Franchise Buisness Advice - How To Select a Franchise Buisness
How to Select a Franchise Business

The primary purpose of this section is to get enough information about the company to be convinced that they are reputable, financially strong, and recognized as a leader in the field.

a. Parent vs. franchise company - As outlined earlier, many times the franchise company is part of a larger company. In order to check thoroughly this should be known. Ask for, in addition to the same name and address of the franchise company, the name and address, if any, of the parent company. Remember that being part of a larger company can be a very important asset to you in terms of financial stability and visibility. Also, it won't hurt when dealing with a bank for financing.

b. Public vs. private company - Here you are concerned with the main or parent company. Find out whether or not you are dealing with a public (stock sold public) or a private (stock held by a small private group) company. Checking on a public company is a relatively easy matter, whereas checking on the private company is more difficult.

c. Public company checking - This can be done via published sources since the SEC requires disclosure of all stock traded public. Determine where the stock is traded.

With this information contact your stock broker, ask him to send you a stock report on the company. This report will give you all the basic information on the financial structure of the company you need. Look for rising trends in sales, profits, and earnings per share. The report will also give you the address of the company and the name of the officers including the treasurer. Write to him on a postal card requesting a copy of the most recent quarterly and annual reports, as well as product literature. It is best to mention that this information is for your investment program. From this literature you will learn all additional information you need to know about the company. If you do not have access to a stock broker, consult a local college or public library. Most of them will have standard reference volumes that contain information on most public companies.

d. Private company checking - This is more difficult than checking public companies. If you have access to a financial reporting service, request a report on the company in question. In any event, you should ask the franchisor for references including a bank and major supplier. Write to each asking specific questions, and in particular, attempt to determine their financial soundness, also ask some questions the answers to which have already been supplied by the franchisor. See if the answers are the same. This acts as a cross check.

In this section you want to determine exactly what you are getting in your franchise package, what you can expect to get in terms of return, and what does all that fine print say.

a. Lawyer - Before you sign anything and commit any money you should have a lawyer advise you and make sure that you understand what you are getting into. Make sure that you understand what legal liabilities are possible when you get into business and more importantly make sure these liabilities are covered by insurance, either your own or that of the franchisor. Check your own lawyer; if you do not have one, check with friends or another local small businessman and get the name of a qualified lawyer. Make sure the lawyer you select has interest and experience in advising small businessmen.

b. Financial - The balance of this section will outline questions of a financial nature. To be meaningful, figures must be interpreted by a "pro" ...an accountant. As in the case of the lawyer, find one who is knowledgeable in advising small businessmen. The best way to find a good accountant is to ask local small businessmen for a recommendation, or perhaps your local Chamber of Commerce might have a suggestion.

c. Management - Business management involves the merging of legal and financial structures with the overall running of the business. Check your local Chamber of Commerce to see what they have to offer. Discuss your proposed new business with a successful businessman and get his views.

a. How much money do I have to have to get started - Don't be fooled by claims such as "Your own business for only 3,500." Make out your own forecast of required finances and include franchise cost, first year operating expenses, and personal funds required for up to 2 years. Keep in mind that starting a business does not mean that the income will automatically come in. In some franchises you might go as long as six months before a penny flows into your bank account. In any event, there is start up time regardless of whether it is a personnel agency, fast food outlet, motel, rental agency, etc. I cite the 2 year period because this is the accepted break even "rule of thumb" for a new business. A franchise, however, should break even much earlier because part of what you are buying are proven products, programs, and procedures. In any event be wary of any franchisor that promises "riches" in less than 2 years. It just doesn't happen that way.

b. What do I have to pay the franchisor to get started - This consists primarily of two things ...franchise fee and inventory, and material or construction costs. Make sure you get a complete answer to this question. It's too late once you have started in business to discover the true costs are more than you can handle. Let's consider each of the elements that go to make up the initial amount you pay the franchisor...

c. Franchise fee - Is there a fee as such? If so, how much? What does it include? What you are paying for in the franchise fee is the right to use and promote a name and identification program. The value of this depends on how well known the name and trademark really are. This factor is directly related to marketing and your judgment should be guided by what you find out in Section E-Marketing. Two other areas are also covered by this fee ...initial training and home office assistance. Training is covered in Section D-Training, and Section F-Home Office Support. Ask the opinion of your lawyer and accountant and make sure you are getting true value for the fee. There are many good franchises that have no fee and others who will consider negotiating the fee.

d. Services - Are you paying for home office services as part of the initial franchise cost. If so, what are they? Find out what specifically you will get. Included here should be complete operating manuals on all phases of the operation. These should be updated as required. Also, is on the spot assistance of home office experts available? If so, who, when, what, how long, etc. In addition, find out whether or not the franchisor offers a computerized accounting system. Accounting is a costly and time consuming chore if you have to do it yourself, so this service from the franchisor is a plus.

e. Product - Does the initial cost include an "opening" inventory? Is the price fixed for this and reorder? Is the price competitive? Can you buy elsewhere more cheaply? Are you permitted to do so? Can you continue to do so? Get an itemized list including your cost and your cost to your customers. Check and see what percentage of your total initial cost can be recovered by the resale of the inventory. Also important in this evaluation is the cost to your customer:

1. Is the price competitive with equal products?

2. Is the quality worth the price?

3. Will the customer be a repeat customer based on the quality of the product?

f. Real Estate - How much of the initial money required is for the purchase of land and/or construction of your place of business?

g. Equipment and fixtures - Is the cost of start up equipment and fixtures included in the initial costs? Does the franchisor have an equipment subsidiary from which you can purchase all equipment, furniture, and supplies at a favorable cost? Are they priced competitively? Could you save money buying them elsewhere? If so, can you? If all the supplies and equipment you need are not included in the package price then you must allow for this in your personal start up costs. Personal service type franchises will usually require only office furnishings; whereas fast food and education franchises will usually require a physical plant and various types of equipment and supplies.

h. Other - Always check to see if there are any unique features of the franchise. If so, are they part of the initial cost. Also, are there any "employee benefits." Some franchises include benefit programs of life insurance, hospital insurance, and retirement plans.

i. Is any of the initial cost refundable - Some franchises make it possible to get back the cost of the franchise fee if the franchise is successful and maintains a predefined sales volume. This is a good thing to look for ...it provides a real incentive for the franchise to "stick with it" and "follow the rules." If there is such a plan, find out exactly what it is and make sure it is covered in your franchise agreement.

a. Is part of the initial cost to the franchisee financed - In most cases where the start up costs are high the franchisor will finance a portion of the cost. Usually they will require that you pay the franchise fee in cash. Then on the basis of an acceptable financial statement they will finance the balance of the start up costs.

b. What is the interest rate - Find out what the interest rate is and check around and see if you can do better. Remember that many franchise companies have finance company subsidiaries whose business it is to lend money to the franchisee. Make sure they are competitive. Check your local bank. Get the best deal you can since every dollar you can save in interest is a profit dollar for you.

4. FORECAST OF INCOME AND EXPENSES

The forecast, the product or service to be sold, and the written agreement are the three most important areas that must be considered in the evaluation of a franchise. Evaluation of the product has already been covered, the agreement will be discussed later in this section. Remember in computing the forecast of income and expenses that this should be based on the experience of successful franchises and a conservative forecast of sales. Don't be carried away by good looking figures that show amazing profits at the end of one or even two years.

a. Is a forecast of income and expenses provided - Ask this question and get a copy if the answer is yes. Ask your accountant to review it and if he does not agree with the franchisor have him prepare one. Review the two opinions with the franchisor and require that he provide reasonable answers for the differences. Also check some current franchisees and ask them the same questions. If the franchisor does not supply a valid forecast of income and expenses in writing or if he cannot give reasonable answers to your questions, consider these as strong negatives against purchasing the franchise.

b. Does the forecast relate to your market area - This consideration relates back to the initial section and the question "Needed in your area." If the need is there the chances are very good that the forecast can be projected to relate to your market. Make sure, however, that this is the case. Find out if the forecast is based on experience, if so make sure that the forecast you follow is based on a market equal in size to your own and compatible with the profile of your market demographics (average age, income, race, family size, property value, etc.).

c. Does the forecast provide to meet your personal goals - Is there sufficient income so that you can meet expenses and payroll and at the time pay yourself a salary that will support your family in the way you want to? Only you know the answer to this. A good idea is to put the family budget on paper. Start by listing month by month all regular expenses. Then take annual costs such as medical, clothing, recreation, etc. and divide them equally assigning a portion to each month. This gives you a monthly "break even" point for the family. What you will be doing is paying regular bills as they come up and building an escrow account for the annual type bills. Savings, when you are building your own business, will probably not be possible for awhile; but remember every day you operate a successful business you are building an equity which will be your future.

d. Does the forecast show an adequate return on investment - In starting your own business you are investing in yourself. Like any investment you expect a return on the principal invested as well as safety of the principal. See that the return you have set as your goal is there. (This is in addition to the money you take out as salary.)

e. Does the forecast provide for adequate promotion and personnel - Sales to obtain orders and people to fill them are the key factors to the success of any business. One without the other can spell disaster. Make sure that there is adequate money assigned to the payroll and advertising promotion accounts. The latter will be covered in Section E-Marketing.

5. WHAT IS THE PROPER LEGAL STRUCTURE FOR MY COMPANY

There are six points, in addition to tax considerations, that are significant in determining the proper legal structure. They are cost and procedures in starting, size of risk, continuity of operations, adaptability of administration, influences of applicable law, and attraction of additional capital. Use your lawyer on determining the answer. The following are the three main choices for legal structure.

a. Proprietorship - The easiest to begin and end, can have the most flexible purpose for its operations, need no Government approval, has business profits taxed as personal income, and makes the owner personally liable for debts and taxes.

b. Partnership - This is the simplest for two or more people to start and terminate, has the same flexibility of objective, has partners taxed separately, and makes all except limited partners personally liable for debts and taxes.

c. Corporation - This is the most formal of structures, operates under laws, has continuous and separate legal life, has its scope of activity and name restricted by a charter, has the business' profits taxed separately from earnings of executives and owners, and makes only the company (not the owners nor managers) liable for its debts and taxes.

6. ARE ALL DETAILS COVERED IN A WRITTEN FRANCHISE CONTRACT

This is the instrument that is the formal understanding between the franchisor and franchisee. All the major points about your franchise should be spelled out there. Do not accept the "gentleman's agreement" from a representative of the franchisor ...get it in writing. Have both your lawyer and accountant review the contract before signing.

a. What to look for - Once again be guided by your lawyer and accountant but be sure to look for franchise fee; termination, selling, and renewal clauses; cooperative advertising and promotion funds; does franshisor patent and liability insurance protection extend To the franchisee; are the home office services spelled out; are all the details as to commissions, royalties, etc. spelled out; is the training program and who pays for what spelled out; are financing and financing details spelled out including repayment and interest; is the territory covered outlined, is it exclusive or nonexclusive, and can the franchisor or his representative sell direct in your area.

Note: the termination clause should be carefully reviewed to make certain that you have a sufficient grace period and that your rights as well as those of the franchisor are represented.

One of the unique features of franchising is that it provides an opportunity for a person to enter a business that is of interest to him but about which he knows nothing. The franchisor assumes the role of educator and is responsible for the training and education of the franchisee and his staff. This training should be very concentrated at the start and should be continuing to keep the franchisee and his staff current and up to date as far as new products, techniques, methods of operation, etc.

1. INITIAL TRAINING

This is the critical area. What does the franchisor provide in the way of a training school to teach you the business of your franchise, how to operate your business, how to recruit and train personnel, etc. In other words a "How to" course. Usually this training is of a formal nature and conducted at the home office.

a. Duration - This of course depends on the franchise and how complicated the business is. It can range from one day to two months. how long is your initial training program? Equally important here is what happens after you have "graduated." Are you sent home to run your business; or does a field representative work with you at home to give you "on the job training" and guide you as you start out. If "on the job" assistance is not provided by the franchisor this should be considered a negative. Remember here that while you are gone from home you will not be generating any income. There are, however, some franchises that pay you while you learn. This should be the case when the training period is quite long.

b. Cost - This should be part of your franchise contract. Usually your franchise fee includes the cost of training, supplies, and your personal expenses while training. Check and make sure that this is the case. See that everything is covered including transportation, room and board, as well as training and supplies.

c. Curriculum - What is included in the training program? The franchisor should be able to provide you with a training schedule so that you can see what is included. If you are dealing with a reputable franchisor you will have no problem here since the success of your business, and therefore his, is determined by how well you know your business. Also, as was pointed out before, successful franchises follow a prescribed program and you can only learn the program through training. Make sure that the following is covered: franchise operations, sales, finance, promotion, personnel, management, manufacturing and maintenance (if franchise includes this), and training.

d. Staff Training - In many franchises you will be hiring employees who have to be trained. Usually this becomes the job of the franchisee and field trainers of the franchisor. Very seldom does the franchisor provide employee training at the home office. There are exceptions to this of course. Check and find out which is the case with your franchise. If the job becomes yours there are two things to find out ..do you get assistance from the home office in the form of a field representative to help with the training and what is the training program provided. Training is not as difficult as it may sound. Most franchisors have "canned training programs" which are on video. The franchise package usually includes all that is needed to run the program including manuals, samples, etc. Find out exactly how this will be handled and what you will get.

2. CONTINUING TRAINING

You have to stay up to date to get ahead. It's as simple as that. Things change every day and your success depends on how current your business is. For example, if you have a fast food outlet and teenage fads change to the point that what you offer is no longer "in," what do you do? Once again you look to the franchisor to keep you and your staff up to date through continuous training.

a. Program - What is the specific program of continuous training. Is there a formal "refresher course" for franchise principals? Are the staff training programs updated regularly? Are there seminars? Is there a constant flow of home office educational materials? Request samples.

b. Cost - What is the cost of the continuing program? Is it part of the franchise package or does it cost additional?

c. Materials - You should be given a complete list of training materials as well as an outlining of both initial and continuing training programs.

Suggestion: When you interview present and past franchisees, include training in you line of questioning. Find out if the franchisor provides the training he promised at the time of signing the contract and is the training effective and complete?

This is the lifeblood of your franchise once you are in business.

How you market, or sell, your product or services is important because it determines size of staff, capital required, and most important of all the type of work you will be devoting your future to. It is important that you understand how you will market your products or services. In some cases you do selling only, the franchisor provides the leads; in other cases it is up to the franchisee to generate leads and follow up on them. Also important is who will be your prospects and customers.

1. HOW IS THE PRODUCT OR SERVICE SOLD

There are different methods of selling. For example, a cosmetics franchise might require cold canvass, door-to-door; a technical school franchise would probably be in-home by appointment; a bill collecting agency will probably be a combination of direct mail and telephone; fast food outlets and other retail franchises would be instore sales; and most franchises selling to business executives would involve selling at the prospect's place of business by appointment. Which of these, or possibly a combination of two or more, is the selling method of your franchise?

2. HOW DO YOU GET THE SALES LEADS

This takes various forms. In some cases the franchisor through national advertising, public relations, and direct mail generates all the leads and turns them over to the franchisee for follow-up. The other extreme is that the franchisee has to secure his own leads either with or without cooperative advertising support from the franchisor. (If this is the case, is it provided for in the forecast?) An important thing to remember is that a satisfied customer is your best advertisement. There should be a technique to get referral prospects from your satisfied customers. Other methods of securing sales leads are telephone solicitation and trade show booths. Trade show attendance is usually handled by the franchisor or a distributor.

3. WHO ARE THE PROSPECTS FOR THE PRODUCTS OR SERVICES

It is imperative that you know who your prospects are. In most businesses an accurate rule of thumb is 20 percent of your customers account for 80 percent of your business. You need to know who that 20 percent is for your franchise. In consumer products the profile of your best customer will probably be described by age, sex, and income; whereas your best business customer would be described by type of business, annual sales volume, number of employees, and title of purchaser. Ask for a profile of the prospect. If this information is not available it should be viewed as a negative.

4. WHAT IS THE NATIONAL ADVERTISING PROGRAM OF THE FRANCHISOR

The answer you get to this question depends on the way you ask it. Most franchises are sold via ads much like the one you probably answered. Many franchisors will include the franchise sales advertising program as part of the answer to how much they are spending in advertising. Others will include the dollar value of publicity appearing in newspapers, magazines or on radio and TV. What you want to know is what is the national advertising program promoting the products or services of the franchise to the prospective customers. Public media such as television, radio, newspaper, magazine, and outdoor are important to the visibility of the product and franchise trademark. Remember the franchise fee you pay is for the use of these; and therefore make sure they are properly and effectively promoted. Direct mail if it is local or supporting franchise sales should not be considered as part of the national program. Samples of the national advertising should be available to prospective franchisees. You should find out where the advertising runs so that you can look for it and form your own opinion as to its effectiveness.

5. WHAT KIND OF ADVERTISING AND PROMOTION SUPPORT IS AVAILABLE FOR THE LOCAL FRANCHISEE

This is the local advertising and promotion program in support of your franchise in your market. This should be an extension of the national program ...make sure it is. For this reason the franchisor should supply packaged programs for your use. These programs should include ad mats, radio scripts, TV commercials, sample media programs, direct mail programs, point of purchase material, sample publicity releases and accompanying photographs, etc. Refer to the section on finance for a discussion of coop advertising. The establishment of your business is news. Does the franchisor provide plans for a grand opening; including advertising, publicity, etc. Ask to see a sample kit.

6. SHOULD YOU HAVE AN ADVERTISING AGENCY

Probably not because part of the franchise package should be a tested advertising program along with complete instructions as to how to implement it. You should get some assistance from the franchisor's field man and possibly his advertising agency. In some cases, particularly in larger cities, the national advertising agency of the franchisor might have a branch office in your city. If this is the case, you can probably get assistance from them at no cost other than the normal cost of the advertising space or time. Check with the franchisor to see if this assistance comes from the field man or the advertising agency.

Even though you will be in business for yourself your success is tied directly to the franchisor and therefore you should look to your home office as a branch manager of a company would look to his home office. For the most part the home office of the franchisor will consist primarily of people as opposed to manufacturing facilities, warehousing, etc. You will probably find that the number of home office personnel might seem low when compared to companies with company owned distribution systems. It is important to keep in mind, therefore, that it is not quantity but quality that is important to you. For example, a technical school franchise would be expected to have persons on staff who have backgrounds in education; also there should be education experts serving either as directors or consultants. In this section therefore you want to find out the qualifications of the franchisor in respect to the product or service of the franchise.

a. Principals - Who are the key persons in the day to day operation of the business? What are their backgrounds and accomplishments? If all have financial and or sales backgrounds and no particular experience in the field of the franchise this should be considered a negative. Look for sound business and financial experience and a depth of expertise in the business of the franchise. For example, if the franchise is in the automotive field you would expect to find that some of the principals came from automotive companies. If the franchise is in the motel field you would expect experience from one of the major motel chains.

b. Directors - Who are the members of the board of directors? These board members usually serve without pay and many times are majority stockholders. What you are looking for are directors who have backgrounds related to the business of the franchise. The more the better for you. Also it is always good to find the following on the board: officer of a bank, professor of a university, and officers of major companies.

a. Consultants - Somewhere in between the principals and the directors fit the consultants. These are people who are specialists in specific fields and sell their services on a retainer basis to companies needing strength in the particular area the consultant serves. There are transportation consultants, medical consultants, marketing consultants, management consultants, etc. Check and see if the franchisor has "beefed up home office capability" with any consultants. Find out who they are and a little bit about them.

a. Service departments - These departments are what the title says ...service. They are in existence to be of service to the franchisee so it is in your best interests to find out what they are, who is in charge, what is his background, and the specific services they provide. Other sections have covered what services you may want. Critical departments to look for are: finance and accounting, advertising and promotion, sales and marketing, research and development, real-estate, construction, personnel and training, manufacturing, and operations. In addition to the departments covered earlier two others mentioned above are very important. Research and Development is the lifeblood to any organization since it is charged with plotting the future of the product or service line. This should be an active department with an adequate budget. Also the operations department (many other names are assigned to this) with which you will have much of your contact is most important. This is the department that is charged with the responsibility of liaison between franchisor and franchisee. In the case of a distribution set up, the distributor works through the operations department and the local franchisee through the distributor. In any event make sure that there is a clear channel of communication between you and your distributor or franchisor.

a. Field Support - This is covered in the sections on training and marketing as it relates to those specific subjects. What you want to find out is specifically what you get in terms of help at your place of business from the franchisor. You will note that most franchise package benefits mention field support, but the questions are when, how often, who, what does he do. It would be good to get the name of this person and talk to him to get an understanding of what he really can do for you.

Yes / No

1. THE COMPANY:

1. WHERE TO GET ADVICE:

1. INITIAL TRAINING:

1. PRINCIPALS AND DIRECTORS: