Franchise Flag Maker

There are many advantages to Franchising. When you buy into a trusted name, take on its fame and programs, you can be sure to have a business that people will recognize quicker than a start-up mom and pop-type business. In fact, it’s one of the most common business expansion tools. Not only this, but entering into Franchising is like entering into a family: there are other people there who will help you with everything from day-to-day operations of your business to buying your business’s equipment at the lowest price possible.

One of the biggest advantages of Franchising is the draw of the brand name. People recognize brand names, and because of this, the name of a business is worth quite a bit. People come to trust names they see again and again because they associate this frequency with quality and consistency. Soon, people become loyal to certain brand names. Franchising helps develop a brand name’s worth by upping the number of businesses popping up around the world.

Buying into a franchise is smart because it will make dealing with banks easier. A bank is more likely to give you money if they know you’re investing in something that has found success before. Additionally, if people know the name of the franchise, it will make it easier to attract customers to your establishment.

Another great plus to Franchising is that a person doesn’t have to market their business or learn how to do such things as accounting or distribution: The business’s model is already firmly in place. Many statistics say that as many as 90% of new businesses fail in the first few years because it’s hard to get the business generating funds while learning the ropes of what works and what doesn’t work. A franchise’s model is proven – it’s why people what to buy into the business – and it makes it easier to keep your business afloat. Once you’re in charge of a franchise, you’ll have a manual that explains the business’s ins and outs and will make day-to-day operations easy as pie.

When it comes to a franchise, it’s easier to buy your equipment and materials because people know the name. The other folk involved in the franchise system will be a great support system when it comes to buying materials. Additionally, one of the biggest advantages of Franchising is that you don’t have to spend as much on marketing and publicity: the more franchises there are, the more publicity you’ll receive. The sheer number of businesses helps establish a brand’s credibility.

Ultimately, there’s less risk involved with opening a franchise, and this is perhaps Franchising greatest advantage. Though the cost may be high to buy into a well-respected name, the possible rewards are much higher. As always you need to ensure your research is done in a manner which means you have all the facts in place, doing your due diligence will ensure that not only the franchise is right for you but that it is one that is going to be value for money too.

Before buying a franchise business there are a great number of things to consider. This article provides you with 10 factors you should look for from a franchise business that will help you avoid some of the major pitfalls.

The article is also known as Avoiding a RIYOT, the acronym RIYOT stands for REPENT IN YOUR OWN TIME. The point being, that if you pick the wrong franchise in haste you could be regretting the decision for a long time to come. We hope by reading this article we can stop at least a few people making a very costly error of judgement. Hope you find this useful.

This list has been compiled by a very experienced franchisee. All the information here is based on direct experience, near misses and the stories we have heard from the “trenches”.

- How would your franchise business be affected by economic cycles? (eg for example during a general economic downturn or worse a longer term recession).

All economies are cyclical and as you will be aware from experience there are times of prosperity (that can last many years) and there are times when global, national and local factors result in economic slowdowns (which can also last many years).

What impact will a change in the economy have on your prospective business? Typically luxury products and services, non-essential services and goods will suffer more than those seen as cost saving or essential items or services.

- How dependent is the franchise on area/socio-economic mix?

Most franchises start from a single business in a single area. The success of that initial operation and perhaps a subsequent pilot are often the basis for the entire franchise operation. However the area the business started in and the area you will operate the franchise in are likely to be different (different mix of houses to businesses, blue collar to white collar workers, high income to low income, different levels of competition etc). Evaluate the impact of these differences on the earning potential.

- Will the franchise operation as a whole survive if there is a change of ownership or change of management?

Some franchise operations only succeed due to the influence of the founder or the current owners or management team. What would be the impact of a change in the owner, manager of the business? Do you think the product and operating model would work equally well regardless of whom owned/operated the franchise group? A change of management may well have the effect of turning a well run business into a poorly run business.

- Does the franchisor have the right management structure in place to be proactive in developing the business?

New ideas and approaches to business are an essential and necessary function of the franchisors remit for the long term survival of the franchise. Ask about their experiences and how they intend to keep competitive over the long term? What ideas have they got for product/service growth? What flexibility will you have as a franchisee to change the product mix, marketing or pricing strategies?

- Profit margins must be high and above the normal levels if you are going to be able to pay the franchise fees as well as yourself.

When reviewing financial forecasts for the business you will need to establish the net profit after any franchise fees are paid. Often numbers are quoted that look great, but do not include the franchise fees you will be paying out monthly. Depending on the franchise these can include both fixed amounts and percentage fees based on turnover.

- The products or services on offer from the franchisor should have some element of uniqueness about them which is exclusive to the franchisor and ideally patented.

If your franchisor is not offering a unique product or service, then it is highly likely you will already have or will shortly be getting direct competition from other franchises, independent retailers and chain stores. Open a franchise magazine and you will see that many industries already have many franchise businesses in them (eg lawncare, property rental, food outlets etc) and they offer very similar products or services. Factor this in when looking at the income levels quoted by your franchisor, if a competitor opens next week will your income potential halve?

- Supermarkets are a great idea for most of us but you do not want to be in competition against them.

Supermarkets and big chain stores will reach into markets and niches that have a high degree of profitability and/or will build their customer numbers (eg photo processing, dry cleaning, newspapers, books, DVD’s etc). If there is enough profit supermarkets will look at any business opportunity and will often have the resources to enter the market. Many small businesses have closed due to the power of the supermarkets. Could this happen to your franchise?

- A good franchisor will permit you to speak to any of the franchisees he has up and running.

A good franchisor will give you a list of all franchises currently operating and you choose the people you wish to speak to. Due to the pressures of running a business, not all existing franchisees will be willing to see every potential new franchisee. Bear this in mind, but do try and speak to as many as possible ideally 5 or 6.

- Piloted and fully audited franchise operations give the best chance of success.

You can further help mitigate the risks of buying and operating a franchise by looking at BFA accredited franchises. For more details on membership status, please see the BFA website (http://www.thebfa.org/standards.asp). However this does not guarantee success and conversely less proven franchises can work very well. Furthermore the more established a franchise is the more of a premium you will have to pay for it.

- A good franchisor will encourage you to visit their HQ, they will encourage you to work with them for a day and they will give you all the information you ask for and will not pester you for a decision.

Ideally however your franchisor will go a stage further. If they truly want you to succeed they will vet your suitability as a franchisee (not just checking you have the money!!). We would suggest you to have a credit agency check out the Directors / Franchisor / key financial staff.

Please NOTE. This not an exhaustive list of the factors that make a good franchise, but should give you some key areas to look at. Take your time, take care and take advice (avoid a Riyot !!)

Evaluating franchise attorneys and evaluating franchise consultants can seem a daunting task. But the firm a company selects to assist its entry into franchising, refine existing franchise efforts or make franchise opportunity investment decisions will have profound consequences. While asking for a list of references is one approach (and when is anyone ever dumb enough to provide a bad reference?) there are more objective criteria that are not dependent on selectively disseminated information.

By addressing the nine Franchise Questions, topics and subcategories of information discussed below, you will eliminate virtually 95% of the individuals or firms you are considering. Then efforts can concentrate on evaluating the 5% cream of the crop (especially franchise attorneys) that truly merit consideration:

A. FRANCHISE EXPERT:

The #1 factor in evaluating so-called expertise – are the principals really franchise experts? There are objective criteria to determine this:

(1) Have they qualified and been allowed to testify as a franchise expert in court and arbitration proceedings? Being involved as a franchise expert in the franchise litigation process gives a sensitivity and radar for detecting and avoiding future franchise problems.

(2) How many books on franchising have been written by the principals?

(3) How many franchise articles have been published in journals or magazines?

(4) What is their franchise-related teaching experience? (see topics E and F below)

(5) What is their depth of experience in the franchise industry? (see next topic below)

B. EXPERIENCE IN THE FRANCHISE INDUSTRY:

(1) Length of time the firm has operated exclusively in the franchise industry?

(2) Experience on both sides of the franchise fence – working with franchise companies (franchisors) as well as with individual investors (franchisees) who have purchased a franchise?

(3) Past experience principals have owning and operating a franchised business? This factor is absolutely critical. If the principals have owned and operated a franchise, they bring a unique perspective and radar for avoiding future franchise relationship problems from disgruntled franchise owners.

C. COMPREHENSIVE TRAINING & ONGOING SERVICES; CONTROL SYSTEMS:

(1) Can (and will) the firm train your personnel to operate and manage your new franchise company? Remember, you’re entering an entirely different business, one requiring new skills and abilities. If this topic is not addressed in detail, you might as well earmark the franchise fees received when you sell franchises for a future franchise litigation war chest;

(2) Will the firm help you review and update operational (franchise operations manual) and legal documentation (franchise offering circular) on an ongoing basis?

(3) Has the firm developed, and will they help you put into place, franchise marketing, sales control and legal compliance programs during the critical implementation (start-up) phase of your franchise program?

The existence of these programs is essential to ensure only the cream of franchise applicants are allowed to enter the network, and to create a series of documented files should a dispute arise in the future. Most of the legal risk in franchising occurs during the franchise marketing cycle when franchises are sold. If your company’s done a good job here with these programs, then you’ve eliminated most of the risk.

D. LEGAL: FRANCHISE ATTORNEY

(1) Is the law practice devoted exclusively to franchise law?

(2) Total number of franchise disclosure documents (formerly called franchise offering circulars) drafted and reviewed?

(3) Experience filing franchise registrations and working with state examiners in all 14-plus franchise registration states?

(4) Experience represeting franchise companies as well as persons buying a franchise? Knowing both sides of the fence is a tremendous asset.

E. ACADEMIC: UNIVERSITY & COLLEGE

Experience teaching franchise courses at graduate and undergraduate university levels?

F. ACADEMIC: PROFESSIONAL

Experience teaching franchise courses to franchise attorneys and general practice attorneys?

G. BLEND OF BUSINESS & LEGAL SKILLS:

Specialist franchise attorneys and law firms produce tight legal agreements (sometimes overly so leading to future franchise relationship problems) and usually adequate franchise offering circulars. Setting aside the overly tight contract issue, the problem is most franchise attorneys – franchise lawyers are not capable of making sound, strategic business decisions and providing practical, ongoing advice. Some franchise consultants, on the other hand, have good business sense, but lack the requisite legal skills. Questions:

(1) Does the firm have the proper blend of business savvy and in-house franchise legal expertise? It’s always a big plus if the franchise attorney also has an MBA. You can do a Google search with these twin attributes (franchise attorney MBA) and narrow the field considerably.

(2) Can the firm produce good legal documentation (franchise disclosure documents) and help you edit (or create) consistent operational documents (such as the franchise operations manual, training program, etc.) If your franchise agreement says “x” but your franchise operations manual or advertising materials say “y” about the same issue, be prepared to pay hefty franchise litigation fees and deal with franchise litigation attorneys in the future.

(3)Can the firm provide competent and practical ongoing advice in critical areas like effective franchise marketing, media decisions, interviewing franchise buyers, adopting the best franchise organizational structure, implementing a franchise advisory council, etc? Mistakes made in these areas can easily cost the franchise company tens, if not hundreds of thousands of dollars.

H. CONTRACT FAIRNESS:

Does the firm give you an option of choosing between:

(a) an hourly rate and

(b) a flat contract amount, where you don’t have to worry about accumulated hours and an unknown total amount?

I. RED FLAGS – BEWARE OF ANY OF THE FOLLOWING:

• Combination teams where one entity does one part of the project and another the other part. For example, a consulting firm does planning, and operational documentation, while an attorney “they know very well” writes the legal documentation.

• Or, a variant of the above, the company in the “fine print” of its contract, requires your attorney (who you obviously have to pay) to review and approve everything they do because the company (it says) is not rendering legal advice. Actually, by providing documents that affect legal rights, they are rendering legal advice, but in an illegal manner. It’s called the unauthorized practice of law. You end up paying two attorneys – yours and theirs. Besides the expense, it sets you up for future franchise problems. Their attorney represents who? The franchise packaging group, of course, and definitely not you. He or she is typically a recent law school graduate who hasn’t figured out what they’re doing is illegal and could cause them to lose their license to practice law. Besides that, they represent the franchise consulting group, whose interest is to churn as many franchise packages per year as possible. You end up with a bad franchise disclosure document and sloppy franchise operations manuals. To save time, the franchise agreement gets watered down so it’s easier to push through some franchise registration states. Some of the “t’s” may be crossed and some of the “i’s” dotted, but not most of them. The end product are documents that set you up for future franchise litiga
tion difficulties.

• Firms that advise you to franchise your business, and they’ve never seen your business! You’d be surprised how often this happens.

• Firms that say they’ll write your franchise operations manual for you. How someone, who knows absolutely nothing about your business, could ever come close to anything but a mediocre product at best, is a frightening thought. The use of boilerplate manuals produced by consulting groups is yet another future litigation time bomb. You are the true expert in your business. With competent guidance and editing, you’ll be able to produce a professional and workable operations manuals, if you don’t have these already.

• Pricing quotes that seem exceedingly high or low (especially “do-it-yourself” franchise kits).

• If you are buying a franchise, BEWARE of any attorney recommended by the franchise company. Even worse, beware of franchise companies who say you don’t need to use an attorney. There are a couple of these online.

• Firms (or individuals) that have EVER been sued for fraud, misrepresentation, the unauthorized practice of law or violating any franchise law. DON’T FORGET TO ASK THIS CRITICAL QUESTION!!

©1990-2008, Kevin B. Murphy, B.S., M.B.A., J.D. – all rights reserved

For more informaton, consult the Franchise Foundations website.