Franchising has a longer history than many people may imagine but there have been several defining moments during its history. One of the biggest events occurred on October 21, 1979 when the Federal Trade Commission (FTC) introduced the Franchise Rule. This was designed to protect franchisees because it asserted that all US operational franchisors were legally obliged to fully disclose details that all potential franchisees should know before committing to investment.
As such, it enforced FTC standards to ensure that all disclosures contained uniform information that has been prepared to meet the legal criteria. One of the main requirements of this law ensured that there has to be evidence to support any financial details given. This in turn assures all potential franchisees that there is profit to be made and make them fully aware of any pitfalls.
More specifically, the Franchise Rule requires the following information to be disclosed by all franchisors:
(a) The franchisor must declare its affiliates, directors, officers, management and individuals responsible for all areas of the business, such as training, support, and franchising information.
(b) The franchisor must declare whether it or any of its officers, management, and directors have ever been bankrupt or faced lawsuits in the past, even those from before the individual in question joined the business.
(c) The exact amount you are expected to pay in franchise fees and various other associated charges must be disclosed. This includes all immediate and ongoing payments after the franchise contract is signed and the business has opened.
(d) Any and all restrictions on the quality of goods and services that you, as a franchisee, may use. This includes any purchase restrictions that may be in place.
(e) Any help and support that will be offered by the franchisor and any affiliates including financial support.
(f) All restrictions applicable to the goods and services you will be managing and selling, as well as any restrictions that you have to work with when dealing with customers.
(g) Any advantage or guarantees provided regarding the location and locality of the franchise.
(h) The franchise conditions under which your franchise may be terminated, sold on to another franchisee, repurchased, or modified.
(i) Franchisee training programs that are available and any fees associated with them.
(j) The involvement, if any, of celebrities or known figures in the public eye within the business, whether in advertising or behind the scenes.
(k) Site selection assistance that is offered by the franchisor.
(l) The number of present franchises, franchises projected for the future, franchises terminated or not to be renewed, and the number repurchased in the past.
(m) Full financial statement disclosure.
(n) How far you are expected to participate within the franchise operation after becoming a franchisee.
(o) Full disclosure of proof for earnings and profit claims made regarding other franchisees.
(p) Full names and addresses of franchisees that you can talk to.
All of the above legal considerations of franchising must be fully disclosed during initial contact with the representative of the franchise, whether that is a broker or the franchisor him or herself. As soon as the franchise opportunity is discussed, the legal considerations must be fully disclosed. The disclosure must be at least ten days prior to payment or to any franchise or related contract being signed. This pertains to the contract signing itself and also any financial statements changing hands.
The Federal Trade Commission does not require franchisors to register, but depending on the state your franchise may be in, it may have to register on a local level. The Uniform Franchise Circular Offering (UFOC) guidelines have been adopted by most states as a result of their strict disclosure requirements. However, you should never take it for granted that the franchise is registered or offers full disclosure, thus providing you with protection of any kind. You must research the franchisor fully before committing.
About the Author:
GlobalBX provides a FREE business for sale exchange connecting business buyers, sellers and lenders. Search over 32,000 businesses for sale and franchises for sale. Sell your business for sale for free with no listing fees and zero commissions. We have 1000s of franchises as well as franchise resales. Find franchise reviews and get free franchise information. You can also contact over 300 lenders directly and get a business loan.
Category: Franchise
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Don’t Undercapitalize Your Franchise
Franchise Genius: What can I do to help avoid undercapitalization? As you already know, a franchise start-up is much more likely to succeed than a non-franchise business start-up. Still, even a franchise isn’t a sure thing.
One of the biggest mistakes that people make in opening a business is starting undercapitalized. The good news is that making sure you have enough money to get to the starting line (opening your business) AND the finish line (running a business that meets your financial and life goals) is almost completely within your control. All you have to do is be willing to learn from others.
Remember, when you join a franchise system, you’re joining a group of people – your fellow franchisees – who’ve already been down the road on which you’re about pursue. If you are willing to learn from their experience, and you’re willing to put your desire to open for business tomorrow on hold while you do your research, you’ll reap the dividends for years to come.
Before you do anything else:
– Accept that it can happen to you. This is really the first step. Once you accept that your business could fail due to undercapitalization, you are much more likely to do your homework. And the more homework you do, the more likely you are to succeed.
– Be willing to learn from others. Remember, part of the reason you are considering a franchise is so that you don’t have to do it all on your own. So let some other people help you. Learning from the experience of others is a lot wiser – and less painful – than learning from your own mistakes.
Before you sign your franchise agreement:
– Do some basic research. Franchisees are the single best source of information regarding startup and operating costs. They can tell you about the unexpected things that drove their costs up, as well as tips for cutting costs and increasing profitability. Also, don’t underestimate the wealth of information and resources that are available on the internet, and on the International Franchise Association website (www.franchise.org).
– Get help. There are plenty of places where you can go for help. Start with SCORE (www.score.org). It’s free, it’s in most cities in the country, and even if your counselor doesn’t have specific franchising experience, they can still help you with the basics of business planning and budgeting.
– Build some high-level budgets and financial models. Once you’ve narrowed your choice for franchise systems down to the most appealing, build some high-level budgets and financial models. Do this for each of the franchises you are considering. This will help you understand the potential risks and rewards for each franchise you are considering. Your accountant or consultant can help you with this.
– Run your budgets and financials past existing franchisees. Ask them to tell you if they think your numbers are realistic. Be sure to choose a mixed group – some who are doing well, some who are doing okay, and some who are doing poorly. It will give you a well-rounded picture of what to expect.
– Have an accountant review your high level budgets and financials. Ideally, choose an accountant who is familiar with your line of business.
– Don’t budget a theoretical or ideal Cost of Goods Sold – use a COGS that is based on the real numbers that franchisees in your area are experiencing. If you are the first franchisee in your area, be sure to verify distribution costs, which sometimes vary widely from market to market.
– Verify employment costs. Just because someone in one city pays $8/hour for help doesn’t mean that you will also. It could be more, or it could be less.
– Verify real estate costs. If you need to rent or acquire space, make sure you understand what other franchisees in your market are paying.
After you sign your franchise agreement:
– Prepare a detailed proforma. Be sure to include projections for startup and for ongoing operations. If you’ve established a relationship with any franchisees, ask them for help again. Many will be amazingly open with their books, partly because they’re nice, and partly because it’s in their best interest to see you succeed.
– Be realistic about startup costs, operating costs, and revenue. Don’t base your budget on “I think I can”. Base your budget on “this is what other franchisees are reporting”. Many people prepare aggressive, realistic, and conservative models so they can be as prepared as possible for whatever comes up.
– Don’t guess. If you’re not sure, find out.
– Factor in the cost of delays. Delays are a fact of life, even with the best planning. Make sure you have enough time and money set aside to weather whatever comes up.
– If your business involves renting space, negotiate for rent abatement and TI money. First-time renters will often fail to negotiate for rent abatement (essentially, “free rent”) and Tenant Improvement money (money the landlord gives you to help make the improvements to your space). Don’t make that mistake. In fact, get an attorney to help you negotiate your lease.
– Factor in turnover and training costs. People often forget to budget this expense. Remember, somebody has to pay to teach your employees how to do their work!
– Budget marketing dollars and operating capital. Even the best businesses often start slowly. Make sure you have enough money to operate the business AND market the business during that slow period. A safe rule-of-thumb is to have at least a year of operating capital.
Have your accountant review your detailed proforma. Your accountant’s responsibility is to give your numbers a logical, unemotional analysis. Encourage them to challenge your assumptions on the front end, and things will end up much nicer for you on the back end.
Start with these items and you’ll be well on the road to making sure you have enough money to get to the starting line AND the finish line!
By: FranchiseGenius.com is the largest, most comprehensive online directory of franchise concepts and includes a franchise resource center full of objective and useful information.
For any individual looking to capitalize on franchising opportunities and owning a franchise business, there are several advantages to consider. Some of those you may be interested in are outlined below:
The Franchise Business Pros
· Having a brand behind you, whether it is locally or nationally famous, will save you a lot of time and money that would be needed to create your own brand or trademark. You will also attract customers immediately rather than having to advertise extensively.
· You will have an established business framework to work within, which dramatically reduces the risk associated with a startup business.
· You will already have tried and tested suppliers and services at your disposal, which will again save you the time and money associated with finding your own.
· You will receive ongoing support for sales and marketing throughout your franchise ownership. Franchisees often choose to tap into the help that is offered to them throughout their tenure via existing marketing and advertising assistance.
· Franchisees often get comprehensive financial assistance because banks are often more willing to lend money to well-known brands and names than business startups that are completely unknown to consumers. Franchisees may also have access to direct financial assistance from the franchisor.
· The risk of investing in a franchise is lower than it is for a regular business startup. An established concept is much more desirable because there is less risk.
· Continued development opportunities and research will be available. Franchisors tend to choose to tap into information concerning competition in the local area, seasonal goods, demand, and local attitudes.
· You will get business support from your franchisor, which will help to find you the best possible site and enable any construction work that needs to be done in addition to employee training and operational assistance.
· All business procedures and methods that you use will already be tried, tested, and proven to work.
· The quality and desirability of the franchisor products have been proven and come at a certain standard level that is well established.
· You will have the buying power of the franchisor and centralized purchasing at your fingertips, so costs may be reduced as a result of bulk buying savings that are handed down to the franchisee.
In addition to the pros of franchise businesses as outlined above, there are also others that you may want to consider. For example, expansion may come more easily with a franchise business and you may enhance your business interests with additional businesses, either within the franchise or outside of it. This is how dreams of riches become realities.
That is not to say that there are not cons and disadvantages associated with franchise businesses. A few of them are outlined below:
The Franchise Business Cons
· You may lose ultimate control of your business as a result of the established franchise standards that you have to run your business in accordance with. You may also find that you cannot implement your own ideas and initiatives.
· The level of royalties could be as much as 10% or more in select cases, which will of course affect your profits.
· You will have to pay an initial fee to buy into the franchise. It could be as little as $4,000 but may extend up to $50,000 so there is significant initial outlay.
· You will have to pay advertising fees to ensure that your business is recognized as existing in your current location. If the franchisor advertises poorly then your fees are wasted.
· You may have to buy a signage pack from your franchisor. Some franchisors insist on you buying their specific signage and so you may find it extremely expensive.
· If the franchisor gets into difficulties then so do you. As you effectively bear their name then you bear the brunt of a problem, including issues with suppliers.
In conclusion, although there are some disadvantages with having a franchise business, the positives far outweigh the negatives. The risks of failure are significantly reduced and so there are fewer problems than a brand new startup business. Of course, you should always ensure that the paperwork is in order, and you should complete your research and due diligence before committing because there are no guaranteed profits, and you would ultimately be responsible should the venture fail.
About the Author:
GlobalBX provides a FREE business for sale exchange connecting business buyers, sellers and lenders. Search over 32,000 businesses for sale and franchises for sale. Sell your business for sale for free with no listing fees and zero commissions. We have 1000s of franchises as well as franchise resales. Find franchise reviews and get free franchise information. You can also contact over 300 lenders directly and get a business loan.
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How To Find A Franchise
Article Contributed by Ray Haiber
As a franchise sales consultant I am often asked what is the best way to start the initial process of finding the right franchise business. Most of these individuals are still in the initial stages of thinking about buying a franchise, and don’t necessarily have a strong opinion either way about what type of opportunity they are looking for. My answer is that there are more resources available in today’s market then at anytime to find and research franchise opportunities. Below is a list of some of the most popular methods prospective franchise buyers can use to help narrow the search process and find the franchise business that’s right for them.
Internet Directories:
The fastest and most convenient way to begin the process of finding a franchise is via the Internet. There are now dozens of franchise opportunities directories online today that offer comprehensive listings of franchises for sale, including information about investment levels, training, availability, and how to contact the franchise company for more details. These directories are also a good source for free information about the general process of buying a franchise business. You may want to visit A few different directories such as franchiseopportunites.com, franchisegator.com, and azfranchises.com because not all of then will carry the same franchise listings.
Franchise Industry Publications:
Trade publications are another good source for general information about franchises available and franchising industry news. There are magazines available such as Franchise Times and Entrepreneur, as well as multiple online venues such as franchise-chat.com and franchisenewscenter.com that provide a wealth of free information about finding and buying a franchise.
Trade Shows & Conventions:
There are numerous franchise opportunity trade shows and conventions held through out the year and around the world. These venues offer the chance for individuals to discover and research new opportunities, as well as the unique opportunity to meet actual representatives of franchise companies they may have an interest in. Some of the more popular shows include the National Franchise & Business Opportunities Show, and International Franchise Expo.
Franchise Consultants & Brokers:
Franchise Consultants and brokers work with as little as a few to dozens of different franchise concepts in their database that they generally have in depth knowledge about. Considering the thousands of different franchise opportunities that buyers can choose from these days, they can be effective in helping a prospective buyer narrow their search by first qualifying them, and then showing them opportunities that could be a potential good match. Since the majority of these consultants are paid a referral fee or success fee by the franchisors if one of buyers they introduce moves forward, the buyer generally has no direct expense associated in engaging a franchise consultant to help them.
Some of the potential downsides to working with a franchise consultant can include that some only represent a few or a limited menu of franchise concepts which can potentially limit the prospective buyer’s exposure to seeing all the opportunities available in the market. And like some sales people who work on commission, the motivations of the consultant may some times not be entirely consistent with the prospective buyer’s best interest or goals. But I would say overall, that the franchise consultant industry has a very good reputation for treating their clients fairly and professionally.
Business Brokers:
Many professional business brokers are also franchise consultants, and they also can be an excellent source to find existing or established franchise business for sale in your local area if you decide to go that route. Business brokers generally also have good working knowledge of how franchising works, and can often be very helpful to a prospective buyer because of their inside knowledge of the local small business market. You can find a local professional business broker in your area here by searching this business broker directory.
Hit The Streets:
Another good and obvious way to find a research a potential franchise opportunity is to scope out and visit existing franchise businesses in your local area. There is no better validation that a franchise opportunity concept works than seeing a busy store or restaurant full of customers. And if they are available and have the time, you may also want to ask the owner about how business is going, are they happy with the franchisor, and would they recommend this opportunity.
About Author:
Ray Haiber has 10 years experience as a professional small Phoenix Arizona Business Broker and franchise consultant. Go here to view and research franchise opportunities for sale throughout the USA including master and multi-unit opportunities.
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How To Sell A Franchises Business
Article Contributed by Ray Haiber
As a business broker and franchise consultant I am often asked what the general process is to sell a franchise business. It’s a valid and important question because at some point the vast majority of franchise owners will want to sell their business for a variety reasons including retirement, relocation, divorce, owner burn out, etc. Here are some general tips below that all franchisees should keep in mind before putting their existing franchise business up for sale and will hopefully make the sales process unfold much smoother.
Contact the Franchiser
It’s important to let your franchiser know that you are considering selling for a number of reasons. Most franchisor’s have explicit rules (read your franchise agreement carefully) regarding the transfer of franchise unit to new ownership including buyer qualifications, disclosures, transfer fees, etc. Most franchiser’s can also be very helpful in the consummation of the re sale and may even have a prospective buyer on file who has expressed an interest in your specific location or territory.
Sale Preparation
Before moving forward with a listing it is imperative that franchise owners invest the time to prepare and provide sufficient information for a comprehensive listing package that should include a business summary profile, equipment & asset list, and most importantly current and past financial statements. Most prospective buyers will not move forward with a business purchase unless they and their advisors have been provided adequate financial information to verify the business is a good investment. I would strongly recommend that you consult with your accountant or book keeper to help prepare your business records to help validate and support your asking price.
As far as developing a business profile, most professional Business Brokers are very good at helping business owners at organizing and preparing a professional business profile which can be an instrumental tool in the sales process. A professional and thorough profile can also be invaluable in ultimately saving time for both the Seller and Buyer. You can find a business broker in you area by accessing a business broker directory on the web.
Pricing Your Franchise to Sell
Industry sales statistics indicate that the #1 reason why most small businesses and franchises don’t sell is because they are overpriced. It’s very important for business owners/sellers to establish a realistic and credible asking price for their business that can be supported on a number of levels, including financial history and market comparables. You should consult with your franchise company or other franchise owners in your system about recent re sales in the market to give you an idea where the market is.
You may also want to find a Business Broker in your local area about demand and supportable pricing guidelines for your type of franchise business. It’s also important in most cases to offer terms to the prospective buyer because the majority of small business acquisition deals will not be acceptable for bank or SBA financing.
Confidentiality
Unlike the sale of assets like real estate, maintaining the confidentiality of a small business sale can be very important to the owner/operator for a number of reasons. It’s not unusual for employees, customers, and even vendors to become very concerned (or worse) if they become aware that the business for sale. Competitors may also use the knowledge of the business being on the market to gain potential unwanted and untimely advantages.
The best way to maintain the confidentiality of a sale is to hire a professional business broker or intermediary that has experience in confidentially marketing businesses and franchises for sale. This includes providing services such as screening, qualifying, and requiring prospective buyers to sign a non-disclosure agreement before releasing any confidential information.
Marketing & Advertising Your Franchise Business
Franchise owners today have a number of options when deciding how they would like to market and advertise their franchise business for sale. This includes going the “for sale by owner” route which has advantages and disadvantages. The biggest disadvantage being the potential loss of confidentiality and the possible negative effects it may have on the business and its chances of selling. The biggest advantage of a “for sale by owner” transaction is the owner obviously is not responsible for paying a commission to a Business or franchise Broker.
The most common option franchise owners choose when selling a franchise is to hire a professional business or franchise broker to handle the sale. Most brokers are only paid a commission after the sale is completed, so there is usually no up front expenses. They are also familiar with their local market and buyer demands, and can help maintain confidentiality as well as prepare and price a business for sale so that it has a good chance of attracting a qualified buyer.
As far as advertising, most brokers also employ a number of local and national “business for sale” web sites that can give a listing maximum & confidential exposure to prospective buyers. They also commonly work (or co-broke) with other professional brokers in their area that might have a prospective buyer for your business.
About The Author:
Ray Haiber has 10 years experience as franchise sales consultant as well as a professional small Business Broker in Arizona. Visit here to research franchise opportunities for sale throughout the USA, including existing franchises for re-sale.