Posts Tagged ‘franchise’
Seeing the Whole Picture: Franchises
Thursday, September 4th, 2008
Q: I am looking at buying a franchise and the franchisor has painted a very rosy picture. What is the other side of the story?
Tom
A: First let me say that as a general rule, I like franchising as a business concept (and write for the Franchise Handbook.) The pros of buying a franchise are self-evident:
- There should be less risk - ideally, the business model has been vetted and there is a successful system in place that you can follow.
- There is support - a great franchisor will help you all along the way. As Ray Kroc, the founder of McDonalds and inventor of franchising said, “in business for yourself but not by yourself .”
- There is a plan - entrepreneurs who start from scratch have to figure everything out for themselves; franchisees do not.
That said, not all franchises are created equal. You simply must do your due diligence to make sure that you are buying into a system and franchise that has a high likelihood of success and profitability.
Here then are the 3 most important things any potential franchisees needs to check out:
1. What do current franchisees say? When you meet with the franchisor, they will indeed paint a rosy picture, and that is understandable: It is their business, they believe in it, and want you to buy into it.
You will learn plenty more by speaking with current and past franchisees. These folks will give you the lowdown:
- What is the franchisor like to work with?
- How much money can you expect to make?
- What sorts of hours can you expect to put in?
- What should you be on the lookout for?
It is current franchisees (and any former ones if you can find some) who can best impart this invaluable type of info.
2. How much will it cost and how much will you make ? When you meet with the franchisor you will receive their Uniform Franchise Offering Circular (UFOC.) This legally-mandated document will relate such important things as expected startup costs, the company’s litigation history, ongoing fees, and so on.
What it probably will not tell you is how much you can expect to make. The reason is because they don’t want to open themselves up to potential litigation if you don’t make as much. So again, this is where doing your homework is essential.
Many people get bit by the franchising bug and cannot wait to jump in, so sure are they that they will make a bundle. Beware of this false euphoria.
Yes, you may make a bundle, and plenty of people have, but remember - you are going into business so act like a businessperson. Crunch some numbers. Do your research. Rely on facts, not emotion.
3. What is in the fine print ? Things you may never think are important can turn out to be incredibly so:
- What about exclusivity ? You probably want to make sure that you are given the right to own the only franchise of this type in your area. You sure do not want another one of the same ice cream shops as yours opening up down the street!
- Who will be your supplier? Some franchisors mandate that you buy your supplies directly from them. If so, make sure the prices are reasonable.
- What sort of ongoing fees will you be required to pay? Whether it is a monthly royalty payment or regular advertising fees, you will be making ongoing monthly payments to the franchisor. How much are they?
The bottom line is that you have to find a franchise that realistically affords you the chance to make a profit and have some fun. Be savvy, make an informed decision, and you will probably be very happy.
Today’s Tip : Here is a SCORE Tip for potential franchisees:
“You will probably want to have an attorney review the UFOC, but it is crucial that you understand every statement in each of the 23 parts:
- Items 1 through 4 - describe the franchisor, his background, business ethics and possible bankruptcy history.
- Items 5 through 10 - deal with the fees, royalties, advertising fees and all financial arrangements including restrictions as to sources of products and services.
- Items 11 through 19 - detail the franchisee’s obligations and provisions in the agreement. These are very important as they define what restrictions there are on products that can be sold, transfer assignments, terminations, dispute resolutions and the like.
- Items 20 through 23 - provide a list of existing franchisees, both active and those who have left the system. They also provide financial statements of the franchisor and copies of contracts used in connection with the franchise offering, including the Franchise Agreement.”
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Tags: buying a franchise, expert advice, franchise, MrAllBiz.com, small business expert, Steve Strauss
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Know Your Rights in Case Your Franchise Fails
Thursday, March 13th, 2008
The U.S. Department of Consumer Affairs reports that less than 5 percent of all franchises end up failing, as opposed to non-franchise companies, whose failure rate is 30 percent. Those seem like great odds until you’re a franchise owner in that 5 percent, left with an empty bank account and a worthless business. If that happens, you’ll be left wondering if there’s anything that can be done. And the answer is, maybe.
There have been many owners of failed franchises who have sued their franchiser - and won. The reason for their store or restaurant’s demise may have been because a franchiser over-stated earnings or under-stated costs. Or perhaps, little or no help was given in training, or there was little or no on-going support. These are all things that are inevitably crucial to a franchise’s success. If you believe that you may be a victim of "franchiser embellishment abandonment", you may have grounds for a lawsuit.
Steps to take when you believe your franchise failed
because of the fault of the franchiser:
Step 1: Seek out an attorney. You can find a list of franchisee-specific attorneys on the American Franchisee Association’s website, as well as helpful information on franchisee and small business laws that may work in your favor.
Step 2: Know your franchisee rights. Read over the Small Business Franchise Act of 1999 and see if your franchiser is in violation of any of the terms. If you are uncertain, make notes of questionable areas and then ask an attorney.
Step 3: Find your evidentiary support. Go back and read through any written correspondence between you and your franchiser (including contracts and emails) and see if there is any written evidence of exaggerated claims or promises as to the amount of training or support that will be given.
Step 4: Research other failed franchises. Do some research and see if other franchises have recently closed and why. You may indeed find that the franchiser has a habit of broken promises and inflated claims. You may even want to call other existing franchise owners to see what their experience has been. Also, do a Google search on the franchise company and the franchise contacts you dealt with to see if there are any online posts about them that are relevant to your situation. If so, get your printer ready!
While there are several reasons a franchise can fail because of the fault of the buyer, there are other cases where the franchiser is obviously at fault, basically leaving the franchisee to fend for him or herself after taking the franchise fee. If your case falls into the latter category, then there’s no reason why you should have to just shrug your shoulders and say "oh well" after you realize your franchise isn’t making a comeback. Instead, get the law behind you and fight back! If your franchiser told you everything you wanted to hear (stretching the truth all the while) to get you to hand over that franchise fee, then there’s a good chance that you’ll end up with the last laugh!
Tags: advice, american franchise association, buying a franchise, Carrie Hinkel, franchise, small business franchise act of 1999, Starting a Business, startups, tips
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The Dollar Store Boom: How to Get in on the Ever-Popular Dollar Store Industry!
Thursday, January 17th, 2008
The popularity of dollar/99 cent stores has risen dramatically in the past few years, and there are several reasons for this. First, big box stores like Wal-Mart have successfully closed many local retail stores, due to the local store’s inability to compete over price and selection. This has left a gap to be filled by dollar stores - satisfying consumer’s needs to quickly buy convenience items without having to drive across town to the big box store, find a parking space and navigate their way through a warehouse-sized store. Second, name brand companies like General Mills, Proctor & Gamble and Colgate Palmolive are selling their products to dollar stores, where in the past they refused. Third, the quality of low-cost imported merchandise has increased considerably in recent years. Fourth, lower-income consumers and the elderly are many times forced to stretch their budget, making the neighborhood dollar store a natural place to shop.
Dollar stores have become so popular that it is now estimated to be a $40 billion a year industry, with an annual growth rate of 6.9%! It’s no wonder why more entrepreneurs are considering opening their own dollar stores to take advantage of this growing industry.
Important points to know before opening your own dollar store:
Location - A successful dollar store does well because it is in a convenient/heavily trafficked area and it’s in an area where their target audience lives or works. It’s doubtful a dollar store would do well at the end of a dirt road, or in posh Beverly Hills. The location of your store is of the utmost importance, and plenty of research should go into finding the perfect spot. Typically, dollar stores do well in a strip mall on a main road. It’s also important that your "dollar store/99 cent store" sign will be visible from the road. Also, remember that the typical dollar store consumer has a low or fixed income, so focus on towns where your target audience either works or resides.
Products - Getting customers in your store the first time is one thing, but getting them to be regular customers is what will prove to make or break your business. Show your customers that you have unique, quality, name-brand products and a great price and you’ll be sure to see them again and again. Always continue to bring in new merchandise, and stock plenty of name-brand merchandise. In order for your dollar store to succeed, your customers need to see that your products have value - not that they’re just cheap junk. Be selective in your products and try to think like your customers!
Advertising - Having a big, bold and prominent sign outside your building is the most important piece of advertising you can do. For dollar stores, most of the customers are either walking or driving by - so you need to grab their attention! You can also advertise in local newspapers (especially bargain pages), on restaurant placemats, in the yellow pages and even local TV commercials.
Calculating the investment needed to open a dollar store
The amount needed to open your own dollar/99 cent store will vary greatly depending on the area you plan to open your store, and whether or not you plan on buying or leasing your building. If we assume you are leasing the building, then it’s safe to say that you’ll need somewhere in the range of $50,000 - $100,000 in cash to get your dollar store off the ground. That includes rent, inventory, fixtures, signs, advertising, insurance, and working capital. Just be sure not to sacrifice the location of your store for a "great deal" on a building on the outskirts of town - that just won’t work for a dollar store.
Should you open a franchise store or own your dollar store outright?
There are really three ways you can choose to open up a dollar store: 1) buy into a franchise like Dollar Discount or Dollar Tree, 2) open your own store with the help of a turn-key company like OwnaDollarStore.com or 3) open a store all on your own. Working with a franchiser requires the most investment, but offers the least risk, while opening a store all on your own requires the least investment with the most risk. Working with an experienced turnkey company falls somewhere in the middle on both cost and risk. A turnkey company that is experienced with opening dollar stores basically helps you open your own dollar store - finding the perfect location, selecting the merchandise, choosing the store layout, etc. There is usually an upfront cost, but no monthly fees like with a franchise. Plus, you own your business outright.
What type of dollar store is right for you will depend on your available cash, as well as your experience in the retail industry.
Tags: Carrie Hinkel, convenience store, dollar store, franchise, ownadollarstore.com, Starting a Business, startups
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Factors to Consider When Choosing a Franchise to Buy
Monday, December 24th, 2007
When you want to go into business for yourself, but aren’t quite sure you want to start from scratch and you can’t find an existing business that fits what you’re looking for, you might consider franchise ownership.
Purchasing a franchise involves paying an initial fee and then a percentage of profits to a franchisor. In return for your investment, you gain the use of the company’s trademark, ongoing support from the franchisor and the use the franchisor’s systems and methods of doing business including logistics, purchasing power, IT systems, and more.
Buying a franchise has several advantages over starting a business from scratch. You are buying a proven system of operation and will get training in how to use it.
Advantages of Buying a Franchise
* You are buying turnkey operation, a plug and play business
* Standardized products and systems come with the franchise
* Most franchises have standardized financial and accounting systems
* Collective buying power with all the franchisees pooling together
* Training and consulting available
* National and local advertising programs
* Most franchise corporations have ongoing research and development
* Financial assistance is available through some franchises
* You will be provided an operations manual
* Sales and marketing assistance come with your franchise fee and may include some advertising as well
Franchising is not for everyone. If you have an independent spirit and do not like to be told what to do, be careful of entering into a franchise. If you like to create and color outside the lines, a franchise may not be a good fit for you, so really check out operating policies and procedures to see what freedoms you are afforded in running your business.
Things to be aware of when buying a franchise
* Loss of control - you will need to do things as the franchise indicates
* You are entering into a binding contract
* The franchisor’s problems become your problems
Franchises are designed to help people who are new to business set up shop and run a business, and it can be very exciting. Don’t let your emotions dictate your decisions, factor the positives and negatives and make a good assessment of the best decision for you based on your situation.
Purchasing a franchise can cost as little as $3,000 and as much as $50,000, depending on the business type. There also is usually an ongoing charge or percentage of the profits, known as a royalty fee. These are variable and the amount will depend on the franchise ownership. These costs are in addition to the many other business costs you will have such as:
* Facility/Location
* Equipment
* Signs
* Opening Inventory
* Working Capital
* Advertising Fees
According to the FTC’s Franchise Rule, put into effect October 21, 1979, franchisors are required to provide a full disclosure of the information a prospective franchisee needs in order to make a rational decision about whether or not to purchase the franchise. The timeline for the disclosure is the first personal contact and must end at least 10 days prior to any money changing hands.
The purpose of the rule is to have a cooling off period so the buyer has time to rationally think about the options before them without any high pressure sales tactics. You can visit the FTC’s Franchise and Business website to find out more about the Franchise Rule.
Franchises can be a very rewarding purchase and an excellent investment if you are of the right personality and purchase the right type of franchise. As always, make sure you consult with your accountant and attorney prior to entering into any agreements regarding your business.
Tags: buying a franchise, entrepreneur, franchise, FTC, Rebecca Button, Starting a Business, startups
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To Franchise, or Not to Franchise…That is the Question
Thursday, October 18th, 2007
Q: I have never owned a business before and am looking at buying a franchise. It is a well-known outfit, so I like that and think I can make a lot of money, but what should I be on the lookout for as I do my due diligence?
Dave
A: First let me say that as a general rule, I really like franchising a lot as a business model, especially for new entrepreneurs. The way it is supposed to work is that an entrepreneur creates a successful business, irons out the kinks, is able to turn it into a franchise system that most anyone could follow, sells the system and brand to franchisees, and then supports those franchisees with ongoing training, advertising, and other services. For a new entrepreneur, most of the mistakes have hopefully already been made and therefore they are buying a business good to go.
But remember this too: Rules are made to be broken, and not all franchisors are created equal. Some are scrupulous, and others are un. Some give lots of training and support and are easy to work with, and others don’t. Some do not have problems with their network of franchisees and others have far too many
So before you get too excited and start thinking with your wallet instead of your head, find out the answers to these sorts of issues long before you sign any documents:
What are the real costs associated with the franchise? There are several fees associated with a franchise and you have to understand them all to get the whole picture:
* The franchise fee: This is the fee to buy the system and use the logo, etc. Usually not astronomical, it can run between, say, $5,000 and $50,000
* The build-out: This cost may surprise you. If you buy a retail franchise, the franchisor will want you to build the store according to their specifications of course. This may mean hiring an architect, leasing or buying a building, remodeling and so on. It easily could be hundreds of thousands of dollars, or not.
* Other costs: What about equipment leases, monthly advertising fees, or ongoing royalty payments?
What about exclusivity? In all likelihood, you do not want competing businesses of the same franchise in your neck of the woods. Find out how big your exclusive territory is, what sort of commitment you get, and for how long. And, if you do get exclusivity, do you also get an option for new franchises in the area? Multiple units can be sweet.
What’s the deal with suppliers? If the franchisor mandates that you buy supplies directly from the franchisor, or from a franchisor-authorized dealer, they better have a pretty nice deal in place for you too. If not, not only will your choices be limited, but you will be unable to shop for a better price.
How much money can you reasonably expect to make? Maybe not surprisingly, few franchisors offer this sort of information, and the reason makes sense: If you don’t make as much, you just might sue. So mum’s often the word on their end.
Because of that, and for other reasons as well, it is vital that you meet with as many current franchisees as possible as part of your research. How much do they make? What is the franchisor really like to work with? Are franchisees generally happy or unhappy with their choice? You can learn these sorts of things best from current franchisees.
How many leave within two years? Either from failure or selling out, a high percentage of dropouts is a bad sign indeed. By the same token, find out what one of these franchises goes for on the open market, and maybe even more importantly, whether you even have the right to sell it on the open market.
Franchising can be great, but you have to get answers to questions like these before plunking down your hard-earned money and signing any contracts.
Today’s Tip: One place to learn some of this information is from the Uniform Franchise Offering Circular (UFOC). The UFOC is a federally-mandated disclosure document that franchisors give potential franchisees. It discusses the background of the franchisor and its principals, fees to be paid, territories, and much more — in all, there are 23 categories covered.
The UFOC must be given to a potential franchisee either at the first meeting of the franchisor and potential franchisee, or ten working days prior to the execution of a franchise contract, or payment of money to the franchisor, whichever comes first.
Steven D. Strauss is one of the world’s leading small business experts. His latest book is the Small Business Bible. A lawyer, author, and public speaker, Steve has spoken around the world about entrepreneurship, including at the United Nations, and he has been on CNN, CNBC, MSNBC, The O’Reilly Factor, and many other television and radio shows. If you would like Steve to speak to your group, help your business grow, or if you would like to sign up for his free newsletter, "Small Business Success Secrets!" please visit his website - www.MrAllBiz.com .
Tags: advice, entrepreneur, franchise, MrAllBiz.com, small business expert, Starting a Business, startups, Steve Strauss, tips
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Becoming a Franchise
Tuesday, September 25th, 2007
A lot of people consider getting into the franchise business because it allows you to operate a business by simply paying a franchise fee and taking on another arm of an already established brand name and product. You are given the right to use the franchisor’s name, as well as help in running and setting up the business.
Franchises can be a good investment if you want to start your own business without as big a risk initially because you are setting up an already established business. Although start-up costs and fees can go up to hundreds of thousands of dollars, and you won’t have total control over how your business operates, many people are willing to take what a franchise has to offer and run with it.
When deciding whether or not a franchise opportunity is right for you, take the costs involved into consideration specifically, for each franchise you are interested in.
Research the initial fees and expenses expected of you - usually the first franchise fee is not refundable and can be quite costly, running into hundreds of thousands of dollars for major franchises. It can also be costly to rent, build, and equip the location and get started with your first round of inventory. Operating licences can also cost a pretty penny, as well as insurance coverage. Some companies make you pay a grand opening fee to fund the cost of promotion for the new location.
On top of all the initial fees you may be required to pay, you have to take into account royalty payments down the line. Royalty fees are usually based on a percentage of your weekly or monthly gross income, so it’s important to research royalty percentages and fees thoroughly before signing the dotted line and making a full commitment.
Sometimes royalty payments are due even if you fail to earn a substantial amount in a month - make sure you know what you’re getting into before making a final decision. Oftentimes royalty rates are levied just for the right to use the company’s name, so fees may remain due until the franchise agreement expires.
Advertising fees are another cost to consider. Some franchisors require that you pay into an advertising fund to help with the cost of national advertising or for the purpose of attracting new franchise owners to the business.
When researching different franchises, ask yourself the following questions so you can discover whether or not being a franchisee is the right decision for you:
What are your life and business goals?
How do you define success?
Will you need a certain level of annual income to get by?
Is there a specific industry that interests you that you would love to run a franchise in?
Is retail or selling a service product important to you?
How much time are you willing to commit to the venture?
Will you be running the business entirely yourself, or do you want to hire a manager?
Do you expect owning a franchise to earn your entire income for the year?
Is running a franchise something you want to do for a very long time?
How many outlets do you want to operate?
In the end, the decision is purely personal, so if opening up a franchise is right for you, go for it!
Tags: advice, entrepreneur, franchise, Leeia Ladipoh, Starting a Business, startups, tips
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