( This exchange is much longer than normal, but if you are looking for a franchise, you need to read every word. )
Nick,
I recently went through an evaluation with a franchise placement company and they concluded that my best franchise opportunity exists within something I have little or no interest - a retail shop. I feel that I have to have an interest in a business in order to be successful. However, the placement expert says otherwise. He says that I have to demonstrate leadership and place the right people within the business for me to succeed. Who is right?
Adam
Adam,
Not only are you right, you are 100% right, and this "expert" needs to go back to “expert school.” First, no one but you should decide which business best fits you, your personality and needs . Second, to make matters worse in this case, the "expert" argues with you after you express discomfort. Run like hell from that kind of help.
Most franchise consultants offering “free” services to help us find the right business can make life pretty confusing because their focus is really on selling an opportunity that pays a commission, while all the time making us feel that our needs are being met. Nothing is free, and under this arrangement, the consultant has established relationships with certain franchisors that have agreed to pay a commission when a sale is made. Now, the process might work for quality franchisors that use such agents to identify the right franchisees for their program, but the same process can be terribly unfair for inexperienced prospects that do not understand the dynamics.
(As an aside, when people ask for my help, they are surprised when I tell them there is a fee for my services. But, when I explain reality, most serious buyers want a consultant who is truly working for them and not a business opportunity seller. The cost of a franchise goes way beyond the “total initial investment” quoted in the UFOC when you consider time, emotion, money, and especially the cost of a bad decision. Be sure that you are #1 in the equation. There are exceptions to the rule, but not for first time buyers of single units.)
There are numerous ways to conduct due diligence on franchise opportunities and they range from questioning franchisees to spending a few days immersed in the franchisor's business. Good franchise companies welcome your examination (if you are a qualified, serious candidate) and you will be made to feel comfortable as you search for answers to your questions. However, if you are side-stepped during the due diligence phase, you have most likely found a hole in the offering and this is the sign of a less than high quality opportunity.
Returning for a moment to the idea of using a consultant, I think that they can provide great insight concerning the industry in general, if they have adequate experience to actually know their subject, so ask about their background, their experience and the length of time they have been in the business. Also, choose a consultant with a logical "screening mechanism" that helps you reach logical conclusions about your options.
(There are nearly 100 segments such as pizza, printing, dry cleaning, etc., and you need to narrow your options or you will turn your search into a life long hobby of considering what entrepreneurial life "might be like." I wrote the Focus Program for Emerging Entrepreneurs for just that purpose - see www.emerging-entrepreneurs.com .)
Take all the legitimate guidance you can find, but make sure YOU like the deal as much as the consultant or seller of the deal likes it. You, not anyone else, will live with the final decision.
Here's the bottom line. If you use a franchise consultant, use one who has YOUR “best interests” at heart. I am essentially alone on this stand, but I believe in what I say.
Good luck,
Nick
Dear Nick,
What is a UFOC? Eld
Eld,
The UFOC, Uniform Franchise Offering Circular , is a document of disclosure required by the FTC of all franchisors that provides prospective franchisees a fair opportunity for studying the investment before buying. It is routinely given to prospective franchisees by the franchisor once the franchisor is satisfied that the prospect is qualified (at least financially) to purchase the franchise.
Of great importance is the fact that the UFOC contains a listing of all current (and recently departed) franchisees. Why is this so important? Because the prospect can contact as many franchisees as desired to get their perspective on the franchise and the franchisor's performance. In other words, the UFOC is really a key to due diligence.
Regards,
Nick
Nick,
Is there a difference between a regular business plan and a franchise business plan? My business partner and I were thinking about starting a franchise, and most sample business plans we find are for start-from-scratch businesses. Thanks!
Catherine
Hello Catherine,
A basic business plan used for both planning and financing purposes would be similar in “elements” for independent or franchised start-ups. However, there may be information available for franchised start-ups that cannot be generated for independent plans. For example, the franchisor may have been processed and accepted on the SBA's franchise Registry. This would be a major plus when applying for financing with an SBA approved lender. In addition, if the franchisor has successful units already in operation, you will most likely receive greater consideration in financing circles and you will definitely have access to business plan “input” from the franchisor that you would otherwise have to generate yourself as an independent.
Good luck,
Nick
Nick,
Hello, I was wondering if you buy a franchise, or even an existing business, about the details of the business plan. Does the company that offers the franchise help in developing the plan so you can obtain a loan? Every time I read an article or anything about franchising, I never see any info on this topic. Thanks
Al
Al,
You hear little about the subject because it is rare that franchisors offer such programs. In fact, there are only a handful of programs aimed at assisting in this area and they are not through franchisors. The production of business plans is a delicate subject for franchisors because they are conditioned to “not” talk about earnings claims if those claims are not published in their offering circular. However, (and this is something that many franchisors themselves do not know) franchisors are able to talk about all manner of income and sales issues once you become a franchisee. Seek a franchisor who understands the law regarding disclosure, one who has a success record, or if not, at least knows how to help you in this critical phase. Also, check out BibbyRosenfeld.com , which has established just this type of sorely needed assistance.
Nick
Nick,
Who has legal rights to the client list for a service franchise? Is it the franchisor or the franchisee? Who will maintain the client list after the term of the franchise relationship? I don't see anything regarding maintenance of client list in the franchise agreements I have looked at.
Thank you,
Irina.
Hello Irina,
There is no universal "right" to a client list be it the franchisor or franchisee. Instead, contrary to your experience, I am accustomed to seeing the issue clearing defined in the franchise agreement. Now, if you are looking at a concept that chooses (intentionally or through oversight) not to address the issue, I suppose that the franchisee assumes ownership. Make sense? Ask the franchisor; you will get the individual answers.
Regards,
Nick
Nick,
The franchisor I am looking at has an international company outside of the US as the "parent" company and a US corporation to handle the US side of the franchise business. The US franchisor corporation has a very poor balance sheet. When questioned about this the company
replied that the "parent" company was in very good shape but that they could not disclose financial data from the international corporation. I'm concerned. Should I be?
Andrew
Hi Andrew,
In order to franchise in the U.S. , it is necessary to form a corporation here and therefore, a shield is naturally provided. However, here are my thoughts. One, I probably would not be too concerned about the financial picture of the partner so long as other (U.S.) franchisees are having a positive experience. Two, if there are no other local franchisees to talk to, then I would ask for contacts info on franchisees in other countries. If that is not possible, then I would ask again for financials, but of even greater importance to me would be proof that there "program" works somewhere. It's all a matter of track record. Make sense?
Nick,
Several of my fellow franchisees have been terminated and many other franchisees are afraid this will happen to them. We all feel that we have been a victim of a scam by the franchisor. Everyone feels the franchisor needs to be exposed but we are afraid because of the financial obligations we have. This particular franchisor will continue to do this until someone exposes them for the frauds that they are. Is there any organization that will investigate this matter without giving your life savings to them or risking your franchise to termination?
Pat
Pat, If you want serious help, I suggest the first thing you do is contact an attorney associated with the American Bar Association's Forum on Franchising. There you will find expert advice on how to go about handling your complaint either individually or in a group format if you have enough fellow franchisees to join with you. If you are unable to find your way to this group of attorneys, let me know and I will help you make that connection. Don't allow yourself to be bullied.
Best regards,
Nick
Dear Nick,
Through careful research I have selected one franchise out of three that I feel offers me the best vehicle to reach my goals. My problem is there isn't any proprietary product or info being exchanged for the franchise fee or the royalties collected. The business plan is very simple and straightforward and I'm trying to find a reason why I shouldn't start this type of business on my own and possibly turn out a similar franchised business a few years down the road.
Bryan
Hello Bryan ,
By all means pursue the "independent" route if you feel that you can fully launch a similar concept with confidence, if you can compete directly with the franchise already established, if there are not major stumbling blocks that will only be seen "after the fact", and if you will not loose valuable time, money and momentum by going it alone versus accepting membership in someone else's franchise.
Not all franchises offer proprietary products or services, in fact, most do not. For franchise fees you should receive a territory to operate in, training in running the business and use of the marks and manuals to set up and launch the business. For royalty payment, you should receive on-going support, new systems and developments to keep your business current with market, trends and technology, and hopefully marketing materials and programs to keep your base growing.
Nick
Nick,
I am seriously researching various franchise opportunities. However, I do not have experience enough to do the correct demographic research and other type research necessary to determine the viability. While I think the franchise I am looking at is a good one, I am not sure if it would work in the northeast (there are none located here).
Do you have a recommendation on how to research these topics?
Kevin
Kevin,
If there are none in the NE, or in regions with similar seasonal changes and similar ethnic/cultural influences, then do at least two things. First, test the franchisor's opinion and reasons as to why none currently exist and why you should be comfortable going in alone. Second, find out if there are similar concepts under different names be they franchised or independent that you can investigate. If none of those avenues provide decent information or peace of mind, then move on to a more accepted concept.
Best regards,
Nick
Dear Nick,
My question deals with verifying the accuracy of the information being provided by a franchise. For example I'm studying the ----- franchise system and I'm wondering how I can verify some of their claims or expectations for the territory I'm interested in. Is there a service that I can hire to verify such data or better yet some other venue for verification. I know most of these 'estimates' are based on statistical data, but with an investment of nearly 200k I don't want to, 'take someone's word for it.'
Thank You
Adam
Hi Adam,
This is a little confusing to me. If a franchisor provides earnings claims in its UFOC, those claims should be verifiable according to data collected from the units used to create the claims. So, that is one scenario. In the second scenario, and this is what is confusing, it sounds like the franchisor is offering you "expectations" of a new territory. If that is so, ask them to prove it to your satisfaction. I know of no independent company that could provide such assurances, but I do understand due diligence, and it is possible that you, with the franchisor's assistance, could satisfy yourself enough to make the investment.
Nick
Hi Nick,
How do I find out if the franchise I am looking to acquire is a positive moneymaker?
Dee
It's pretty simple Dee . 1. You talk to the franchisor and ask if they provide earnings claims - they are listed in the offering circular, and then, 2. You do a ton of investigation with franchisees to see how they are doing. Compare the two answers, and then add your own set of parameters relative to financial, managerial, and demographic elements present in your own situation.
Make sense?
Nick
Nick,
How would you rate the Mail Boxes Etc. franchise concept? I'm told the royalty fees are 6% and another 3% for advertising (in Canada ). Also would you recommend buying an existing franchise, even though it's losing money but has great potential with the right sales and marketing techniques?
Regards,
Steve
Hello Steve,
I may have a personal opinion on any number of franchised offerings, but those opinions positive or otherwise, unfairly impact a person's thinking unnecessarily, especially when the two parties don't know each other. The best opinion of a franchise system is "always" formed by listening carefully to what a franchisor tells you and promises you during the sales process, and then comparing that to what franchisees tell you is reality from their prospective. Make sense?
As far as buying a failing franchise is concerned, I could be motivated in that direction if the price was right and if I had proof of what the issues "really" were combined with a belief that I could actually turn it around.
Hope this helps.
Nick
Nick,
I'm interested in learning more about how advertising works with franchises. I know it varies across different franchises but I'd like to know how many franchise companies have national advertising campaigns and how many advertise on the individual franchisee level. Any information on this would be greatly appreciated. Thank you.
Marisa
Marisa,
Most franchise companies make provision for a national advertising fund even if they don't have enough franchisees to implement one. It is a hedge against the future when they assume there will be more people contributing. With regard to local advertising, again, most franchisors obligate franchisees to spend a percent of sales or a fixed monthly amount to promote the business within their area of operation. There may also be provisions for regional funds or cooperatives.
Best regards,
Nick
Nick,
I am about to franchise with a company overseas. Should this company help with advertising?
Katz
Katz,
I am making the assumption here that you are bringing a foreign brand to the U.S. as a franchise as opposed to taking a U.S. brand overseas. If the founders of a business have made it successful, they should have, in the process, built certain systems, including marketing plans that work. So, in the normal course of events you would use the founder's plan, but pay for the advertising yourself to bring in sales.
Make sense?
Nick,
We are in the middle of making one of the biggest decisions of our lives. My wife and I are looking at a franchise that seems to be a great investment for us. The UFOC looks okay but the franchise only has one location currently. We all know that in order to establish direction or a line you must have two points of reference or more. Should this kill the idea?
Thank you
Aaron
Hello Aaron,
Your question is a good one and frankly, I would also be skeptical of a franchise offering without a track record. However, every venture has its starting point, and franchisors are no exception. So let's examine some of the issues.
First, the start-up franchisor has the same concerns as you, but simply from a different perspective. Whereas you are fearful that the concept doesn't have franchisees for you to check with, the franchisor is faced with overcoming the same problem, i.e., "how do I sell franchises if I don't have some already established as references?" Well, it is not an easy problem to overcome, but you will find new franchisors perhaps willing to provide some incentives in order to get started, and those same incentives, if strong enough, may induce you to buy with the feeling that you are getting a break while entering on the proverbial "ground floor." And candidly, there is nothing wrong with that. One common incentive offered by new franchisors is a discounted franchise fee to gain a seed group of franchisees. You save some up front money and the franchisor begins building their network. In addition, because the franchisor is painfully aware that their future success depends, in part, on the success of its franchisees, you, as one of the first in, will most likely receive much more attention than those who succeed you. Now, what could be better for you than an incentive to join plus an increase in the amount of start-up support you receive?
Second, due diligence is a necessity, whether the franchisor has none or a hundred units in place. Yet, few people take the time to complete such an exercise. In the case of a start-up it is true that you cannot check with franchisees who are already in the system, but there are other things you can check on. If you immerse yourself in the franchisor's core, or company owned unit, you can experience the business firsthand and observe customer satisfaction, the presence of an operations and marketing plan, etc. That's really the same kind of information you would be looking for in talking to franchisees.
Third, franchising is about relationships and as one of first, if not the first one into the network, you have a great opportunity to establish a strong tie with the franchisor and become one of the "cadre" in the system. All manner of extra benefits can come from that position beyond the franchisor's obligations as spelled out in the UFOC. For example, you will probably be asked to assume a leadership role in the franchisee network. You may be asked to first test new products, services or profit centers. You may be offered new strategic programs such as area developments.
Fourth, when it comes down to making your decision, you must finally ask yourself, do I really like the personality of the franchisor, do I trust this person at a guy level, and do I really like the kind of business that they operate? Now, I would suggest that a buyer looking into a well established system ask the same questions, but you perhaps will have the advantage of seeing the franchisor from a more realistic perspective in the beginning, as they will most likely still be deeply involved with the core business and you will see them working at the trade and concept they propose to help you establish.
Bottom line, if I liked the person and the concept, and then studied their business and saw first hand, why and how it operated successfully, I would do it.
I hope this helps.
Nick
Here's input from franchise attorney Jeff Haff.
Aaron,
A franchise with only one operating location obviously lacks some of the value generally associated with franchising -- group buying, name recognition, common advertising.
What you are looking at is more akin to a partnership. You better be comfortable with the franchisor and confident that they will do what is necessary to help you succeed and to build the system.
Since you are thinking about "getting in on the ground floor" you should try to negotiate some favorable terms for yourself. These terms could possibly include an area development agreement or an extensive "exclusive territory" where no other store could be located. You could ask for royalty concessions (for example, until we make a profit we pay a reduced royalty).
Otherwise, I generally agree with Nick's analysis.
Jeff Haff
Input from franchise attorney Warren Lewis
Aaron
On what basis do you believe the franchise is a "great investment"? If you have a good basis for that belief, if you and your wife would enjoy operating the franchise, and if you have a good feeling about the franchisor, seriously consider investing in the franchise. If all of these conditions do not exist, pass on the opportunity.
In terms of evaluating the franchise as an investment, since the franchisor has only one location, you should be relying, at least in part, on independently-sourced information about potential sales, costs and profits, such as information from a trade association (the National Restaurant Association, for example), an unaffiliated operator in the industry, or an accountant or consultant familiar with the industry. If you are relying on sales, cost or profit information in Item 19 of the franchisor's offering circular, that information is helpful, but it is of limited value, since it is based on only one location. You can use it, but you should be careful to investigate whether the franchisor's location has unique advantages that your potential location might not have. If you are relying on sales, cost or profit information from the franchisor that is not in Item 19 of its
offering circular, beware. While the information might be accurate, it may have been given to you in violation of the law, and therefore, is highly suspect.
Warren Lewis
Nick,
My husband and I have owned our own construction company in San Diego for the past 20 years. We are burnt out with construction and we would like to purchase a franchise business. How do we find the best franchise in our area that will be profitable?
Hello Cori,
If you are burned out with construction and in need of a new concept to focus on, then franchising could be a great option, but obviously you need direction which will come from speaking to various franchisors that interest you, and then comparing their comments to those made by local franchisees operating those concepts to see how they are faring with their businesses. It's still hard work though starting up a new venture, as I am sure you can well imagine.
Nick
Is there any way I can compute the average gross sales of a franchise using a franchisor's financial reports?
From franchise attorney Jeff Haff
Dennis:
It is a VERY dangerous exercise to estimate anything. It is even more dangerous to "estimate and average." For example, in 1960 the Philadelphia team had a basketball game where they scored around 160 points and played 8 guys. So, the "average" guy got around 20 points.
Well, that was also the night that Wilt Chamberlain scored 100. No one else got 20. Had you bet money that one particular player would get at least 20, you had an 87.5% chance of losing. You really do not want the "average" sales what you want is the "median" sales figure. There is no way to figure that out without data from every single franchisee.
To answer your question, however, you COULD do a mathematical calculation to get an estimate of the average sales.
1) Read the proposed contract and find out the royalty percentage.
2) Find a line on the financial statement that identifies royalty receipts from franchisees (the UFOC has financial statements and they often break this figure out).
3) Read the UFOC's section that sets forth the number of existing franchisees per year.
OK, so you have the percentage each franchisee pays (say 5%) you have the number of franchisees (say 100) and you have total franchisor revenue from royalties (say $1,000,000).
The average received per franchisee is $10,000 ($1,000,000 divided by 100). $10,000 divided by .05 (the royalty rate) equals $200,000. So, your franchisee average revenue is $200,000.
This calculation is so fraught with error that I can recommend it for only to check on how POORLY a franchise system is doing. If the system is bringing in $300,000 a year in royalty revenue and it has 1,000 franchisees, the franchisor is clearly lying to you if it says that all of its franchisees are doing well.
I apologize if my math is poor.
Jeff Haff
From franchise attorney Warren Lewis
Dennis:
I agree with Jeffrey's math and generally agree with his observations about relying on "averages." It is helpful to calculate an "average" unit revenue number, but you should not assume that most franchisees' revenues equal or exceed the average, or that your revenues will equal or exceed the average.
Warren Lewis
Nick,
The UFOC I am evaluating says that the agreement is to be enforced "according to the laws of Arizona ." How would this impact my rights in my state ( Florida )?
Ed
Ed, your rights are your rights as outlined and described in the sample franchise agreement as seen in the UFOC and disclosure documents you have in your hands. The document in your hands is putting you on notice that any legal proceedings will take place in AZ not FL. Hence, it will cost you more in travel, etc. It is a standard issue, but please, get a "Franchise" attorney to help you review the document to reveal any sore spots. If you have not done proper due diligence yet, get it done.
Best regards,
Nick
Nick, Is there any way of determining the success of a new franchise or franchise location?
Gene
Gene,
There are really only two means of predicting performance in this industry, and neither one can be banked on.
The first is the franchisor's earnings claims if provided in the UFOC. Roughly 20% of franchisors offer earnings claims for you to consider, so you have an 8 out of 10 chance of not be privy to those numbers. Why? Most franchisors really don't want to expose reality in the system. Not a great endorsement? You're right! Most franchisors do not provide such claims as they are not able, or not willing, to meet the guidelines for such disclosure. Therefore, they tend to leave such examination to you as a prospect by means of performance testing #2. That means carefully "getting to know" and then questioning a number of franchisees concerning their individual experiences and performance. Unfortunately, there is no clear path for knowing what "your" location might experience.
Best regards,
Nick
Nick, I need to find statistics on franchise failures.
Jamie
Jamie, those numbers are not available. Although we have tried to find them and have had no luck, I feel that the 5% published rate is not reliable. There is no formal study that I am aware of, but I think if you checked into units taken back, closed before the term expired, resold/reopened, etc. you would find that the 5% rate is very low compared to reality.
Nick
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