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Everything You Wanted to Know About Franchise Business Ownership...But Were Afraid to Ask!

Written by : John McGavin
2007-05-15
  1. What is a franchise? It is a long term license to distribute goods and services using a business system the franchisor has developed, and during the term of the agreement the franchisor has some control or provides significant assistance. (Description is based on the FTC definition.)

  2. How many franchises are there? Estimates range between 5000 and 7000, and 900 were reported to have been registered in the last 9 months.

  3. Why “registered?” Franchises are heavily regulated provincially in Canada in Alberta, PEI, and Ontario, and by federal law in the U.S. These regulations require the franchisors to register with them very specific information. The franchisor must then provide all of this registered information to any prospect with whom he meets. This comes in a book called the Disclosure Document in Canada, or the Uniform Franchise Offering Circular, (UFOC) in the U.S.

  4. What is in the Disclosure Document? There is a great deal of very specific information including: a description of the industry and the competition; the history of the franchise company; biographies of the directors, officers, and key managers; reports on lawsuits between the franchisor and franchisees, and the regulators and the franchisor; the cost of the investment; restrictions; territorial protection, the number of units open, closed, and transferred for the last three years; names, addresses, and telephone numbers of every unit; name and last known address of anyone who left the program in the last year for whatever reason; and any sales or earnings claims. ALL THIS MUST BE WRITTEN IN PLAIN LANGUAGE. There are also annually updated financial statements of the franchisor, and a sample of every document the franchisor might ask the candidate to sign. If you live in an area where this disclosure is not required, ask for it anyway. And if the franchisor cannot or will not provide it, think very seriously about this business before investing your time and savings into it. Franchising is the only type of business where this information is available, and you want to take advantage of all of the information that you can.

  5. What does a franchise cost? Investments range from under $15,000 to in the millions, and they depend on the type of franchise, or the industry that it’s in. But how much do you need? There are four categories of required capitalization: a) Initial Franchise or License Fee (what you pay to use the franchisor’s system, trademarks, products, services, etc). The cost of this will depend on the franchisor. b) The Buildout, or the cost to open your doors, includes leasehold improvements, fixtures, inventory, etc. This amount will depend on the type of franchise that you purchase. Retail, Food, and most Automotive can have a high buildout cost, while businesses in the services sectors can be much lower.

    The franchisor knows these costs, and can assist you with a firm figure to work with. c) Cash Flow, because once your doors are open, you need to keep them open. You will require on going cash to meet your financial business requirements while you build the business to breakeven and profitability. The franchisor can provide estimates of this cost, but these estimates can vary on many factors. To be safe, research the business, your location and come up with the best estimate for how you think you’ll do.

    Then add 25%. d) And the fourth are of capitalization is also Cash Flow, but not for the business. You will still need to live while you are building the business, so cash flow for ongoing expenses like mortgage, insurance, food, clothing, etc. is also required. Only you know these costs. The franchisor cannot help you with them, as only you know your lifestyle and its related costs. Again, determine your best estimate, and add 25%. The important thing isn’t how much franchises cost, but how much does the one that’s right for you cost! Once in business, you will also have a “Royalty” structure to follow. Royalties are a percent of sales, usually about 4 % to 7%, or a fixed amount. The initial investment must be detailed: how much is each item, who gets it, and what is it for?

  6. What do I get for my investment? You get a “business in a box.” The system includes the initial training and on-going support, sales training; the marketing system; purchasing power; the value of the brand name; the networking with other franchisees; and the experience of the franchisor, who has already made and fixed a lot of mistakes. But the range of quality of all these aspects is vast. There are franchises that have been in business for seventy years, and others for seventy hours!

  7. What do I give? You give your money, your hard work, your time, your passion, and some independence.

  8. What critical questions must I ask? What is the function of the business? More importantly, What is the function of the owner? What are the total investment and the royalty? Does the business build equity? How long has the franchisor been in business? How experienced is the management team? What is the opening, closing, and transfer rate? How well do the current (and former) franchisees validate the system? What does the successful franchisee do? Can I do it, or learn how to do it? Do I want to do it? If I do it, will I get what I want, that is, my business goals and my desired lifestyle?

  9. How do I learn how much I can make? You ask the franchisees! They are under no restraints, and can tell you whatever they want. If they are approached respectfully, they can be very forth coming. They also serve as a check on the franchisor. Whatever the franchisor asserts or claims, the franchisees can either affirm, deny, or validate!

  10. How can I find the right franchise business for me? I thought you’d never ask! Work with FranNet! We have been in business for 20 years. Our system is tried and true. We help you build your business model. Then, from a list of 70+ franchisees we have vetted, we suggest two or three that seem to “fit” you and your model. We have the franchisor contact you, and coach you on how to deal with the franchisor. Then we teach you how to research the franchise. We can refer you to qualified franchise attorneys and to financing sources. If you decide to invest, we receive a fee from the franchisor. Our services cost you NOTHING!
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