For those without experience running and owning their businesses, a franchise system can be a very efficient method to launch and run a small firm. Using a franchise system has many benefits, including turnkey operations, marketing, and business planning; ample corporate support; a shorter learning curve; established accounting, cost control, and management systems; brand recognition; training programs; national and regional advertising; customer service initiatives; responsiveness to market trends; and supplier and vendor discounts, among others. Despite their popularity, franchise systems are pricey. A franchise fee, royalty fees, and start-up costs make up the fees and costs. To ascertain whether a specific Franchise Opportunity is suited for you and whether the costs to open and operate the franchise match the potency of the Franchiser’s Package Offering, it is crucial to have a robust due diligence procedure in place.
FRANCHISING SYSTEM TYPES
Franchises for goods, services, and trademarks
In this arrangement, the franchisee is given the authority to market a well-known brand. Most franchisees focus on a single franchiser’s product or service line, associating their company with the brand. Car dealerships, gas stations, soft drink bottlers, etc., are a few examples. Although the franchiser has minimal direct influence over the franchisee’s business, the integrity of the franchisee’s goods and services is her priority.
– Organization and Accountabilities
— A standardized product is supplied by the franchiser.
— Franchisee pays franchise fees and has the following obligations:
* Building, equipment, and signage * Marketing * Training * Control System * Operating System * Accounting System
The franchisee can deploy a turn-key marketing system with the franchiser’s extensive support and direction. Restaurants, retail, hotels, business services, automotive products, parts, and services, convenience stores, entertainment centers, and more are examples of franchisees.
– Organization and Accountabilities
— The franchisor offers:
Building plans, signage, equipment, operating systems, training personnel, accounting systems, control systems, business plans, and marketing strategies.
— The franchisee offers:
Fees, Observance, and Reporting
determining whether a franchise is a suitable choice for you
Adhere to a franchise analysis checklist
— Concerning The Franchise
– Has the franchise agreement been approved by your attorney?
What have legal ambiguities been discovered?
– Will you have sole possession of the area?
– Does the franchiser collaborate with other chains offering comparable goods and services?
– What are the consequences of terminating a franchise agreement?
– Will you receive goodwill compensation if you sell your franchise?
What is the franchiser’s priority?
– What problems have franchisees faced in the past? Difficulties?
What abilities do franchisees most need?
– How are disputes settled?
– Request the top management’s biographies. Do they have a history in entrepreneurship?
What discrepancies exist between the franchiser’s profit claims and their Franchiser Disclosure (FDD)?
– Has the Franchiser thoroughly investigated your qualifications?
– How long has the Franchiser been in business?
– Is the franchisor known for honesty, integrity, responsibility, and fair dealing among franchisees, rivals, and the business community?
– Has the franchisor provided reliable and audited financial information about franchisees in your area that you can verify?
– Does the franchisor offer programs for personnel development and executive management?
– Is there any capital or credit provided by the franchiser?
– What training and merchandising programs does the franchise provide?
– Will the franchisor offer assistance in choosing a site?
– Is the franchisor financially able to carry out its franchisee plan?
– Does the Franchiser have a management team with extensive training and experience?
What unique skillsets does the Franchiser bring to the table that you don’t already have?
– Has the franchiser previously complied with state laws? What State Regulations Apply to Franchise Sales?
Which amount of equity capital will you require to:
– Acquire the Franchise?
– Run the business until break-even?
Where are you going to receive the equity capital?
– In exchange for the benefits provided by the Franchiser, are you willing to give up some of your independence?
– Do you possess the skills necessary to succeed as a franchisee? What further resources for personnel can you offer?
– Are you willing to work with this franchiser for most of your career?
– Does the local market meet your needs?
– Will the market support the franchiser’s product and service prices?
– What demographic trends will affect your region’s population over the next five years?
What will your product and service demand look like in 5 years?
– What other franchises and related franchises exist in your territory and area?
CAREFULLY CONSIDER FRANCHISE OPPORTUNITIES
– Ascertain which franchises are expanding the quickest.
– Examine potential market expansion.
– To access the complete Franchise 500 Listings, consult Entrepreneur Magazine.
– Use the Franchise Opportunity Handbook, a yearly publication of the U.S. Commerce Department.
– For help, get in touch with the International Franchise Association.
Discover the benefits of the franchise for you.
SERVICES OF A TYPICAL FRANCHISER
– Assistance in starting a business, including market research, site selection, financial counsel, building and equipment design, and purchasing.
– A productive operational system.
– System for accounting and cost control.
– Support for monthly operational results, performance requirements, financial auditing, and financial comparisons between franchisees.
– Financial Support: Real Estate, Construction, Equipment, Stock, and Working Capital.
– Support for online purchases.
– Standardized Signs, Design, and Construction.
– Training initiatives.
– The Regional and National Advertising Program.
– Promotion of brand recognition.
– Customer Services Program and Standards.
– Being adaptable to market developments.
– Supplier discounts are obtained through ordering in bulk.
FRANCHISE DUE DILIGENCE
Analyze multiple franchises and compare/contrast through a standardized checklist (see previous part) (see last section). Look into franchisees operating in the same industry.
CONTACT CURRENT FRANCHISEES
– Speak with several franchise owners, both those mentioned in the FDD and those the Franchiser does not say, to learn about their experiences.
– Look for franchisees who have operated their firm for at least five years.
– Speak with seasoned franchisees about what to anticipate during the first year of operation, typically when a franchise succeeds or fails.
– Request the business plans of the franchisees. You can learn more about the operating and planning standards for a typical franchise and the secrets to success from this.
– Inquire of franchisees how the franchisor justifies all the fees collected.
– Evaluate the franchisees’ level of preparation before starting the franchise. Surprises? Franchisees’ shortcomings?
– How successful are the marketing, promotion, branding, and advertising programs? Do they provide franchisees with the appropriate customers?
– Ascertain the actual financial figures. What is the cost of starting a franchise? How quickly a franchise began to turn a profit? To determine credibility, get the narrative and contrast it with the Franchiser’s disclosure.
– Conduct your homework and research before meeting with franchisees to avoid wasting their time and coming across as serious.
– Provide a positive, professional first impression with franchisees because they frequently tell the franchisor how they feel.
– Recognize the franchisee’s perspective. For example, a franchisee in your territory might give you false information if he feels threatened by a rival. Or a franchisee might exaggerate how successful they are.
– If the FDD permits, consider forming a joint venture with a seasoned franchisee. Both new and seasoned franchisees in a nearby region or area may find an 80/20 relationship very logical.
– Make an effort to meet with each Franchisee for an entire day. The only way to truly understand a franchise and learn why a franchisee is successful (or, conversely, why he or she is spewing smoke) is to do this. Develop a relationship with franchisees to increase your chances of getting frank, thorough and in-depth feedback.
– Inquire of franchisees whether the franchisor welcomes their input and whether their ideas, accomplishments, and failures are implemented in the business.
– Is the franchisee content with their life now that the business is opened? Is the work satisfying?
– Visit Entrepreneur.com for additional advice on how to persuade a franchisee to communicate with you.
SEARCH QUALIFIED Counsel
Franchise Consultant, Franchise Attorney, Franchise Accountant, Business Consultant, and Finance Consultant
KNOW YOUR ETHICAL AND LEGAL RESPONSIBILITIES
A code of franchisers’ ethics and obligations to franchisees is maintained by the International Franchise Association, which provides services to franchisers in more than 50 countries.
– Franchiser members agree to abide by all laws and to provide disclosure records and statements that are accurate, full, and not misleading.
– Franchiser members promise only to accept franchisees who satisfy strict requirements.
– Recognize your rights if the franchisor tries to repurchase the franchise.
– Questions to consider:
Price from captive suppliers and subpar service
Cutting back on support services — Fraud — City and State Franchise Laws and Regulations
Business consultant, turnaround consultant, and coach Frank Goley work with ABC Business Consulting. He possesses in-depth knowledge of creating, producing, and executing business plans, business funding plans, marketing plans, strategic plans, and business recovery plans. Also, he provides full-service business counseling, advising for a business turnaround, and consulting for web development, marketing, and SEO. The Complete Business Plan Workbook – A Step-by-Step Guide to Successful Business Planning, written by Frank, is a book about business planning. He also maintains the Business Success Strategies Blog.