Franchising 101 Gary Wofford, Franchise Consultant/Advisor Your Guide to a Range of Opportunities This presentation is intended solely to inform and educate entrepreneursabout franchising -- the process, benefits, drawbacks and available resources.Only the individual entrepreneur can determine if franchising is right for him.
What is Franchising?Franchising is a method of distributing goods orservices to consumers. The franchise system ownsthe right to the trademark of the business. Thefranchisee purchases the right to use the trademarkand operating system.Most people associate the word “franchise” withfast food restaurants. But, there are many moretypes of franchise businesses, including everythingfrom advertising to automobile repair, printingservices to party supplies and many more.
Categories of FranchisesAccounting/Tax Services Fitness Packaging/Ship/MailAdvertising/Direct Mail Florist Shops Painting ServicesAuto & Truck Rentals Food/Restaurants Paralegal ServicesAutomotive Products/Services Payroll Services Golf Products/ServicesBatteries-Retail & Comm. Pest Control ServicesBeverages: Special Greeting Cards Pet Sales/SuppliesBusiness Brokers Hair Salons & Services PhotographyBusiness/Mgmt Consultants Health Aids & Services Printing/CopyingCampgrounds Home Furnishings Real Estate ServicesCheck Cashing/Financial Services Home Inspection Recreational ServicesChildren’s Services Hotels and Motels Rental Equipment & SuppliesClothing and Shoes Insurance Retail StoresComputer/Electronics/Internet Janitorial Services Security SystemsConstruction Materials Senior Care Jewelry Sign Products & ServicesConsumer Buying ServicesConvenience Stores Laundry & Dry Cleaning Tanning CentersCosmetics Lawn/Garden/Agriculture TelecommunicationsDating Services Maid & Personal Services Transportation ServicesDrug Stores Maintenance Travel AgentsEducational Products/Services Marine Services Vitamin & Mineral StoresEmployment Services Optical Aids & Services Weight Control
Well Known Franchise NamesMcDonald’s Gold’s GymSubway Great Clip’sCurves H& R BlockAlphagraphics IHOP – International House of Pancakes7-Eleven, Inc. Jenny CraigBarbizon School of Modeling Kwik CopyBaskin Robbins MAACOBig O Tires Molly MaidBlockbuster New Horizon’s Computer LearningCentury 21 Real Estate Once Upon A ChildCourtyard by MarriottDairy Queen Papa John’s PizzaDale Carnegie Radio ShackDunkin’ Donuts Seattle’s Best CoffeeKentucky Fried Chicken Taco BellFuddruckers Wild Bird Centers of America
What is a Franchisee? “Frantrepreneur” (fran*tre*pre*neur) n.One possessing the desire to be a businessowner -- without the desire to recreate thewheel -- by following a proven system for thebenefit of personal and professional goals.
The Frantrepreneur Mentality “I’m in “I have the opportunity to business for learn from the success andmyself, but not failure of others.” by myself”. “I want a ‘bottled’ process for success that I can use in developing my own “Why would I work successful business.” for someone else when I can work for myself and reap the "Why would I spend years and the investment rewards of my required to establish a successful brand when I efforts?" could buy a franchise which provides immediate access to a successful business system and a brand name which others already have made successful?"
Franchise Options TYPE: OWNERSHIP: • Traditional retail • Mobile products/services • Hands-on • Work from home • Passive • Part-time/full-time SCOPE:PRODUCT/SERVICE:• 75 categories - an endless • Single Unit Franchise array of possibilities • Multiple Units• Something to match anyone’s • Master Franchise background, skills and • Area Developer interests
Franchise StatisticsFranchise businesses account for about 50% of all retail sales in theUnited States.1 out of every 10 business is a franchised business.A new franchised business is opened every 8 minutes of everybusiness day.Franchise businesses employ more than 18 million Americans.There are an estimated 2,000 franchise companies operating in theU.S. doing business through more than 400,000 locations.More than 75 industries use franchising to distribute goods andservices to consumers.A 2009 study by The United States Chamber of Commerce found that86% of franchises opened within the last five years were still under thesame ownership and 97% of them were still open for business.
Franchise Statistics (continued)A U.S. department of commerce study conducted from 1971 to 2009showed that during that time less than 5% franchise businesses wereclosed each year. Compare that to a U.S. Small BusinessAdministration study conducted from 1978 to 2009, which found that62% of non-franchised businesses closed within the first 6 years oftheir existence due to failure, bankruptcy, etc.Total sales by franchised businesses are projected to reach $2 trillion,this year.In 2009, the median gross annual income, before taxes, of franchiseeswas in the $86,200 to $142,600 range, with over 30% of franchiseesearning over $170,000 per year.
Franchise Success Rate Franchises have a 90% + success rate. Most people can’t even predict that they can keep their jobs with a 90% certainty.
Advantages of Buying a FranchiseFranchisor business practices are tightly regulated by the federal governmentFranchisors have a vested interest in your success.The value of a branded franchise business is significantly more than anindependent business.The marketplace has already been checked out by the franchisor anddetermined the system to be successful.The franchisor utilizes collective buying power and passes on the discounts toyou.Local and national advertising for the franchise operation as a whole issupplied by the franchisor.Supervision, training programs and consulting are readily available from thefranchisor.Managerial, operational and accounting systems are in place to facilitate yoursuccess.
Disadvantages of Buying a FranchiseYou have to pay the ongoing royalties to use the proven systems.The contract with the franchisor must be renewed after a certain periodof time (typically after 10 years).There is limited flexibility because business methods are dictated bythe franchisor.You may be forced to buy products supplied by the franchisor ratherthan the most cost effective product available.You don’t get to make all of the decisions in how to run your business.
Questions To Ask YourselfHow much capital do you have to invest?How much liquid assets do you have?Do you require a specific level of annual income?Are you interested in pursuing a particular field?Are you interested in retail sales or performing a service?Do you want a part-time or full-time opportunity?How many hours are you willing to work?Does your family support your desire to own your own business?
Questions To Ask Yourself (continued)Do you want to operate the business yourself or hire a manager?Do you want to have employees?Do you want to have inventories?Do you want to have Accounts Receivables?Will franchise ownership be your primary source of income or will it supplement your current income?Would you be happy operating the business for the next 20 years?Would you like to own several outlets or only one?
Questions to Ask a FranchisorDetermine what assistance the franchisor provides. Do they assist withtraining, store design, location construction, site selection, andfeasibility studies?Do they have any access to demographic studies to get anunderstanding of the audience within the market area?What types of support will the franchisor provide once your franchisehas opened its doors?After the initial investment, will there be additional financialobligations requiring working capital?Does the franchisor offer any form of financing?Ask the franchiser how many franchises have been sold in the stateyou will be operating in during the last 12 months, and how manyhave been opened for business?
Questions to Ask a Franchisor (continued)What types of territorial restrictions and protections have been set upby the franchisor?Is the franchisor planning on expanding within your state? Are theyfocusing on any specific locations?What arrangements are established through the franchisor in terms ofproduct supply?Ask if the franchisor has been forced to terminate any of itsfranchisees and detail the reasons for this decision. Have anyfranchisees failed or gone bankrupt?Are there any current lawsuits pending or past judgments against thefranchisor? What steps are taken to settle disputes between thefranchisor and franchisees?Is there a Franchisee Association or Advisory Board in place?
Questions to Ask FranchiseesHow long have you owned your franchise?Is your franchise profitable?In which month did you reach your breakeven point?Have you made approximately the same profit that was forecast in thedisclosure document?Were your opening costs consistent with the original projections in thedisclosure document?Are you satisfied with the franchisor?Are you satisfied with the product or service?Is the operations manual, clear, up-to-date and adequate?Are you satisfied with the marketing and promotional assistanceprovided by the franchisor?If you had it to do all over; would you purchase this franchise?
Questions to Ask Franchisees (continued)Was the initial training and ongoing support sufficient for you to operateyour business?What was your background prior to buying your franchise and was itbeneficial to your success?Are deliveries of goods provided by the franchisor timely andcompetitively priced?Is the franchisor fair and amicable to work with?Does the franchisor listen and help you with your concerns?Have you or other franchisees had any disputes with the franchisor? Whatwas their nature? Were they resolved fairly?Do you know of any disputes between the franchisor and the government?Do you know of any disputes with competitors?Who are the major competitors?
Common Mistakes of Prospective FranchiseesNot reading, understanding or asking questions about the FDD, franchiseagreement and other legal documentsNot understanding the responsibilities of the franchisee and the obligationsof the franchisorNot seeking sound franchise, legal and financial advisorsNot verifying oral representations of the franchisor, representatives orbrokersNot contacting enough current franchiseesNot contacting closed, sold or changed franchisees and confirming reasonsNot having enough working capitalNot recognizing the need for financing
Common Mistakes of Prospective Franchisees (continued)Not knowing how to make a proper loan requestNot developing true and accurate budgets/forecasts and financialstatementsNot meeting the franchisor’s key management and support personnelNot analyzing your market in advanceNot developing your marketing strategyNot determining dollar amounts necessary to implement marketing strategyincluding advertising and promotional programsNot choosing the right locationNot analyzing the competition
Established versus New FranchisorsEstablished Franchisors offer: Name Recognition More regional and national advertising Experienced management Better chance of competing with competitors in a price or advertising war More refined training and support Better purchasing power with established price discounts More likely to have franchise financing available More established and efficient working prototype or company-owned stores Improved assistance from existing qualified franchise owners through advisor councils
Should You Use a Consultant?A Franchise Consultant... will take the time to educate you on the franchise industry will help you define your qualifications so that you don’t waste your energies and time on franchises that are not right for you or that you are not qualified for can provide you valuable insight on franchises that you won’t find on your own will help you present your qualifications to a Franchisor are paid by the Franchisors, but they recognize that this only happens if they provide you excellent service and present to you the right opportunities will take an unbiased approach to helping you achieve your goals
Pre-Sale Disclosure FDD Or (Franchise Disclosure Document)•There are 23 items to the FDD – this is an important, if not the most important, part ofyour validation process of the franchise company.1. Description of the franchisor, its 13. Trademarks, service marks and trade names. predecessors and affiliates. 14. Patents and copyrights and Proprietary2. Business experience. Information.3. Litigation history. 15. Franchisee requirement to operate the business.4. Bankruptcy history. 16. Restrictions on sale of goods and services.5. Initial franchise fee and additional costs. 17. Renewal, termination or transfer of the franchise.6. Other fees. 18. Endorsements by public figures.7. Requirements to purchase or lease from 19. Earnings claims (optional). designated sources. 20. Names, addresses, and telephone numbers of8. Requirements to purchase from approved current and former franchisees. suppliers. 21. Financial statements.9. Franchisee’s Obligations. 22. Copies of the franchise agreement and other10. Financing. contracts and agreements.11. Franchisor’s Obligations. 23. Receipt of FDD.12. Territory.
Common Elements of a Franchise Agreement•Grant of Franchise •Operation of the business format •Remedies for breach and methods•Term of Franchise* •Representations by franchisor of enforcement of the agreement •Attorney Fees•Name of Franchise •Representations by the franchisee •Amendment•Location of Franchise •Relationships of the parties •Waiver•Obligations of Franchise •Renewal and renewal fee* •Approvals •Assignment•Initial franchise fee •Construction and venue •Termination*•Franchise service fees; •Severability •Procedures after terminationreporting and audits •Binding to successors•Advertising fund •Exclusive property•Training assistance •While there are as many franchise agreements as franchisors, the above represents several common elements fundamental to most agreements. The few that vary from franchisor to franchisor are identified with an asterisk (*).
Directories & BooksFranchising for Dummies – Dave Thomas & Michael SeidTips & Traps When Buying a Franchise – Mary TomzackGuide to Negotiating a Business Lease – Keith J. KanouseThe Franchise Opportunity GuideBond’s Franchise GuideStreet Smart Franchising – Joe Matthews, Don DeBolt &Deb PercivalThe Franchise Handbook
AssociationsInternational Franchise AssociationAmerican Association of Franchisees and DealersAmerican Franchisee AssociationCanadian Franchise Association
Common Terms•Acknowledgement Of Receipt: The last page of an Franchise Disclosure Document, signed to indicate you received the Receipt:documents on a certain date.• Advertising Fee: An annual fee paid by the franchisee to the franchisor for corporate advertising expenditures; It is often less Fee:then three percent of the franchisees annual sales and typically paid in addition to the royalty fee.• Capital Required: The amount of cash you are required to have available. Required:• Earnings Claims: Representations made by franchise companies that their franchisees have achieved specific levels of sales or Claims:profitability.• Exclusive Territory: The "territory" granted to you by a franchise company, which restricts the franchisor from establishing Territory:any other location within your area.• Federal Trade Commission (FTC): The federal agency in Washington, DC that regulates various trade practices including thefranchise industry.• Franchise Agreement: An official document that sets forth the expectations and requirements of the franchisor. It describes the Agreement:franchisors commitment to the franchisee, and includes information about territorial rights of the franchisee, locationrequirements, training schedule, fees, general obligations of the franchisee, and general obligations of the franchisor.• Franchisee: The owner of one or more franchises. Franchisee:
Common Terms (continued)• Franchise Fee: The initial fee you pay to a franchiser to acquire a franchise. Fee:• Franchising: Neither an industry nor a business, but a method of doing business within a given industry. At least two parties Franchising:are involved in franchising: the franchiser and the franchisee.• Franchisor: The person or company that owns or controls the right to grant franchises for a specific "brand". Franchisor:• FTC Rule 436: The law passed in 1979 that regulates the franchise industry. It set forth "disclosure" requirements and 436:prohibited franchisors from making earnings claims.• Initial Investment: Generally, the initial cash investment required of you to buy and open a franchise. This can include the Investment:franchise fee and other initial start-up costs and expenses you may incur, but may not be reflective of your total investment.• Liquid Capital: Also known as, liquid assets, quick assets, and realizable assets. Assets held in cash or in something that can Capital:be readily turned into cash.• Master Franchisee: Describes an individual or company owning the exclusive rights to develop a particular territory for the Franchisee:franchising company.• Net Worth: Total assets, once youve subtracted your total liabilities. Worth:• Non-Compete Clause: Upon termination, non-renewal, or other sale or transfer, some franchise agreements prohibit you Clause:from competing in any way with the franchised company.• Offer: An oral or written proposal to sell a franchise to a prospective franchisee upon understood general terms and Offer:conditions.
Common Terms (continued)• Protected Territory: A designated area or geographic boundary granted to the franchisee by the terms of a franchise Territory:agreement. The franchisor promises not to open another franchised or company-owned business of a similar nature within thefranchisees protected territory.• Qualification Questionnaire: A document prepared by the franchisor to be completed by the prospective franchisee, which Questionnaire:provides initial information to the franchisor in order to assist in determining whether or not the prospect is capable andmotivated enough to own a franchise. Often a financial statement is included in the questionnaire format.• Registration: A requirement in several states that specific information be submitted and approved by state regulatory Registration:authorities before franchises may be offered in that state. It is quite extensive in the information required and may ask for: abond, fingerprints and pictures• Start Up Costs: The required amount of money the franchisor will request that a new franchisee have to invest in the new Costs:franchise unit in its earliest stages of development.• Total Investment: The amount of money estimated for complete set up of a franchisees business, including the initial Investment:investment, the working capital, and any additions to inventory and equipment deemed necessary for a fully operational andprofitable business.• FDD - Franchise Disclosure Document: Provides background information in over 20 categories as well as a copy of theproposed franchise agreement. Also know as, the “Circular”, “Offering Circular” and “Disclosure Document”.
“If you don’t follow your dreams, you’ll be working for someone who did.” -anonymous Your Guide to a Range of OpportunitiesGary Wofford, Franchise Consultant Call Today – 877.455.4749 Denver Office - 303.255.4749 Email: Gary@OwnFranchises.com www.OwnFranchises.com