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THE FRANCHISE HandbookA Complete Guide to All Aspects of BUYING, SELLING or INVESTING in a Franchise
Atlantic Publishing Group, Inc.Copyright © 2006 Atlantic Publishing Group, Inc.
All right reserved.
Chapter OneChoosing the Right Franchise
You're interested in buying a franchise, but how do you know which franchise is right for you? Which franchise will suit your individual knowledge, skills, goals and preferred level of involvement? By choosing the right franchise, your chances of success increase substantially-most failed franchises result from a buyer not doing sufficient research to find the franchise that suits him best. This chapter will help you decide how to choose the perfect franchise and will tell you where to find the information essential to making your choice.
FRANCHISES ARE NOT INDEPENDENT BUSINESSES
The first thing any franchisee must realize is that a franchise is not an independent business. Franchising is not for you if you are the type of person who needs exacting control over your business. Do not forget: when you purchase a franchise, you are simply providing the capital to enable another person's dream, idea or product enter the marketplace. Why? Because it has already proven its worth-it works.
Most independent businesses fail within three years of their launch. A large amount of capital, time, energy, and personal sacrifice is needed to make an independent business succeed. Don't let this deter you, though, ifyou have a big, new idea for a product or service that you are sure consumers cannot live without-perhaps establishing an independent business is the way to go.
There are many resources available to help you decide whether your business idea is worth pursuing.
Check out the Service Corps of Retired Executives (SCORE) (score.org). The Corps partners with the U.S. Small Business Administration (SBA) (sbaonline.sba.gov) and offers the advice and counseling of retired business executives to those thinking about starting an independent business. SCORE can help with financial planning, creating and following a business plan, and other issues that are critical to starting a business.
The Small Business Development Center (SBDC) (sbaonline.sba.gov/sbdc) is another organization affiliated with the SBA. The SBDC has 63 of its own centers across the nation, as well as more than 1100 offices within local schools, colleges, and chambers of commerce. Your local SBDC can provide you with technical and management assistance for your independent business.
Before establishing an independent business, you should do extensive market research on your idea. Is it appealing to consumers? Will it have a market? Have SCORE and an SBDC review your findings and point out any weaknesses. Also, be sure that your idea is economically feasible. Will your costs (rent, inventory, taxes, fees, payroll, insurance, legal fees) be covered by your revenue? Is your product pricing fair? Do you have a supportive and reliable bank? Once again, use SCORE and an SBDC to be sure your financial calculations make sense.
BECOMING A FRANCHISEE
Establishing an independent business may seem like a lot of work. It does hold a great amount of risk. If you do not have a unique product in mind and you want to build upon the proven success, reputation, and customer base of an established product or service, then franchising is your answer. Unlike in independent businesses, decisions are made for you by experienced industry professionals. Your name, trademark, and product line are known, trusted, and recognizable from day one.
If you decide to go this route, you still have a large and vastly important decision to make-which franchise is right for you? Which franchise will keep you interested, will make proper use of your skills and knowledge, and will bring you profit in the end? You have a number of options as you begin to gather the information that will enable you to choose exactly the right franchise.
You may have considered visiting a franchise broker. Brokers have low fees and can match you to a franchise based on your education, skills, and psychological attributes. However, you should know that brokers match you based upon a small list of available franchises. Brokers are paid by franchisers to market their businesses. That means that brokers will not suggest all possible options, but only those businesses with which they are in partnership. In order to find the perfect franchise, narrowing your options by visiting a broker is probably not your best bet.
We suggest gathering your own information to make the most informed choice. Don't worry! A number of resources exist that can help you. The most important thing to remember at the information-gathering stage is to remain organized. Keep organized and detailed records of names, databases, and Web sites. Be sure you record which information goes with which franchise or industry. Such detailed analyses will prove invaluable when the time comes to make your final selection.
Begin your information gathering by making a list of questions. When beginning a new enterprise, everyone has concerns and needs as well as more general questions. Write these questions down, and do not stop gathering information until you have a satisfactory answer to every one. Try to find the overlap in your questions and answers. How do the questions and answers interact? Such observations can provide you with even deeper insight.
What kinds of questions should you be asking? In addition to any personal needs or expectations, you should consider company and product longevity, competition, and modernization. For example, you should research the company's past financial records and its relationship with other companies. You should also research where the market and technology are heading and assess the company's products and services in that light. Has the company stayed up to date with current trends? Are there any upcoming introductions of new products or services that might threaten the company's own products and services? If so, how would the company be likely to respond? Is the company expanding? Is it focused? What kinds of services and support does it offer its franchisees? Finally, if your franchise would require employees other than yourself, is the labor attractive? Would you be able to offer competitive pay rates?
The answers to your questions can be found on the Internet, in franchise and business directories, in books and magazines, and at trade shows.
Much useful information can be found online. As with all Internet research, be careful of your sources. You should especially be sure to check the individual Web sites of the companies you are considering taking a franchise with.
A number of franchise directories are available to assist you. Directories are the best place to begin the information gathering process.
Franchise Opportunities Guide (franchise. org). Published bi-yearly by the International Franchise Association (IFA), this guide contains essential information such as the names and contact information of franchisers, suppliers, and legal consultants specializing in the franchise industry. It also includes franchise statistics and articles of interest to the franchisee. You can order the guide through the IFA at (800) 543-1038 or via the IFA Web site for $17.
Franchise Update Publications (franchise-update. com). This organization publishes a number of guides, including Executive's Guide to Franchise Opportunities; Food Service Guide to Franchise Opportunities; Guide to Multiple-Unit Franchise Opportunities; and Franchise Update Magazine. These are essential publications. For information about ordering them, go to the Web site or call (800) 289-4232.
Bond's Franchise Guide (worldfranchising.com). This guide covers both the United States and Canada and includes contact information for more than 1000 franchisers. It costs $29.95 and can be purchased at (800) 841-0873 or via the Web site. World Franchising also publishes a number of helpful books.
Franchise Annual (infonews.com). This guide also publishes franchiser contact information, along with brief business descriptions and fees. The guide is available online and can be purchased for $44.95 by calling (716) 754-4669 or via the Info News Web site. Franchise Handbook (franchisel.com). This handbook is published quarterly and contains information about companies offering current franchise opportunities. The handbook also contains relevant articles and success stories. The handbook is issued quarterly and you can subscribe to it for $29.95 a year at (800) 272-0246 or via the Web site.
International Herald Tribune International Franchise Guide (franchiseintl.com). This annual publication, printed by Source Book Publications, contains information on international franchising. It can be purchased for $29.95 at (510) 839-5471 or from the Web site.
Consumer Business Publications
There are a number of business publications and newspapers you should consult for information that is useful to the future and current franchisee:
Franchise Times (franchisetimes.com)
Franchising World (franchise.org)
Franchise Update (franchise-update.com)
USA Today (usatoday.com)
The Wall Street Journal (wsj.com)
The New York Times (nytimes.com)
Trade shows and Expositions
Franchise trade shows may be the best source for information. Most importantly, they offer the opportunity to meet face to face with prospective franchisers. You should leave a trade show with brochures, pamphlets, and other great tools for answering the questions you wrote down at the beginning of the information-gathering stage.
The world's largest trade show, the International Franchise Expo, is sponsored by the IFA and is held annually in Washington, D.C. This gathering includes hundreds of organizations offering franchises to interested individuals and includes classes for an extra fee. It is well worth a visit. Information can be obtained from the IFA at 1501 K Street NW, Suite 350, Washington, D.C. 20005, franchise.org, or (202) 628-8000.
Additional smaller shows are held every year. For starters, your local SBDC might hold low-fee seminars of interest to you. In addition, regional trade shows are held throughout the year and could include franchise opportunities specific to the needs and market of your home region. Check the Internet for these.
Keep the following things in mind when visiting a trade show.
Make sure you are dealing with a franchise and not some other kind of business opportunity. Many companies at trade shows offer "multi-level marketing plans" or other such business plans. These are not franchises. The best way to ensure that you are looking at a true franchise is to ask for a copy of the company's Uniform Franchise Offering Circular, or UFOC. These circulars, which must conform to FTC regulations, ensure that the company is offering a true franchise. They contain a wealth of relevant and important information about the franchise opportunity. (More information on UFOCs is provided in Chapter 3). You may be asked to sign for the circular and to provide your contact information. This is acceptable. Taking a UFOC and reviewing it does not mean you are under any obligation to buy a franchise. Companies are required to abide by a ten-day "cooling off period" before selling a franchise, giving the prospective franchisee and franchiser time to reconsider and clear up any mistakes. By providing your contact information, the company can ensure that you purchase your franchise legally. Franchises cannot be purchased legally at a trade show.
Have a plan before you walk into the trade show. Take the time to look at the show directory before the event, and know which franchises you want to examine. Structure and organization are your most important allies. Have any specific questions about your chosen franchises ready beforehand.
BUYING AN EXISTING FRANCHISE
After you've done your research and determined which franchise is right for you, you need to consider some additional issues. One of the most important is: should you build a new location, or should you purchase an existing location from another franchisee? This section explores the latter option.
Often, companies provide a list of existing franchise locations that are available either from a current franchisee or from the company directly. Such locations provide the benefit of being already established, with a presence in the community and an existing customer base. In addition, these locations often already have trained employees, and many may be willing to stay through the change in management. Taking over such a location can save you months of preparation and allow you to bypass such time-consuming steps as finding an appropriate location, negotiating a lease, and hiring.
Before you purchase an existing location, be sure to research its history. Some owners might be planning a retirement, looking for a new occupation, or have other such innocuous reasons for "getting out." However, it's also possible that the location is suffering, and the owner is looking to "unload" on another buyer. Do not count on the existing owner to provide you with all the information you need to make an educated choice. Rather, use all the resources at your disposal to discover what you need to know about a location's history. Check media sources, public records, and available financial data. Is the owner legally obligated to share any franchise information? If so, it would be good information to have and useful to the reader.
If you find that a location's history is not favorable, you need to be able to determine the cause of any failures. Sometimes, a new owner with energy and foresight is all that is needed to bring new life to a beleaguered franchise. However, location problems, competition problems, or other such issues may be less easily overcome.
Purchasing an existing franchise will undoubtedly cut down on advertising, hiring, and other costs associated with opening a new location. However, you will most likely have to pay a transfer fee (a fixed fee or a percentage), in addition to some legal fees. Also, be sure to pay close attention to the terms of the new franchise contract. Some owners may sell you only the remainder of their own contract rather than a new, full-term contract.
If you are interested in finding existing franchises that are up for sale, take a look at the Business Resale Network Web site: br-network.com.
If you would rather purchase a franchise and open a new location, odds are that you will not be entirely on your own. However, the help you might receive in this endeavor will vary from company to company. While the franchiser will often help you to locate an appropriate property, sign a lease, advertise, and hire help, be sure of the quality of the assistance you can expect to receive before agreeing to the purchase.
Getting to know the franchiser and other of its franchisees in person is a good step to take in deciding if the franchiser will provide you with the aid you might need as you begin your business venture. Take a trip to company headquarters-it is well worth the expense. Talk to the staff, evaluate the premises, and decide if the company is well run. If it is not well-run, and if there are disgruntled staff members at headquarters, chances are that franchisees are also unhappy. Take any invitations to tour premises and other outlets, but also take the initiative to visit some outlets unexpectedly. If you are touring with other interested franchisees, make yourself known and share information.
Likewise, ask current owners of the franchise if they have received satisfactory aid from the parent company. While you're at it, ask about any problems they have encountered and how the problems were solved, how much capital was required for them to set up their franchise and how long it took for them to begin realizing a profit.
Just as you should get to know the company on a personal level, you should expect a quality company to want to get to know you as well. Good, responsible companies will only want to sell franchises to responsible franchisees. If a company takes your check without any kind of interviewing or examination of your background, how interested are they in the success of their company, and how interested will they be in you and your personal success after that check is cashed?
Excerpted from THE FRANCHISE Handbook Copyright © 2006 by Atlantic Publishing Group, Inc.. Excerpted by permission.
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