*All info for this blog was taken from: ‘So You Want In? How to Assess a Franchise Opportunity’ by the Franchise News; Volume 3, Issue 3; April 2012.

Because nearly 90 percent of all new businesses fail within the first five years, starting your own new business can be quite a scary challenge. However, investing in a franchise model means that you would have the opportunity to follow a ‘recipe’ for success tried and tested in other locations. Franchising removes a lot of the worries and pressures that other brand new businesses may face. So, for many of us, why risk losing all the hard earned money we have saved over a lifetime in a new startup business when you could make a smarter, more secure decision in franchise investment?

Not only does franchising offer the convenience of a proven business model but it also offers many other positive aspects, such as continuing to put to use skills one might have attained in a previous career and the possibility of being one’s own boss. Many baby boomers are coming out of careers where they have already learned the drive and dedication it takes to be successful within their work field. Why not then take advantage of being able to continue using these positive characteristics but in a new way? A franchise business offers the possibility to continue practicing these leadership, sales and business dynamics within a new field. And, not to forget, who wouldn’t want the chance to be their own boss in a new, exciting area? All those years of working for others may have shaped you into the positive business person you are today, but now is the time to put those aspects to work for your own personal endeavors.

Franchising offers many new and exciting possibilities for people of all walks of life. Whether you are a retiree not quite ready to just hit the golf course or someone looking for another option in the hard economy, opening your own franchise could be the next, successful business step you have been looking for.

That’s the goal of Metro State’s Franchise Ownership Program. Click on the link and check out the 5-minute video.  Then imagine this program being replicated at universities and economic development agencies across the country. As member of the board of advisors, I am excited to assist with the curriculum development as well as the franchisee selection.

Best of all, this opportunity can help great causes—veterans, minorities, economically disadvantaged, to name a few—change lives by training and financing people to own successful franchises.

Knowing you, I thought you might like to help.  This first-of-its-kind program can be an economic game-changer at a time we need it most.

Ruth

Our video will explain how it works and let me know what you think.

Securing territory. It is common when you decide to invest in a franchise model that you may be limited to a geographical region for marketing. For this reason, when deciding to purchase multiple locations, you are able to eliminate competition from other franchise owners of the same brand. While not every franchisor offers this arrangement, it is definitely worth exploring. It is also important to note that franchisor fees are also often reduced with the purchase of multiple locations.

Faster growth and reduced costs. Operating multiple locations with similar products and services also allows you to spread your costs among multiple locations. You are about to negotiate larger purchases of goods and services needed for operating your businesses often at a discounted price for buying in bulk. You are also able to share additional resources among your locations, such as employees and management. Once an employee has learned the system provided by you and the franchisor, they are able to move between locations relatively seamlessly.

More cost effective marketing programs. With multiple locations, not only are you able to capitalize on a larger marketplace, but advertising and marketing dollars can promote all locations, maximizing your advertising budget and allowing for larger media buys.

Familiarity. Once you have learned how to run one location using the franchise systems provided by the franchisor, your second and third locations are like riding a bike. Just jump on and start pedaling. You already know the pitfalls and successes of the business model so the likelihood that your additional locations will ramp up more quickly than the first location is much higher.

Before making a decision about one location or multiple locations, also factor in your time to manage the business models, support from the franchisor and your past experiences when running a business. When in doubt, choose just one location to get started. But plan for the future after you have found success to create the business empire of your dreams.

Omega surveyed 409 bankers during the first quarter of 2012 where 77% of respondents say they are likely to increase small business lending over the coming months. However, even though lending practices may become less rigid, there are some important areas to review before approaching your banker when planning to invest in a franchise:

1. Review and prepare a lender package including a personal financial statement, copies of personal tax returns for three years, and verification of the source of your down payment.
2. Keep in mind that bankers prefer a proven business model with some level of brand recognition, a track record of consistent cash flow and multiple locations, so be sure to research your chosen franchise for financial viability. Not all franchisors are required to provide financial information, so when in doubt, speak with other franchise owners to gauge potential cash flow.
3. Determine collateral you are willing to bring to the table. Many people will secure a loan using a home mortgage, but also be willing to put a down payment in place. Much like purchasing a home, 20% is considered to be a standard down payment.
4. Research government funded programs, such as SBA loans and Patriot Express, sponsored by the Department of Veterans affairs. These programs often are seen as less risky and may require less of a down payment may be approved more quickly and may offer better interest rates.
5. Check with the franchisor. Many now offer internal financing or defer a portion of the initial investment franchisee fee to help their business owners ramp up more quickly. Caution however. Some of these offers may come at a higher interest rate than what can be gained from the general lending market.

As you continue to research your options for financing your franchise investment, it is also important to work with a franchise consultant who has a solid network of bank professionals, accountants and attorneys to help you narrow down the ideal method for investing in your new business.

What’s HOT

Senior health services The baby boomers are still booming, and the demand for franchised services geared toward them is holding strong.

Convenience stores People like fast service especially when they are need a one stop does it all between appointments. Expect to see some interesting trends within this category.

Fitness Gyms Americans are becoming more health conscience every day. Fitness gyms are on the rise. When considering this area as a franchise investment, consider multiple locations to provide convenience for your customers.

Mobile franchises Think lawn care, home improvement and repairs, plumbing, pet care–mobile franchises are taking off, allowing franchisees to invest in a system and growth model, without the cost of maintaining a traditional storefront.

Business coaching Peer consulting, mentoring, advisory boards, brokerage services are all on the rise. Business owners need assistance and advice when growing their own brands. Franchises are offering up their best advice around proven models that have worked for decades.

Advertising services/direct mail With the advent of social media, these organizations are beginning to redefine themselves. Traditional marketing services are actually beginning to have legs again. Be sure to consider high tech ways to create join t efforts with both traditional methods as well as new internet methodologies.

What’s NOT

• eBay drop-off stores
• Meal-preparation services
• “Gourmet” food retail
• Framing stores
• Weight-loss centers
• Cosmetics studios/tanning salons

Issues Pertaining to the Franchise Cost Terms

• What does the initial franchise fee purchase?
• Does it include an “opening” inventory of products and supplies?
• What are the payment terms: amount, time of payment, lump sum or installment, financing arrangements, etc.?
• Does the franchisor offer any financing, or offer help in finding financing?
• Are there any deferred balances? If so, who finances and at what interest?
• Is any part or all of the initial fee refundable?
• Does the contract clearly distinguish between total cost, initial fee and initial cash required, etc.?
• Are there periodic royalties? If so, how much are they and how are they determined?
• How and when are sales and royalties reported, and how are royalties paid?
• If royalty payments are in whole or part payment for services by the franchisor, what services will be provided?
• Are accounting/bookkeeping services included or available?
• How are advertising and promotion costs divided?
• Is a specified amount of working capital required of the franchisee to cover operating costs until profits can be made?
• Must premises be purchased or rented, and are there further conditions on either of these (from franchisor, selected site, etc.)?
• How and by whom will the building be financed, if purchased?
• Does the franchisee have to make a down payment for construction and/or equipment?

Issues Pertaining to the Franchise Location Terms

• Does the franchise apply to a specific geographical area? If so, are the boundaries clearly defined?
• Who has the right to select the site?
• Will other franchisees be permitted to compete in the same area, now or later?
• Is the territory an exclusive one, and is it permanent or subject to reduction or modification under certain conditions?
• Does the franchisee have a first refusal option as to any additional franchises in the original territory if it is not exclusive?
• Does the franchisee have a contractual right to the franchisor’s latest products or innovations? If so, at what cost?
• Will the franchisee have the right to use his own property and/or buildings? If not, will the franchisor sell or lease his property to the franchisee?
• Who is responsible for obtaining zoning variances, if required?

Issues Pertaining to the Buildings, Equipment and Supplies Terms

• Are plans and specifications of the building determined by the franchisor? If so, does this control extend to selection of contractor and supervision of construction?
• Are there any restrictions on remodeling or redecorating?
• Must equipment or supplies be purchased from the franchisor or approved supplier, or is the franchisee free to make his own purchases?
• When the franchisee must buy from the franchisor, are sales considered on consignment? Or will they be financed and, if so, under what terms?
• Does the agreement provide for continuing supply and payment of inventory (by whom, under what terms, etc.)?
• Does the franchise agreement bind the franchisee to a minimum purchase quota?
• What controls are spelled out concerning facility appearance, equipment, fixture and furnishings, and maintenance or replacement of the same? Is there any limitation on expenditures involved in any of these?
• Does the franchisor have a group insurance plan? If not, what coverage will be required, at what limits and costs? Does the franchisor require that it be named as an insured party in the franchisee liability coverage?

Issues Pertaining to the Operating Practices Terms

• Must the franchisee participate personally in conducting the business? If so, to what extent and under what specific conditions?
• What degree of control does the franchisor have over franchise operations, particularly in maintaining franchise identity and product quality?
• What continuing management aid, training and assistance will be provided by the franchisor, and are these covered by the service or royalty fee?
• Will advertising be local or national and what will be the cost-sharing arrangement, if any, in either case?
• If local advertising is left to the franchisee, does the franchisor exercise any control over such campaigns or share any costs?
• Does the franchisor provide various promotional materials point-of-purchase, mail programs, etc. and at what cost?
• What are bookkeeping, accounting and reporting requirements, and who pays for what?
• Are sales or service quotas established? If so, what are the penalties for not meeting them?
• Are operating hours and days set forth in the franchise contract?
• Are there any limits as to what is or can be sold?
• Does the franchisor arrange for mass purchasing and is it mandatory for the franchisee to be a participant buyer?
• Who establishes hiring procedures initially and through the franchise term?

Issues Pertaining to Termination and Renewal Terms

• Does the franchisor have absolute privilege of terminating the franchise agreement if certain conditions have not been met, either during the term or at the end?
• Does the franchise agreement spell out the terms under which the franchisor may repurchase the business?
• Does the franchisor have an option or duty to buy any or all of the franchisee’s equipment, furnishings, inventory, or other assets in the event the franchise is terminated for good cause, by either party?
• If the preceding situation occurs, how are purchase terms determined?
• Is there provision for independent appraisal? Is any weight given to good will or franchisee equity in the business?
• Does the original agreement include a clause that the repurchase price paid by the franchisor should not exceed the original franchise fee? If so, this eliminates any compensation for good will or equity.
• Under what conditions (illness, etc.) can the franchisee terminate the franchise? In such cases, do termination obligations differ?
• Is the franchisee restricted from engaging in a similar business after termination? If so, for how many years?
• If there is a lease, does it coincide with the franchise term?
• Does the contract provide sufficient time for amortization of capital payments?
• Has the franchisor, as required, provided for return of trademarks, trade names, and other identification symbols and for the removal of all signs bearing the franchisor’s name and trademarks?

Other Points To Consider

• Can the franchisee sell the franchised business and assign the franchise agreement to the buyer?
• Is the franchise assignable to heirs, or may it be sold by the franchisee’s estate on death or disability?
• Does the lease permit assignment to any permitted assignee of the franchisee?
• How long has the franchisor conducted business in its industry, and how long has it granted franchises?
• How many franchises and company-owned outlets are claimed, and can they be verified?
• If there is a trade name of a well-known person involved in the franchise, is he active, does he have any financial interest, does he receive compensation for work or solely for use of his name, etc.?
• Are all trademarks, trade names, or other marks fully identifiable and distinct, and are they clear of any possible interference or cancellation owing to any pending litigation?
• What is the duration of any patent or copyright material to the franchise? If time is limited, does the franchisor intend to renew, and is this spelled out in the franchise agreement?

Has the franchisor provided the franchisee with an offering document package meeting FTC rule requirements or the UFOC format?

Has the franchisor met all state law requirements (registration, escrow or bonding requirements, etc.), if applicable?

Are there state laws governing franchisor/franchisee relationships, including contract provisions, financing arrangements and terminations? If so, does the contract meet all requirements?