Exploring Franchise Opportunities

February 2nd, 2012

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.

Entry Filed under: Seniors Helping Seniors

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