A question I’m often asked is “how do franchises work?” It’s a great question.
How about I teach you how?
The Franchising World
Franchising is a world full of ideas, determination, grand plans and big dreams.
On the flip side, it’s also a world that includes disappointments and failures (unfortunately).
Simultaneously, franchising it’s a world of fresh starts. A forward-looking world where people fire their bosses in order to be the boss.
In addition, the franchise business model is the ultimate business model-for the right person.
Moreover, the world of franchising is a world of numbers. High finance. Business plans.
That’s because politics can influence the franchise industry…and vice versa. So, we have to talk a little about that, too.
What a world!
The Franchising Business: The Ultimate Guide To The World Of Franchising
This franchising guide is divided into several sections. All of them have their own special place in the franchising world.
- The Business Model: How Do Franchises Work?
- Economic Impact Of Franchising
- Franchising A Businesses
- What You Get As A Franchisee
- Opportunities In Franchising
- The Food Franchise Sector Of Franchising
- Other Sectors In Franchising
- Buying A Franchise-The Steps
- Your Franchise Business Plan
- Legalities In Franchising
- Financing A Franchise Business
- Politics In Franchising
Let’s Begin: How Do Franchises Work?
Franchising has been around quite a while. You should know its history.
To that end, here are some specifics as they relate to the history of franchising, from my hardcover book, “Become a Franchise Owner!”
Most franchise experts agree that the modern business model of franchising can be traced back to an entrepreneurial giant by the name of Isaac Merrit Singer. As in Singer Sewing Machines.
In the latter part of the 1800’s, there was nothing very “automatic” about the manufacturing of clothes. Believe it or not, everything was stitched together by hand, in not very ideal working conditions. The women who did the sewing worked incredibly long hours.
Issac Singer’s Important Patent
Isaac Singer was basically the first person to patent a practical, widely-used sewing machine. Though these machines started to appear on the scene in the mid 1800’s – and worked pretty well, Singer came up with an idea that made them work even better. A lot better. Good enough to sell. But, they were really expensive. At $120 each, Singer sewing machines were out of reach for most Americans.
One of Singer’s partners came up with an idea to make these newfangled machines more affordable. (Actually, he came up with what would turn out to be the first-ever installment plan.) That’s right—because of his financing idea, everyday people could purchase Singer’s sewing machines and pay for it in installments. All of a sudden, Singer was able to sell a lot more machines-and that was a great thing. But, he still needed a better distribution method. And being the entrepreneur he was, he figured out just how to do it.
It’s important for you to know that when you buy a franchise in today’s franchising world, you’re really buying a license in the form of an initial franchise fee. In a nutshell, Mr. Singer and his partners were responsible for that.
Finally, let’s not forget Mr. Kroc. He was a brilliant entrepreneur.
Infographic: History Of Franchising
To bring the history of franchising to light, here’s what it looks like visually.
The Business Model of Franchising
Specifically, an entrepreneur (franchisor) has come up with a business idea, and its model, and is looking to replicate it by partnering with people (franchisees) that would like an opportunity to own their own business. This opportunity may provide equity for the franchisees and their families. The franchisor’s own money is invested up front, while company growth is leveraged by using other people’s (the franchisees) money with the inital franchise fee and ongoing royalties. Does that make sense?
Conversely, here’s the textbook-style franchise definition;
A franchise typically involves the granting by one party (franchisor) to another party ( franchisee) the right to carry on a particular name or trade mark, according to an identified system. Franchises are usually located within a territory or at one specific location, for an agreed upon term. The franchisee is granted a franchise license to use the franchise company’s trademarks, systems, signage, software, and other proprietary tools and systems in accordance with the guidelines set forth in the franchise contract.
Hence, when you buy a franchise, you’re buying a business system, along with everything else that goes along with it.
Franchising: Economic Impact
Franchising-as an industry, makes a huge impact on the U.S. economy. (Other countries like England, The Philippines, South Africa, New Zealand, and even the continent of Australia, benefit tremendously, economically, from franchising, too.)
From The International Franchise Association:
“According to a comprehensive research study on the economic impact of franchising, there are 732,842 business format franchise establishments providing more than 7.6 million jobs, generating $674 billion in economic output and 2.5 percent of the Gross Domestic Product (GDP) for the U.S. economy.”
In any event, franchising is a huge job creator.
And because of that, a large number of businesses and individuals benefit from the jobs the franchise industry creates especially when the industry is growing…when people are buying franchises.
Given these points, what happens in your community when you buy a franchise?
Community Benefits Of Franchising
Simply stated, even before a franchise business opens in an area, several of things are set in motion that contribute to the local economy. And once someone signs a franchise agreement and opens the business, some of the benefits to the local area remain in place.
That said, look who benefits from franchising:
- Business Plan writers
- Franchise attorneys
- Commercial real estate developers
- Surrounding businesses
And many others. It’s how franchises work.
*Don’t be harsh on the banks. When banks are healthy-and lending money, it’s a good thing!
Franchising A Business
When in comes to franchising an independent business, there are two questions that get right to the heart of the matter.
1. Who decides if an up and running independent business can actually be transformed into a franchise business?
2. Who decides if an idea for a product and/or service can be franchised?
Answer: The market.
Or, a skilled franchise development firm.
Let’s say you have a business idea you’d like to franchise. You think your idea is going to be a slam-dunk. You can easily picture 100-maybe 200 franchises scattered throughout North America.
Here’s Your Franchise Business Idea
Specialized K-9 Training
Let’s say you feel that there’s a real need for a franchise business that offers highly-specialized K-9 training for local law enforcement agencies. You’re passionate about dogs and their many uses, including how law enforcement uses them for police work, crowd control, bomb-sniffing and the like-and you’d like to offer it nationwide via the franchise model.
Wait. I can’t emphasize this enough:
Fact: Just because you think there’s a need for this service doesn’t mean that there actually is. You need to do a serious amount of market research. Then, you’ll need to have enough money to set the franchise business up. You’ll need an entire team to do it properly. There is a lot involved. Legal. Operations. Marketing. Sales. Technology. Figure $100,000 or more. (Just to prepare it for launch.) After you launch your franchise concept, you’ll need to have a pretty sizable war chest-filled with money in order to market it to would-be franchise owners.
Get A Team Together
One way to get an entire “team” together (if you feel you have a good shot at success with your idea) is to hire a franchise development firm. But, not all of them are created equal.
To clarify, there are franchise development firms in existence that will gladly take your money. They’ll tell you what you want to hear after you share your idea for a franchise business.
In addition, some of these firms even offer to help you get franchise sales leads and help you sell the first few franchises because that’s how confident they are about you-and your idea for a franchise business. Hopefully.
What’s more, franchise development firms are also used by people who already have businesses up and running, but want to become franchisors. Pizza shops, retail stores…businesses like that.
A Word Of Caution
When it comes to choosing a franchise development firm, I hate to say this, but it’s buyer beware.
Above all, you need to do serious research on them. These firms really need to know in their heart exactly how franchises work.
In view of that, one thing you can do is use Google or “DuckDuckGo” to see if they’ve been sued or have had any other problems. Use Google to find out about their successes. Talk to former clients. Find out if the firms did what they said they were going to do.
Finally, on a positive note, there are several good firms around that do franchise development work. Drop me an email for some recommendations.
(Joel at thefranchiseking dot com)
You can (if you have an idea or a business that you’d like to turn into a franchise) do it another way.
In particular, you can do it on the cheap. It’s something my dad warned me about. That’s because he knew several people who did it.
In this case, you do it on the cheap by only hiring a franchise attorney. The attorney puts together all of the necessary legal documents…including the franchise agreement, to make your franchise offering legal, and Boom! Your business is now a franchise business.
However, you still need to write an operating manual, come up with marketing/advertising ideas, figure out all of the technology you’ll need to have, and come up with a price for the initial franchise fee. Plus, you’ll need to have a formal franchise sales plan. Who’s going to do all of that? You? Really?
How are you going to get franchise sales leads? How are you going to figure out which franchise opportunity websites you need to use for franchise lead-generation? Especially since you don’t know a lot about franchising yet. Moreover, who’s going to help you with SEO, Content Marketing, and Social Media Marketing?
The Bottom Line?
If you end up going the cheap route, you’ll probably sell one or two franchises and be done. How sad!
Franchise Development Update
There are now franchise attorneys who (wisely) have the ability to go beyond legal help-and can help you with almost everything. Contact me to learn more about them.
Fact: It’s not easy to come up with a franchise business idea…one that will be successful.
And while it’s wonderful to read about franchisors that have just sold their 100th, or 1000th franchise, it doesn’t happen as much as you think. I wish it did.
To prove my point, pick up a copy of any “Franchise and Business Opportunities” magazine-the type you see at bookstores, and check out the list of franchises. You’ll see that a lot of them have less than 10 franchise units. That’s not a lot of franchises. It’s not enough to make the needed up-front and ongoing investment in running a franchise concept worth it for a franchisor. It’s expensive to provide top-shelf support to franchisees. The initial franchise fees you get aren’t enough to sustain the business.
Just because you have a great idea for a franchise….or a great business that you think is franchise-worthy-and have a good feel for how a franchise works, it doesn’t mean it is.
That said, if you do become a successful franchisor, the rewards can be tremendous. Life-changing. As an added bonus, you could end up changing the lives of your franchisees. The people who thought enough of your idea to buy in.
Check out the math:
You, the franchisor, have 400 franchise units under you.
Each franchise unit averages $600,000 a year in sales.
You-the franchisor, receive 6% of that figure-from each franchise unit.
6% of $600,000 is $36,000 in royalty income x 400 franchises.
Your yearly income-just from royalties, is $14.4 million.
How does that sound?
In the final analysis, if it works, turning an independent business into a franchise business is certainly something to think about.
Next, I’m going to talk about the people who buy the franchises that are created. The franchisees.
What You Get As A Franchisee
There are certain things you get when you become the owner of a franchise business. When you become a franchisee.
- Operating system
Also known as the business system, this is what makes it all happen.
The system includes the policies and procedures that help the business run in a profitable (hopefully!) efficient way.
In a nutshell, those things, and lots of other things that make the business hum, are included in the operating manual. Everything you need to know to own and operate your franchise business is in the manual.
These days, the franchisors’ operating manual may be available online, too. A lot of franchisors have an internal communications system-an intranet, that allows information to be shared between the corporate office and the individual franchisees. Operating manuals, marketing/advertising templates, group announcements and more can usually be found on these systems. Systems that are part of the business system you’re getting.
An Intranet Infographic
Here’s an infographic explaining the benefits of an intranet system:
2. Franchisor experience
Another thing you’re getting when you buy into a franchise system is their business experience. That’s a huge thing to have behind you as you start your business. The franchisor has already (hopefully) made the mistakes. They’re the mistakes you don’t ever have to make. It’s a nice way to get into business. Making no mistakes-or at least less mistakes-because they’ve been made already, saves a lot of time and a lot of money.
You’ll receive formal training at franchise headquarters.
Today’s franchisors provide incredible training for their franchisees. You’ll learn how to operate every facet of your business. You’ll even learn how to use the ever-important technology the franchisor provides…for maximum benefit. Training at headquarters lasts anywhere from three days to 2 full weeks. Plan to be away from home for a bit before you open for business.
You’ll get support from franchise headquarters. This support may come in the form of phone support when you need questions answered in real time, to in-person field support when you need face-to-face interaction.
Don’t Forget The Economic Power Of A Group
5. Purchasing power
If you own a food franchise, and you purchase let’s say, milk, you will have purchasing power. The power that comes with being part of a network. A franchise network. Independent businesses in your area won’t be able to touch the price you pay for milk. That’s because they’re buying a case of milk a month, while you (the franchise network) is buying 100 cases. Big difference.
Kind of makes you wonder why you would want to compete with a business that buys in bulk and buys at prices you’ll never see-if you’re an independent business owner.
Having a big, well-known brand behind you can do wonders for your business.
If it’s a recognizable brand, your future customers already know who you are and what your business does when you open. That’s a huge advantage. It can also be a disadvantage.
When Franchising Goes Bad
How would you like to be a franchise of this fast food restaurant?
Similarly, this PR nightmare is probably being used in a college class as a case-study
And, these guys may never get it.
Marketing And More!
Call me crazy, but I don’t think you should have to spend weeks (or months) putting together a strategic marketing plan for your franchise business, considering that’s part of what you’re paying for.
That’s why, when you’re ready to open your franchise for business, the marketing-especially your Grand Opening marketing, has already been done.
Know this: your Grand Opening is a big event. It should be highly publicized, with the help of your franchisor.
In addition to Grand Opening marketing, there’s ongoing marketing that you’ll get help with. Just make sure it’s working. The way to find out is by asking franchisees. They’ll tell you. And, don’t forget to ask about social media marketing. It’s a super-important part of the mix.
8. Franchisee network
One of the hidden benefits of the franchising business…one that’s not mentioned enough, has to do with a network. A franchisee network.
This network is an internal network. It consists of each and every franchisee who’s in the franchise system. And, if it’s a tight-knit system with a sharing culture, all the better. Franchisees talk to one another a lot in a sharing culture and share tips and tricks with each other. New franchisees feel very welcome and benefit greatly from the group’s more experienced franchisees-as long as it is an open and sharing culture.
Franchise Tip:: if you’re thinking of buying a specific franchise, ask the franchisees you reach out to during your research about the franchisee network. Ask them how open it is. Ask them if franchisees freely share information and tips with each other.
Opportunities In Franchising
If you’re thinking of becoming the owner of a franchise, there are opportunities galore to explore. (Nice rhyming, Joel!)
Next, I’ll highlight the most popular franchise-type first. It’s the go-to example when talk of franchising comes up-anywhere in the world.
When most people hear the word “franchise” they almost always think of companies like McDonald’s®, Domino’s®, or Subway®. Branding at it’s best, people!
Food franchises are very, very popular. They’re also very recognizable. And they’re everywhere!
Some of the food franchises you see as you’re out and about have been around for decades. Some are new. And, some of them capitalize on the latest trends while others create them.
From Franchise Direct:
“Quick service restaurants (QSRs), aka fast food, again led the way in establishment growth for the three areas of food franchises from the end of 2016 to the end of 2017. The total number of QSR franchises rose to 190,649 from 187,368, a gain of 1.8%. QSRs were followed by table/full service restaurants, which had a 1.7% increase in units, and retail food, which experienced a 0.8% increase in establishments.”
For more data-including the latest food franchise trends, check out the Franchise Direct Food Franchise Report.
Buying A Food Franchise
A lot of people contact me about food franchises. I get a ton of calls from people who are interested in franchises like Chik fil A® and Starbucks®.
Chik fil A is a franchise. Starbucks sold franchises for a minute, but they don’t as of this writing. So, why are so many people interested in those two businesses?
The answer: They look like slam-dunks. They look like businesses that practically anyone can operate and make massive amounts of money in. Heck, everybody eats and drinks, right?
Since Starbucks is currently not offering franchises, let’s learn about the food-service business that is; Chik fil A.
Chik fil A Franchises
I’m only sharing franchise information on Chik fil A because it’s a food franchise that’s often talked about, and as I said, I get lots of calls and emails about them. But, it’s really a poor example of a food franchise.
It’s a poor example of a food franchise-of any franchise opportunity, really, because their business model is bizarre. (Personally, I think the CEO of Chik fil A, Dan Kathy, is bizarre, too-for reasons that I’m choosing to not go into right now.)
3 Strange Things Chik fil A Does
- The franchise fee for one Chil fil A franchise is only $10,000. That’s unheard of in franchising. The average franchise fee hovers around $30,000 these days-which is not a lot of money for what you get. (See above)
- Chik fil A restaurants are closed on Sundays…for religious reasons. It’s pretty strange for a food franchise to not be open 7 days a week. Food franchises need to be open 7 days a week to serve their customer base. (The customer base for a typical food franchise-a fast food franchise like Chik fil A, includes time-starved families who are looking for a quick, convenient meal.) But, this franchise operation still thrives.
- The company blatantly pushes its founders religious views, as seen below, and as reported on by The Atlantic.
“We are very much supportive of the family—the biblical definition of the family unit. We are a family-owned business, a family-led business, and we are married to our first wives.”
Here’s an interview of Dan Cathy in which he discusses his religious views and his true feelings about Gay Marriage.
As much as I’m tempted to discuss my own business philosophy when it comes to the mixing of business and religion, I won’t do it here. It’s not that kind of article. The interview I did of Glenn Beck kind of is, however.
Cry Me A River
Ok. So, I went off-track a bit. Cry me a river.
Now, let’s get back to it. Back to the world of franchising.
Franchising Business Sectors
The food sector is the largest sector in the world of franchising. If you have worked in food-service, it’s a sector worth investigating if you’re looking to buy a franchise. That’s because you kind of know what you’re in for.
- High employee turnover
- High expenses
- Serious food-cost fluctuations
- Expensive real estate
- Unpredictable consumer behavior
Things like that.
And, the massive amount of almost-daily headaches in a business (the food-service business) that’s considered to be one of the toughest in the world to own and operate.
FYI: I was in the food-service business. I talk from experience. It’s a tough business.
That said, the food franchise sector can be a very lucrative one. Especially if you become a multi-unit food franchise owner.
Food franchises-especially fast food franchises, have been in the news a lot, lately.
As a matter of fact, a while back, I was asked (via Skype) about a huge issue having to do with worker pay by a reporter for Seattle’s KIRO-TV. (Unfortunately, the KIRO website was resigned and the interview I did was taken down)
Now, I’m not sure this is the kind of visibility fast-food franchisees really want. But, they’re getting it. They’re in the news a lot now.
One more thing about food franchises. My clients always ask me what’s hot in food.
To that end, if you’re interested in learning about the latest food trends and more, I highly recommend you read this article.
More Franchise Sectors
The information below (except for a few specific franchise opportunities) about the different franchise sectors, comes from Chapter 7 of my book, “Become A Franchise Owner!”
Some of these location-based stores, (that need prime locations) include names like Ace Hardware, GNC, and Great Clips. These can be great family-type businesses because they always have to have a staff on hand. Like the food franchise sector, the hours in retail tend to be long, and almost always include working 6-7 days a week.
As of this writing, investment amounts for some of the smaller retail franchises begin around $130,000 while larger operations can easily top $500,000.
Hotel and Motel franchises are the most expensive types of franchises to invest in. For example, if you’re thinking of becoming the owner of a Courtyard by Marriott hotel, according to their franchise website, you have to have a real estate net worth of at least $5,000,000. Would you like to be a Hilton franchisee? The total investment necessary to begin operation of a typical 300-room Hilton hotel is from $53,486,500 to $90,169,000. Obviously, these are long-term investments.
Owners of home service franchises provide more than services; they help families free up their time to do other things. Franchises in this sector include cleaning franchises like Maid Brigade, lawn care companies like Spring-Green Lawn Care, and home maintenance franchises like Window Genie. Owners of service franchises generally don’t do all of the actual work, although it depends on the specific franchise concept chosen. Figure about $100,000-$250,000, to buy one of these types of franchises.
A question: Would you have a problem owning a cleaning business?
The reason I’m asking is because a franchise opportunity like a cleaning franchise, or maybe a junk-removal business, may not be the type of franchise you thought about owning when you started your search for that “perfect” franchise, but…
What if you found out some interesting things about businesses in this sector-like the potential profit margins, for example? Or the fact that most of them are fairly low-cost? Would you be more interested in at least learning about them?
Watch this video about franchise business opportunities that are dirty. It will get you thinking.
The B2B Franchise Sector And More
Business to Business
If you can sell, (and enjoy it) a B2B franchise could be just the thing. Franchise opportunities in this sector include things like Sandler Sales Training, in which franchisees provide sales training to small businesses, and advertising and marketing sales businesses like Valpak and Money Mailer. Staffing franchises like Express Services provide temporary and permanent employees to small businesses in their geographic areas. Some franchises in B2B sector can be purchased for under $100,000, and can even be home-based.
This sector of franchising encompasses lots of different types of business models.
For example, This children’s franchise is interesting.
Maybe you’re interested in child-care, (and have deep pockets) Goddard and Primrose are two franchises that offer opportunities. Young Rembrandt’s and Abrakadoodle are franchises that offer enrichment programs for children.
And just so you know, there’s quite a wide range of investment amounts in this category. If you’re thinking of investing in a children’s-related franchise, you could spend anywhere from $75,000-$750,000+.
Update: you can get into this feel-good children’s franchise for under $50k.
Health and Fitness
This growing category includes everything from senior-care franchises like BrightStar Care, to fitness franchises like Snap Fitness and Orangetheory Fitness.
Furthermore, franchises that offer therapeutic massages like Massage Heights are included in this sector of franchising.
All in all, franchises in the health space are popular and diverse. Investment ranges in this sector range from $150,000-$900,000 or more. And there are lots of multi-unit owners in this sector of franchising.
There you have it. The main sectors in franchising today.
So, what will some of the sectors be in 5 or 10 years? Who knows.
For instance, do you think they’ll be an entire sector focused on electric cars and trucks?
Buying A Franchise
For those who want to be their own boss, franchise ownership is a popular option to explore. But, owning a franchise business isn’t for everyone.
As a matter of fact, it’s not for most people. Here’s why…
- Most people won’t risk their money in a business venture
- Most people like to be employees because they like to have steady paychecks
There’s something else. Not everyone likes to follow rules. And, it’s the rules that make the franchising business system work.
If you’re thinking of becoming the owner of a franchise, make sure you’re comfortable following rules. Make sure you’re comfortable following someone else’s system.
Important Tip: Read and/or bookmark my comprehensive, step-by-step article, “How to Buy a Franchise.”
Additionally, if you’re convinced that franchise ownership is the right direction for you to go, you need to learn how to choose and research a franchise. The right franchise. A franchise that makes sense for you.
First off, you need to come up with a budget. Ask yourself what the top dollar amount is that you’re willing to invest if you find the right franchise to buy. Start by figuring out exactly what you have to work with. Click the calculator to do that.
Now that you have your net worth figured out, you need to decide how much of it you’re willing to risk.
(You’ll probably end up getting a small business loan for a portion of the investment, so just come up with the amount of money you are willing to put in.)
Choosing A Franchise Business
Choosing the right franchise (for you) should be pretty easy. I mean how difficult can it be? There are only around 3,500 different franchise opportunities to choose from. And, that figure doesn’t include “Business Opportunities.” There are hundreds of them. Make sure you understand what a Business Opportunity is as opposed to a franchise opportunity.
The best way-the only way, actually, to choose the right franchise is to match your top skills and your dominant personal traits to franchises that fit them. Like this:
A. Grab a sheet of paper and write down what you feel your top skills are as they relate to business. Are you good with numbers? Are you a great team leader? Are your sales skills top-notch?
B. Grab another sheet of paper and write down the traits that define you. Are you deliberate? Laid-back? Driven? Detail-oriented? Outgoing? Make sure you write down your most dominate traits.
Now, you have two lists that can help figure out what types of franchises to search for.
Hint: franchise concepts that allow you to use your top skills, combined with your personal makeup in the operation of the business, are the opportunities to start investigating.”
That’s how to prepare to search for the right franchise.
Finding Good Franchises
Most people go online to search for franchises.
But, most people don’t know how to search online for a franchise that could make sense for them. They go from one franchise opportunity website to another-and then another, until their eyes are dryer than the Mojave desert in July. Frustration usually sets in.
“I can’t figure out what franchises to look at.”
“I have no idea if I’m on the right track.”
This is ridiculous! There are too many franchises to choose from.”
But, you don’t have to feel frustrated. You have already shortened your franchise search time, because you’ve determined your budget. You’ve come up with your top skills and personal traits-so you can hone in on only the franchise opportunities that match what you bring to the table.
So, start looking for that perfect franchise.
It’s important to a superb job with your franchise research. You need to become the ultimate fact-gathering machine.
A significant amount of your time is going to be spent on the phone. You’ll be calling current franchisees of the franchise concepts you’re interested in. You’re going to need to know what to ask-and how to ask. Here are a few questions to use when you call franchisees.
“What made you decided to choose this franchise?”
“Was the upfront investment in line with what you were told?”
“Were you aware of any competitors before you invested in your franchise?”
“Are you satisfied with the cost, delivery and quality of your products?”
“Is your role as a franchisee what you expected it would be? If not, what’s different?
“How do you rate the initial support/training?”
“Is there anything that the Franchisor can do better?”
More questions to ask franchisees-along with how to ask them-can be found in “The Definitive Guide To Franchise Research.”
Franchise Tip: in addition to phone calls and emails with current franchisees, you also need to visit one or two of them at their places of business. To arrange those vistis, call a couple of franchisees you talked with back, and ask them if you could spend a day at their location.
Make sure you stress that the visit must be convenient for them. They have franchise businesses to run, so be flexible with them. If they are willing to spend a day with you in their franchise location-or even a few hours, go ahead and arrange a visit. This is what to do once you’re at their franchise location.
Finally, doing great franchise research will provide you with the facts you need to make an intelligent decision on the franchises you’re thinking of buying. You need to spend a lot of time on this step.
Once you’ve done your research, you’re going to have to come up with a plan. A business plan. A franchise business plan that helps you figure out how and when the money will roll in. Today’s lenders need to see a plan for your new business before they’ll lend you the money you’re asking for. It’s not an “option.”
Tim Berry, a friend of mine, and the developer of this, just wrote about business plans, and the importance of their accuracy.
“Financial projections are always wrong, by definition, but they’d better be laid out correctly, reasonable, transparent, in line with industry standards, and, above all, credible.
The goal is to connect the dots in the financials so that spending is in proper proportion to sales and capital resources, and cash flow is sensitive to factors such as sales on account and inventory that make it different from profit and loss. Show that you understand how the financials are going to work in the real world. What drives what.
The sales forecast has to be credible. Make sure you lay it out from the details up, not from top down. That means transparent assumptions about drivers, so for a product in retail channels it’s something like monthly sales per store, and stores carrying the product; and for a web business is traffic via organic, traffic via PPC, and conversion rates; and so on. Definitely not a top-down forecast, meaning show a huge market and a small percent of market.
Profitability has to be credible. One of the most common flaws I see in business plans for competitions is absurd profitability, 30%, 40%, and more as profits to sales, in an industry in which the major players make 5% or 10% on sales. That’s a huge negative. Accuracy in P&L means having realistic percent of sales for marketing expenses, general and admin expenses, and development expenses.
Cash flow has to be credible. Another common flaw is failing to understand how sales on account and accounts receivable affect cash flow for business-to-business businesses; and yet another is failing to see the cash flow implications of having to buy product inventory and carry it before selling it.”
Read Tim’s entire article here, and grab his book!
Yes. I’m going there. “There” being, the law. Franchise law.
Franchising-as an industry, is highly regulated. (Some say it’s not regulated enough.)
There are certain things companies that offer franchise opportunities have to do. There’s a lot of disclosure.
As a matter of fact, there’s a document that all potential franchise business buyers must receive-that they have to receive, by law. It’s called the Franchise Disclosure Document, also known as the FDD.
There are 23 specific items listed in the FDD, along with a lot of other crucial information about the company and about the franchise offering.
Some of the things in the document are fairly complex, which is why I always recommend having a franchise attorney look it over for you. Franchise attorneys read and write FDD’s. They know what to look for, and will advise you on things like liability and risk if things go south.
Franchise Fact: things can go wrong. Sometimes, franchisees fail. Sometimes, franchisors go under. You can lose your money.
Franchise ownership can be risky. Don’t fall for the typical industry speak.
Franchise Tip: if you don’t get the FDD, including the franchise agreement, sent to you pretty early in the process, look at it as a
You want to have the FDD in your hands sooner rather than later, so you have ample time to dissect it. If your franchise representative is stalling, either ask for it right away, or close the book on them and find another opportunity. There are plenty to choose from. And, hire a franchise attorney!
How Do Franchises Work? Visit Headquarters And You’ll Find Out
You need to visit franchise headquarters.
It’s your one chance (before you buy) to meet and mingle with support personnel and executives of the franchise concept you’re thinking of investing in-and becoming the local owner of. Nothing beats spending time face-to-face with the people you’ll be interacting with-a lot, during the next 5-10 years. At least.
A franchise headquarters visit actually has a formal name. It’s called a Discovery Day. And, it really is a day of “discovery.” For the franchisor and for you…the prospective franchisee. It’s your chance to discover what it’s like at headquarters. What the culture is like. What the people who work there are really like. And, it’s a great way for the franchisor and the executive team to see what you’re all about.
Important: You must be officially “invited” to a Discovery Day. You will be (invited) as long as you’ve been doing what’s been asked of you…if you’ve been participating in the franchisors’ sales process, and you’re financially qualified to purchase the franchise.
Do Not Attend A Discovery Day, If…
Don’t attend a Discovery Day if you’re on the fence about the opportunity. Only go to a Discovery Day if you’re pretty much ready to say yes, you’ve done all or at least most of your franchise research, you’ve started to arrange financing (if needed) and you have a franchise attorney in mind that you’ll be using if you are offered an franchise.
FYI: Not everyone is offered a franchise. But, most people are if they’ve been invited to a Discovery Day.
Finally, don’t attend a Discovery Day if you’re just “curious” about the business. It’s a waste of time for both parties.
Franchise Business Financing
Most of the people who buy franchises do so with some form of financing-in addition to their own funds. So, unless you’re looking at a low-cost opportunity, in which you may not need any financing, it’s never too early to start talking to lenders or companies that specialize in connecting future franchise owners with great loan sources.
(Disclosure: I write a monthly article for SBA.gov, the official website of the U.S. Small Business Administration, and I helped put together the team of small business experts who write there.)
Fact: The U.S. Small Business Administration doesn’t loan money. They guarantee small business loans (up to a specific percentage) for banks which are SBA-Approved lenders. You can read more about what the SBA does and doesn’t do here.
Or You Can Do This
Some of today’s franchise buyers use a portion of their 401 (k) accounts or their IRA’s to fund their franchise businesses.
From the Guidant Financial website:
“Through an arrangement called Rollovers for Business Start-ups (ROBS), you can invest your funds from an eligible retirement account into a small business or franchise without taking a taxable distribution or getting a loan. Whether you want to buy an existing business, start one from scratch or grow one you currently have, ROBS could provide a significant part of your capital injection.”
According to David Nilssen, CEO of Guidant Financial, “Using your retirement account to purchase or start a franchise means you don’t owe anyone—and therefore don’t have to jump through their payback hoops.”
Pretty cool stuff. However…
If you decide to work with an accountant who’s familiar with small business, she will most likely give you a hearty “thumbs down” on this idea.
The reason goes more towards the conservative, low-risk nature that most accountants have than the actual level of risk in doing it.
Here’s what I can tell you: my own clients have and still do use this form of financing to start their franchise businesses. I am 100% comfortable with the idea, as long as a lot of things line up-like their age, the amount of money they have in their retirement plan to begin with, and how much they’re willing to risk. Drop me an email if you’d like specific information about my comfort level with this form of financing.
If you’re looking at franchise ownership, and you decide to use my franchise ownership advisory services, I can help you with a massive amount of stuff.
But, I can’t and won’t be able to help you make a yes or no decision on the franchise or franchises you’ve selected. On whether or not you should write The Check. That’s going to have to be on you.
I provide. You decide.
Politics And Franchising
Some people won’t do it.
They won’t (or can’t) include politics-or their own political views in their articles. I do.
I have to.
Because if I didn’t include politics here-and in some of my other articles, you wouldn’t be getting all of me. Make sense?
Now, to be sure, you can agree or disagree with my take on things. It’s your right…your choice. But, I couldn’t publish The Ultimate Guide To The World Of Franchising without mentioning politics and how it’s intertwined with my industry. (Unfortunately.) So, here goes.
I say unfortunately because it is unfortunate. It’s too much. It’s way too one-sided. It’s one of the reasons I dislike almost everything that the International Franchise Association (IFA) has been doing the past several years. What was once one of the beacons of franchising has sadly become just another Washington D.C. lobbying organization. What? You don’t believe me?
Case in point; look at this chart to see who the IFA has been schmoozing with.
(Chart courtesy of OpenSecrets.org)
Now, some of you are right to assume that my dislike of the IFA-and what the executives have been doing there, has to do with my own political leanings. That’s fine, because for the most part they do.
But, it isn’t all doom and gloom when it comes to the IFA. They have a good website. And, their data-filled reports are professionally produced and well done.
To summarize, for now, the IFA is the most powerful association in franchising. I just wish it was focused more on franchising and improving the model and less on campaign contributions and rubbing elbows with members of Congress.
I hope you found the information I provided in this guide helpful.
As long as you read this post in it’s entirety, I’m confident you learned things about franchising that you didn’t know.
And I hope you liked this guide well enough to share it with some of your friends and colleagues via email and on your Facebook, LinkedIn, and Twitter accounts.
Franchising is a fantastic way of doing business. I trust that I answered the question of “How do franchises work?”
To be sure, the franchise business has helped economies all over the world grow. Franchising helps keep things humming along. Local communities benefit when franchise business open. Jobs get created. Tax revenues increase.
Individuals…some with great vision, have taken huge financial risks to turn their ideas into franchise businesses. I commend them.
Similarly, today’s franchisees risk a lot of money so they can take more control of their lives…to be their own bosses. I commend them, too.
All in all, the world of franchising is big.