Franchise Advantages

Starting a franchise is a lot like cloning a successful business and opening it in your own territory. The only real differences include the motivation and talent of the new owner (YOU) and the opportunity presented by the location in which you decide to open the business. Some of the most important advantages of owning a franchise include: Training - Nearly all franchise companies provide you with all the training you need to become successful. After all, they have a vested interest in you being able to run the franchise profitably and really want to see you succeed! Brand Awareness - It can take years for a business to successfully build a well recognized brand that helps drive sales and provides a competitive advantage over smaller competitors.

Brand awareness can make or break a business. Consumers buy things that they are familiar with and work with companies they know and trust. Purchasing Power - Most franchise companies have the opportunity to purchase all their goods, products, and supplies at reduced rates because they buy in bulk. Right away these savings can be passed back to each franchise unit and provide a competitive advantage in the marketplace. Proven Business Plan - Running a successful business is similar to learning a math formula and following its rules and laws time and time again.

Through years of experience franchise companies know what works and will teach you their formula for success. Advertising - In addition to an established brand, most franchise companies support their franchisees with both local and national advertising and promotions to help drive sales. Support - Successful franchise companies provide ongoing support for their franchises and franchisees. This usually includes ongoing training, system upgrades, product enhancements, as well as question and answer support systems using dedicated representatives within the organization. Create a Checklist before you Consider Purchasing a Franchise Hire a lawyer and an accountant. Ask questions to understand all disclosures, franchise agreements, and other legal documents.

Do not leave this up to your lawyer, as it is very important for you to have an intimate knowledge of this information. Verify everything a franchise sales person says by asking for it in writing. Believe it or not, some sales people tend to exaggerate the truth from time to time. Analyze your market and make sure there is a need for your product. Contact both current and previous franchisees and ask them for both the positives and negatives associated with owning a franchise. Ask the franchise company for statistics relating to success rates. Make sure you are appropriately funded. A lack of capital could turn all of your early expenditures into a complete waste. Meet the key management figures of each franchise company. This is especially important for smaller franchise companies. Do everything you can to get to know both the company's executives and their field representatives.

Franchise Guide

Franchise or Business Opportunity?

Business opportunities are less structured than franchises, so the definition of what constitutes a business opportunity isn't easy to pin down. In essence, a business opportunity is any package of goods or services that enables the purchaser to begin a business and in which the seller represents that it will provide a marketing or sales plan, that a market exists for the product or service, and that the venture will be profitable.

Here are other key factors:

  • A business opportunity doesn't generally feature the seller's trademark; buyers operate under his or her own name.
  • Business opportunities tend to be less expensive than franchises and generally don't charge ongoing royalty fees.
  • Business opportunities allow buyers to proceed with no restrictions as to geographic market and operations.
  • Most business opportunity ventures have no continuing supportive relationship between the seller and the buyer; after the initial package is sold, buyers are on their own.

The Pros

The greatest strength of franchising is its ability to bring independent retailers together using a single trademark and business concept. The benefits of this affiliation are many: brand awareness, uniformity in meeting customer expectations, the power of pooled advertising and the efficiencies of group purchasing.

For the individual owner, there are several advantages to franchising. The ever-present risk of business failure is reduced when the business program has already proved to be successful in the marketplace; the use of an established trademark saves the business owner the cost of creating and advertising a name that customers will recognize; and the advantages of group advertising and purchasing make operations more profitable. In addition, ongoing training creates an instant operational expertise that would otherwise need to be acquired through trial and error. Also, with franchising, expansion seems to come more naturally. Operating a successful franchise may quickly lead to building a second and then a third business, and so on. Fortunes have been built this way.

  • Reduction of risk
  • Turnkey operation
  • Standardized products and systems
  • Standardized financial and accounting systems
  • Collective buying power
  • Supervision and consulting readily available
  • National and local advertising programs
  • Point-of-sale advertising
  • Uniform packaging
  • Ongoing research and development
  • Financial assistance
  • Site selection guidance
  • Operations manual provided
  • Sales and marketing assistance

 

The Cons

 

Franchising, however, is not for everyone. Fiercely independent entrepreneurial types (you know who you are) may chafe under the strict operational requirements and specifications of a franchised business. If things have to be done your way, you may want to head in another direction.

Also know that some franchise systems are better than others. A weak franchise program will not train you well to handle the challenges of the business, will not do a good job of assisting you when problems arise, and will not make the best use of your advertising dollars.


  • Loss of control
  • A binding contract
  • The franchisor's problems are also your problems

If you're considering buying a franchise, don't let wild expectations influence your decision. While franchising is designed to put people into business who have never owned a business before, the excitement of ownership can create an impulse to move forward without proper planning. If you rush headlong into buying a franchise expecting to boost your current working salary, but the earnings don't allow you to pull out more than half your former salary, you will be one unhappy camper. Work with a good CPA to prepare a cash-flow projection for the business before you take the plunge. Know how long it will take to break even and turn a profit, as well as the amount of salary you'll realistically be able to pay yourself.

 

Associated Costs

In terms of capital investment, your franchise fee will be determined by the profitability of the business. Most companies have a scale when it comes to franchise fees. They can range anywhere from $4,000 to $20,000 and, in some cases, up to $50,000. In addition to this front-end franchise fee--the one-time charge that a franchisor assesses you for the privilege of using the business concept, attending their training program, and learning the entire business—there will also be an ongoing royalty fee, typically ranging from 3 to 8 percent.

Some of the other costs associated with a franchise include:

Facility/Location
In some cases, you may also have to buy land or a building, or you may have to rent a building. If you rent a building, you'll be responsible for not only the monthly lease but for the one-time security deposit as well. In addition, you'll have to pay for leasehold improvements. In some cases, the owner of the building will put these in and factor them into your rental, probably charging you an additional $50 to $100 per month. The franchisor might provide you with an allowance for leasehold improvements that runs in the neighborhood of $5,000 to $30,000 for your average franchise. Most franchisors will tell you what their estimated leasehold improvements will be.

Equipment
Different types of businesses will need various pieces of equipment. There are generally long-term payments available for most equipment purchases. Fortunately, most banks will provide loans for equipment because it also serves as collateral.

Signs
Outside signage can be very expensive for the small-business owner. Most franchisors have developed a sign package that the franchisee is obligated to purchase.

Opening Inventory
This will usually consist of at least a two-week supply, unless you're in a business that requires a much more complicated inventory. Most franchisors will tell you what their opening inventory requirements are.

Working Capital
For rent, you may be required to deposit first and last months' payments as well as a security fee. You'll also have to pay a deposit to the electric, gas and telephone companies (who will want deposits prior to giving you service). You'll need some working capital and money in the cash drawer to make change. You'll need money to pay your employees. You'll need money just to operate until there's a cash flow. If you're buying a franchise that relies on charge accounts, you're going to have to allow yourself some additional capital before the bills are paid by the customers and returned to you.

Advertising Fees
There is usually a fee for advertising on a regional or national basis. Most larger franchisors require their franchisees to pay a certain amount into a national fund used to advance the concept. For example, McDonald's has advertising funds of nearly $100 million, paid by the franchisor and individual franchisees. The upside is the benefits are quite substantial in terms of the visibility you get with the type of advertising that most franchisors do.

An important protection for the person planning to buy a franchise is the FTC's Franchise Rule, put into effect October 21, 1979. The rule requires covered franchisors to supply a full disclosure of the information a prospective franchisee needs in order to make a rational decision about whether or not to invest. This disclosure must take place at the first personal contact where the subject of buying a franchise is discussed and at least 10 business days prior to signing any contract with the franchisee or accepting any money. This is a "cooling-off' period intended to prevent franchisees from jumping in without carefully reviewing and considering what they're doing.

This means a franchisor, franchise broker or anyone else representing franchises for sale has to present a disclosure document—the Uniform Franchise Circular Offering (UFOC)—containing extensive information about the franchise. Furthermore, you must be provided with completed contracts covering all material points at least five days prior to the actual date of execution of the documents. Again, this provides another cooling-off period and the chance to have an attorney review the contracts prior to execution.

Visit the FTC's Franchise and Business Web site to find out more about the Franchise Rule.

State Laws

The FTC doesn't require franchisors or business opportunity sellers to register with it or any other government agency. However, several states do have registration rules requiring franchise sellers to register. Some of these states laws are tougher than others, but most have adopted the UFOC guidelines for their disclosure requirements.

It would be a mistake, however, to assume that simply because a franchise is registered with a state or provides some type of full disclosure document, you as a consumer are going to be protected from the possibility of failure or rip-off. The only thing that a state reviewing agency can do is ensure that the franchisor has responded and filed the necessary documents

 

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