Getting started? According to a national overview by the IFA, there were 828,138 franchised business establishments in the United States in 2007, which provided 9,125,700 jobs. These franchised businesses supplied an annual payroll of $304.4 billion, produced goods and services worth $802.2 billion, and contributed $468.5 billion to GDP.
These franchise business opportunities continue to grow as franchising evolves into a powerful economic growth engine with endless opportunities.
Whether you’re a curious consumer or experienced entrepreneur, here are a few steps you need to take before taking the first steps towards your franchise opportunities in the USA.
First, Ask Yourself “Is Franchising Right for Me?”
Franchising is not a guaranteed path to success, but it is a solid formula based upon tried and tested systems that can pave the way to success.
Joining a franchise is not for everyone; to be successful you must be willing to follow the system provided by the franchisor. If you don’t like to be managed, follow a business plan, or be a team player, then perhaps you should reconsider your options.
New franchise business opportunities work because they delivers goods or services in a consistent manner, regardless of location. If you want to do things your own way then franchising might not be the right fit for you.
Benefits of Franchising
- A proven system – By purchasing a franchise, you are buying a business with a track record of success and commercial viability. This is where research is vital; you need to ensure that the system you are buying into has continued to be profitable over time. Providing the system is followed, there is less risk of failure then with a start-up venture.
- Start up assistance – The franchisor will assist you with the physical fit out of your premises, or if it is a mobile or home-based business, then everything that will be required to begin operating your business within that system.
- Support – Ongoing assistance is provided by the franchisor. You will also benefit from the knowledge and experience of the franchisor. Being part of a network also allows you to share your experiences and learn from others in the network.
- Bulk purchasing power – Being part of a franchise gives you access to group buying power not available to individual businesses.
- Marketing – Through contribution to a marketing fund, franchisees gain the benefits of a larger marketing fund used to promote the whole network.
- Finance – Franchisors may be able to negotiate better rates of finance for funding the business, and/or better lease location and terms if there are premises involved.
Risks of Franchising
- Reluctance to follow the system: If the franchisee cannot adhere to the discipline required when following the system, conflict will occur.
- The process for sale or transfer of the franchise rights is likely to be controlled by the franchisor (as per the franchise agreement), though approval for sale or transfer cannot be unreasonably with held.
- The behavior of the franchisor or other franchisees can affect the brand integrity for other franchisees.
- If the franchisor goes into receivership, franchisees may face the prospect of having to change brand name and other elements of the system under a new operator.
- Franchisors’ ability to make changes to the system can affect cash flow and/or profitability for the franchisees.
Franchise businesses face the same challenges as other businesses. Economic downturn, increased competition, and many other risks affect franchises in the same way they do non-franchised businesses.
Choosing the Right Franchise
Perhaps one of the greatest decisions you will need to make is choosing the right franchise for you. Remember that once you have entered into the agreement, you will be required to live and breathe the business for it to succeed!
Darryn McAuliffe, Industry Solutions Manager at NAB suggests there are some questions that you need to ask yourself when considering a franchise including:
- Do I have a passion for the brand and its product or concept?
- Am I motivated to work in this business for the next five to ten years?
- Do I see growth in the franchise? Can I acquire more outlets once established?
- Do I share the same vision, values and work ethic as the franchisor?
- Will I be happy to comply with the existing system without wanting to make changes?
If the answer to all of these questions is ‘yes’, then it is likely the franchise you are considering is the best franchise opportunities for you, and importantly your relationship with the franchisor will be a positive and mutually beneficial one.
By conducting thorough due diligence you increase your chances of making a good decision and of future success.
Due diligence is the process of evaluating the prospective business purchase by getting information about the financial, legal, operational and other important aspects of the business.
Kevin Bugeja of Franchise Selections advises that before investing in a particular franchise, it is important to research the operation as thoroughly as possible.
“Find out how long the franchise has been in existence,” says Kevin. “If the franchise has been in operation greater than ten years, it is more likely to have made it through several stages of growth; therefore having a more reliable system in place.”
Other questions that need to be answered, according to Darryn McAuliffe from NAB, include:
- How much will you need to invest to buy and operate?
- What initial and ongoing training will you receive?
- What level of support will you receive with managing your business?
- Does the franchise have the ability to remain competitive and maintain its brand value in a fast moving market?
The International Franchise Association has an abundance of information about franchising and various opportunities. You can learn about franchise relations and read a “franchising 101” on their website http://www.franchise.org.
Asking the Experts
Evaluating a prospective franchise business is not an easy process. “You will almost certainly need professional help to carry out due diligence,” says Tim Kilham, Director of Accounting at Lanyon Partners.
These professional advisors usually include an accountant, a solicitor and a banker.
“It is advised that you consult with a professional advisor who is a specialist in the area of franchising,” says Tim. “In the medical field, general practitioners do a great job but there are times when you need the services of a specialist. So it is with franchising. Most accountants, solicitors and bankers do a great job, but franchising occupies a special niche, with its own legislation and circumstances, and it requires the services of specialists to carry out proper due diligence.”
According to Tim, the roles of your professional advisors are:
- An accountant will help you evaluate the existing business and establish its true sustainable profitability (which may be, and very often is, very different to the profit shown in the financial statements). An accountant will help you prepare your business plan and your profit and loss and cash flow forecasts and help you work out a fair price to pay for the business.
- A solicitor will help you understand all the legal documents – the disclosure document, the franchise agreement, the lease, the sale contract, etc., etc. – and provide advice on these documents.
- A banker will advise whether the finance will be forthcoming and if so what types of finance are available and appropriate. Whilst a banker’s role is not generally that of providing advice about the potential purchase, a specialist franchise banker’s perspective is nonetheless often very useful.
Financing Your Franchise Opportunity
Darryn McAuliffe from NAB recommends the following when approaching a bank to obtain funding for your franchise.
- Demonstrate that due diligence has been undertaken
- Develop a comprehensive, professionally presented business plan
- Provide all requested information in a concise and professional manner – missing details will cause more challenges for you in obtaining what is required
The Franchise Agreement and Disclosure Document
A Franchise Agreement is a legal, binding contract between a franchisor and franchisee, enforced in the United States at the State level.
Before a franchisee signs a contract, the US Federal Trade Commission regulates information disclosures under the authority of The Franchise Rule. The Franchise Rule requires a franchisee be supplied a Uniform Franchise Offering Circular(UFOC ) or Franchise Disclosure Document (FDD ) prior to signing a franchise agreement, a minimum of ten days before signing a franchise agreement.
After the ten day waiting period the Franchise Agreement becomes a State level jurisdiction document. Each state has unique laws regarding franchise agreements.
A franchise agreement contents can vary in content depending upon the franchise system, the state jurisdiction of the franchisor, franchisee, and arbitrator.
A typical franchise agreement contains:
- Uniform Franchise Offering Circular (UFOC)or FDD Franchise Disclosure Document (FDD)
- Disclosures required by state laws
- Parties defined in the agreement
- Recitals (ie: Ownership of System, and Objectives of Parties
- Licensed Rights, such as Territory, Rights Reserved, Term and Renewal, Minimum Performance Standard
- Franchisors Services, ie: Administration, Collections and Billing, Consultation, Marketing, Manual, Training
- Franchisee Payments, ie: Initial License Fee, Training Fees, Marketing Fund, Royalties, Renewal fee, and Transfer fee
- Franchisee Obligations, ie: Use of Trademarks, Financial Information, Insurance, Financial and Legal responsibility
- Relationship of Parties
- Transfer of License, ie: Consent of franchisor, Termination of license, Termination by licensee
- Other provisions, governing law, amendments, waivers, severability and arbitration
If you are considering buying a franchise you will be provided with the current version of the Franchisor’s Disclosure Document (FDD) that will be attached to the form of franchise agreement you will be entering into.
Franchisors must ensure they release in the disclosure document the information which is necessary to enable you to make a reasonably informed decision.
The franchise agreement attached to the disclosure document should be in its final form. This means that the schedule of the franchise agreement must be completed with all the commercial details specific to your franchised business and the agreement must be the current version used by the franchisor. You will need to have decided on your franchisee entity (whether yourself, a company, trust or partnership) as disclosure needs to be made to the franchisee entity in order to comply with the Code.
Lease or License to Occupy
For those franchises that are retail based, the premises for the business is central to its success. Usually, either the franchisor will hold the lease and grant to the franchisee a license to occupy the premises or it will elect to not hold the lease and the franchisee will be the lessee. Depending on the type and nature of the particular franchise system, the franchisor may or may not have an active role in negotiating the lease.
If the franchisor holds the lease then you will be provided with a copy of the lease, license to occupy and in some States, a lease disclosure statement.
In both cases it is important to ensure that you have sufficient tenure on the lease to operate the franchise as the franchise agreement will usually end on the termination or expiration of lease (unless there is a relocation clause).
Elisabeth advises that you should carefully read all of the franchise documents provided by the franchisor and seek legal advice to ensure that you understand their force and effect. In some cases you may be able to negotiate clauses or special conditions to reflect your negotiated deal with the franchisor or to further protect you.
Once the franchisor has served the disclosure documentation on the franchisee, the parties need to wait 14 days before entering into the franchise agreement. This disclosure period is mandated by the Code in order to give you sufficient time to contemplate your purchase and to get advice in relation to the terms.
Welcome to Franchising
Once you have entered into the franchise agreement, your journey in franchising truly begins. As with any business, there will be ups and downs, but with the research you have done, coupled with the knowledge that you are entering into franchise system that has proven to be successful in the past, you have been given every chance to succeed.
Now the hard work really begins!! Good luck!
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