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?

• Build my own schedule – yes I do work an amazing amount of hours, but I choose when.  If I am late, early or need to take my dog to the vet…I can.
• Control your own income – Unlike a “job”, my income fluctuates with the business, rather than a “paycheck” each week. This can have some disadvantage too, but a lot can be said for having a great month!
• Choose your clients – Who hasn’t worked with that “one client” as a representative of the corporate position? As a business owner, you identify your ideal clients and choose who may get to work with you.
• Tax advantages – certain deductions are available to small business owners, like 100% tax deductable health insurance plan.
• Personal Satisfaction – There is a satisfaction around contributing to the growth of the economy by employing people, increasing revenue, paying my taxes….I also believe I make a difference everyday with my clients with solid information, advice and listening.

In summary, learning about the income potential around your future franchise is incredibly important. However, learning about the personal advantages to business ownership around a specific franchise business model is equally important. It is not always about just black and white figures.

I can comment on the benefits other than the actual business profits. As tax season quickly approaches, it is important to also know about some of the deductions available to business owners:

• Substantial sums can be set aside for retirement and get a big tax deduction
• Cost of equipment purchases can be expensed.
• Home office deductions for a home based business franchises are available
• Cost of business travel is deductible
• Entertainment for clients and prospects can be a tax deduction
• Car usage for travel during work periods
• Educational expenses/business seminars
• Health Insurance deductions for the self-employed

Be sure to work with a great tax preparer to take advantage of all of the deductions available to you as a business owner. I’ve already got my call into my CPA. You?

-          49.3% of respondents noted that the current economic climate was a factor in their decision to explore franchise opportunists

-          42% were currently employed

-          49% planned to use personal funds such as savings and retirement accounts to handle the franchise investment

-          52% were examining a franchise as an alternative to employment

-          43% had operated their own business in the past

-          72% have had management experience

-          65% planned to purchase a franchise within one year

After working with many franchisees over the past few years, I would have to agree with the findings within this survey. The majority of my clients examined a franchise as an alternative to employment and many have used their own resources to fund the transaction. The largest success factor has come to those who have had previous management experience; however this statistic is not always necessary to find success within the franchise model. Correctly matching the prospective franchisee with the perfect franchise model can be the real magic to finding success. Are you ready?

Some of the nation’s larger banks, such as Wells Fargo, are seeing a record breaking highs in SBA loans, surpassing over $1 billion made in loans this year. However, the smaller banks are also seeing a benefit. The smaller banks increased their small business loan balances by $17 billion, according to Ami Kassar, chief executive of MultiFunding LLC small-business loan advisor in an article recently published in the Wall Street Journal. Loan approvals by smaller banks increased to 46.3 percent in October, their highest rate this year and an increase from 45.1 percent in September.

If you are interested in investing in a franchise, here are a few tips when seeking credit:

• Choose your bank wisely. Select a bank that has expertise in small business or franchise lending. Ask upfront if a bank is interested in franchise lending. Make sure that the bank adequately covers your footprint, whether it’s local, regional or larger.
• Educate your bank. Present the bank with data and history about your franchise or brand. Banks want to mitigate their risk. The more information and documentation you have to prove the viability of your business, the less risky it appears to the bank. This isn’t just advice for franchisees. Franchise companies can do their part by educating banks about their brands by offering information including sales plans, marketing support for franchisees, HR support and product development.
• Develop a relationship with your bank. Bring your whole relationship to the bank where you get credit. The bank will give you a better rate if you also sign up for services such as deposits, cash management, etc.

The above suggestions won’t necessarily guarantee that you’ll receive credit at the bank of your choice; however, they will go a long way toward helping resolve the disconnect between bankers and franchisees. As always, having a great franchise consultant can make or break the communications between you and your bank. Let me know if we can help at RG2 Consulting.

Franchised businesses create an ideal environment for our returning military personnel. With structured systems and processes, rapid training and the need for operational excellence, a franchise provides an excellent opportunity for our veterans to use the skills learned during military service to build a successful business. As a franchise placement consultant, I especially like to work with this population due to their proven track record of success. According to the US Census, there are over 66,000 veteran-owner franchises, which translate into success business owners who are creating even more jobs for the US economy. My job is to help place these vets with a business model that fits into their personal goals and professional training given to them through their military service. And now this endeavor has become a bit easier.

Over the coming months, the SBA has expressed a new commitment to helping our veterans find the funding needed to invest in their own franchise businesses. Coupled with “Operation Enduring Opportunity,” my passion for pairing people with the dream of business ownership has just gotten more exciting. I look forward to the future!

For more information on this topic, please call me or visit http://smallbiztrends.com/2011/11/franchise-industry-first-lady-michelle-obama-announce-veteran-hiring.html

Solar Energy – As energy conservation becomes increasing popular, the solar panel industry continues to grow. Franchises for installation of solar panels on garage roofs are beginning to emerge as well. Solar Soliel is the latest addition, providing low royalty fees, education, sales and promotional support to their franchisees. Franchisees work with clients by working through the maze of state and federal tax credits, utility regulations and energy efficiency savings available before installing solar panels. With a 30% tax credit in place until at least 2016, I expect the solar installation franchise opportunities will continue to grow.

Moving – According to the Census Bureau, the average person moves at least 11 times within their lives. As a recession proof franchise option, more investors are examining moving companies such as Two Men and A Truck and PODS as possible business opportunities. We are seeing a growing trend of success within the moving industry for companies focused on the environment. These organizations rent reusable packing containers, sell biodegradable packing materials and focus on using bio-diesel fueled trucks.

If you are beginning your search into a franchise model, be sure to do your due diligence by examining disclosure agreements, talk with other franchisees, research brand recognition and investigate franchisor support as these new franchise opportunities begin to sprout. But if helping to save the environment is a core value, these new business models may be just the ticket. For help navigating through your options for franchise investment, give me a call.