carefully. They are air-tight, favor

the franchisor, and are usually nonnegotiable.

Can you be comfortable relinquishing your independence?

If you like to break rules, be creative, and stretch things to the limit,
do not buy a franchise you will very likely end up in court.