Exploring Franchise Opportunities
If you are
starting the process of researching franchise opportunities and also try to
discover if you have the qualities to be a successful entrepreneur, then you
are going through an exciting process! Even if you decide not to invest in a franchise
at the end of your exploration process, you are likely to take away knowledge
that will be useful in the future. Most franchisors will have an education
process that they guide you through to see if you could be a good fit for each
other. Not every franchise system is the same and this paper is intended to
identify some of the more common things to expect as you go through a franchise
education process.
One thing
to keep in mind as you are learning about a franchise: many successful business
people will give the advice “trust your gut”. If a franchise that you are
learning about is conducting itself in a way that just doesn’t feel right, then
it may not be the right system for you. On the other hand, if you really like a
business model or concept and find that you have too many questions or concerns
after your first or second contact with the Franchisor – do not discount that
franchise. You need to do sufficient due diligence and learn enough about an
opportunity so that you can make an informed decision. Most franchisors will be
walking you through several steps to educate you about their system. If you
walk away too early, you may have stopped learning about a business because of
something that really would not have been a major issue or it could have been
misunderstood by you.
Many people
have the dream of owning their own business, being their own boss and being in
control of their own future. Although you may already have the skills to start
your own successful business, a franchise can allow an entrepreneur to start
and grow a business faster and more economically by providing: training and
support, a proven system, brand recognition and other systems and tools. Keep
in mind that no matter how good a system is the success will always come down
to the effort and abilities of the entrepreneur. You may have also heard the
phrase that franchising is a secure way for an owner to be in business for
himself but not by himself.
The All Important FDD
An FDD or
Franchise Disclosure Document is a legal document that every franchisor must
provide. You cannot sign a franchise agreement until you have had the FDD to
review for 14 days. Before you are given an FDD you can expect to sign (either
electronically or on paper) a document that says you have been given the FDD.
You are not agreeing to invest in a franchise by signing this form but a
franchisor must document that they provided you with their FDD. There are 23
items on an FDD and item 23 is the Acknowledgement of Receipt by a Prospective
Franchisee – this is what you are signing when you get an FDD.
The 23
Items contained in an FDD will all be the same:
1. The
Franchisor and Any Parents, Predecessors, and Affiliates.
2.
Identity and Business Experience of Key Persons.
3.
Litigation History.
4. Bankruptcy.
5.
Initial Franchise Fee.
6. Other
Fees and Expenses.
7.
Franchisee's Estimated Initial Investment.
8.
Restrictions on Sources of Products and Services.
9.
Obligations of the Franchisee.
10.
Financing Arrangements.
11.
Obligations of the Franchisor.
12.
Territory.
13.
Trademarks.
14.
Patents, Copyrights, and Proprietary Information.
15.
Obligation of the Franchisee to Participate in the Actual Operation of the
Franchise Business.
16.
Restrictions on Goods and Services Offered by the Franchisee.
17.
Renewal, Termination, Repurchase, Modification and/or Transfer of the Franchise
Agreement, and Dispute Resolution.
18.
Public Figures
19.
Financial Performance Representations.
20. List
of Franchise Outlets
21.
Financial Statements
22.
Contracts
23. Acknowledgment
of Receipt
An FDD will
be accompanied by a copy of the actual franchise agreement that you would sign
if you move forward with a franchise opportunity. A lot of information is
contained within an FDD but franchising is (or should be) a mutually beneficial
relationship. So the exchange of information needs to be a two way street and
as you are investigating a franchise opportunity you should expect a franchisor
to be asking questions of you as well as requesting information including your
financial situation along with a profile or bio.
Many
franchisors will not even call you until you submit your financial information
to them. Some restaurant franchises, for example, have liquid capital
requirements of $1,000,000 and some franchisors do not want to waste time with
a financially unqualified prospective franchisee. Hopefully a franchisor is
asking you other questions along with your financial situation. After all, if
the only requirement is having enough zeros in the bank account how do you know
that other franchise owners will be good neighbors for you? Franchisors are not
required to let anyone buy a franchise they can reject a prospective candidate
at any time for any reason. You must meet their qualifications just as they
must meet yours to be granted a franchise.
An FDD does
make it easier to compare franchise systems. You will hear most franchisors
spend the most time talking about items 7 and 19 (Item 19 is not required).
Item 7 discusses a franchisee’s initial investment to start the business and
item 19 is a financial performance representation of the franchise system.
Up until
recently, the FTC did not allow franchisors to include any financial
performance representations of the franchise system. This was both good and
bad. It protected potential franchisees from misleading or inaccurate
information. But at the same time not allowing this prevented franchisors from
giving any sort of information relating to potential earnings. Depending on the franchise, Item 19 may be
very lengthy, very limited or non-existent.
While it is
nice to have some picture of potential earnings, the numbers from an Item 19
should be taken with a grain of salt for the following reasons:
Average
numbers can be misleading and may not reflect how most franchises perform. A
few very successful franchises could over inflate a number, while a few duds
could under value a number.
Gross sales
also do not tell us about a franchisee’s costs or profit. Many franchisors do
not have Net Profit information on their franchisees to share.
Geographic
relevance is important as earnings may vary with geography.
Franchisee’s
backgrounds are not disclosed and different franchisees are going to come from
a variety of educational and business backgrounds.
The success
or failure of some franchisees does not guarantee anything about your
performance.
Other items
in an FDD that you will want to pay attention to are the:
- Franchise Fee – what you invest for the brand, logos, training, systems, tools and processes.
- The Royalty – This is usually determined based on gross sales. In some industries the royalty fee can be as high as 30%. In the Senior Care Industry it is typically in the 4-8% range[1]
- Required Advertising Expenses – Most franchises will have local and national advertising requirements. Keep this in mind when looking at the royalty fee as some companies will tout a low royalty but have high national advertising fees. You want to grow your business anyway so don’t worry about local advertising requirements if it is only a couple percent of your gross sales as you are likely to spend that regardless of the requirement. National advertising is usually taken as a percentage of your gross sales and the franchisor typically decides where to spend the national ad fund.
- Item 7 cost ranges typically have a low and a high number. These numbers can vary greatly and don’t be afraid to have a discussion with the franchisor to find out what can impact those ranges. The senior care average is under $100,000[2]
While the
FDD is an important document that you should review in its entirety it is still
a document. Franchising is also very much a relationship. You will have
expectations of the franchisor and they will also have expectations for their
franchisees. Just like we said earlier in this paper, trust your gut, are you
confident in the support system that is in place along with the systems, tools
and process that are part of the franchise system? Are you comfortable with the
corporate culture of the organization along with the mission, vision and long
term goals?
The Franchise Education Process
The actual
process that a franchise uses to educate you about their system can vary but,
they often follow some version of this process.
- You may have scheduled phone calls with different people
- You may have scheduled calls with the same person
- You may attend a webinar or be sent a video
- Most franchise will hold an Open House or Discovery Day where you meet the corporate team in person. This day may vary significantly from franchise to franchise but it is a very important step to get a much better understanding of the franchise.
- The franchisor may have set times that you can talk to existing franchisees to ask them questions
- Territory review and analysis
- Pre signing review
- Signing of the franchise agreement
Hopefully
this paper is useful as you search for the right business opportunity to meet
your goals and achieve your dreams. Is there a franchise out there for you?
Well, as consumers we probably interact with a franchise virtually every day we
leave our house. According to a recent IFA report there are about 900,000
franchise businesses in the US. Franchises generate more than $1 trillion
dollars each year in retail sales (which is about 1 of every 3 retail dollars).
Franchises employ one out of every 17 people in the US workforce. So there is
likely something out there that you are passionate about.
About
the Author:
Dave VanderLinde Jr. has a Bachelor of Arts Degree in
Marketing from Michigan State University. He also obtained a Master’s Degree in
Business Administration that he obtained in 2002 while working in Silicon
Valley. Before entering the franchise world he was an international sales
manager supporting agents across Asia, Europe and South America. In 2011 Dave was awarded his CSA (Certified
Senior Advisor) certification. Dave is currently both a franchisee in the
Seniors Helping Seniors® Franchise system as well as a Regional Owner for
Seniors Helping Seniors responsible for franchise development in Michigan and
Northern Indiana along with the coaching of new franchise partners as they open
in his region. Seniors Helping Seniors currently has 13 franchises in this
region and approximately 200 across the country. They were ranked #164 by
Entrepreneur Magazine’s Entrepreneur 500 – Jan. 2012 issue. Ranked #44 in the
Top Fastest Growing Franchises in the country Feb 2012 issue. Expect to be
ranked #37 in the Top Home Based Franchises in the Country – April 2012 issue. info@shsmichigan.com www.homehealthcaregrandrapids.com/franchise
[1] Home
Care Franchise Fees from Franchise
Direct Average Royalty 4%, National Advertising 1.5% and Local Advertising
2.2%.
[2]
Franchise Business Review “Senior Care
and Home Health Care Franchises” Special Report December 2010.
