The world of franchising has many pieces. Many parts. It’s not just a world of “opportunities.”
It’s a world full of ideas, determination, grand plans and dreams.
On the flipside, it’s a world that includes disappointments and failures.
Simultaneously, it’s a world of fresh starts. A world where people fire their bosses in order to be the boss.
The franchise model is also the ultimate business model-for the right person.
The world of franchising is a world of numbers. High finance. Business plans.
To summarize, the world I’m writing about also includes politics. And, lobbying.
What a world.
The Ultimate Guide To The World Of Franchising
This guide is divided into several sections. All of them have their own special place in the franchising world.
- The Business Model
- 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
Franchising has been around quite a while. You should know its history.
The following is an excerpt from my free* online course,”A Proper Introduction To Franchising.”
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.
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.
In addition, the free online lesson goes on to explain how Singer and his partners came up with the idea of “licensing.”
In today’s franchising world, when you buy a franchise, you’re really buying a license. In a nutshell, Mr. Singer and his partners were responsible for that.
*If you’d like to learn about some of the other people who contributed to franchising as we know it today, including this amazing entrepreneur, signup below my free introductory online course on franchising.
Infographic: History Of Franchising
The Business Model
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.
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.
When you buy a franchise, you’re buying a business system, along with everything else that goes 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.)
“The International Franchising Association (IFA) estimates that more than 12,000 new franchise locations will open in 2015. Franchise businesses are expected to add nearly 250,000 new jobs this year. This will bring the total number of jobs at franchised businesses to 8.8 million in the US alone and represents a nearly 3% increase over the gains seen in 2014. With more franchise locations opening and more jobs being created, the IFA estimates that franchise businesses should generate nearly $890 billion in business in 2015.”
In any event, franchising is a huge job-creator. Hopefully, members of Congress and the board members of the NLRB, will pop some reality pills and figure out how to allow franchising to remain the great job-creator it currently is.
A lot of businesses and individuals benefit from franchising these days-especially when the industry is growing. That’s because before a franchise business even opens in an area, lots of things are set in motion that contribute to the local economy. After the business is open, some of the benefits to the local area remain in place.
Look who benefits:
- Business Plan writers
- Franchise attorneys
- Commercial real estate developers
- Surrounding businesses
And many others.
*Don’t be harsh on the banks. When banks are healthy-and lending money, it’s good!
Franchising A Businesses
Here are two questions:
1. Who decides if an up and running independent business can actually transform itself 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.
Specialized K-9 Training
You think there’s a 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.
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.
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.
Some franchise development firms will gladly take your money. They’ll tell you what you want to hear after you share your idea for a franchise business. Some 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.
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.
If You Are Thinking of Franchising A Business
When it comes to choosing a franchise development firm, I hate to say this, but it’s buyer beware. Do serious research on them. Use Google 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.
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)
The Other Way To Do It
You can (if you have an idea or a business that you’d like to turn into a franchise) do it another way.
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 to make your franchise offering legal, and Boom! Your business is now a franchise business. Except…
But 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 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 should be using for lead-generation? Especially since you don’t know a lot about franchising yet.
Fact: Most likely, if you go the cheap route, you’ll sell one or two franchises and be done.
Fact: It’s not easy to come up with a franchise business idea…one that will be successful.
It’s great to read about franchisors that have just sold their 100th, or 1000th franchise. Personally, I love to hear that kind of news. But, it’s not as common as you think.
In order 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.
Just because you have a great idea for a franchise….or a great business that you think is franchise-worthy-doesn’t mean it is.
But 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.
So, do you have an idea for a franchise?
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.
Specific 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 there. 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.
Here’s an infographic explaining the benefits of an intranet system:
2. Franchisor experience
You are getting 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.
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 Franchises Go Bad
Remember what happened at Taco Bell?
How would you like to be a franchise of this fast food restaurant?
This PR nightmare is probably being used in a college class as a case-study
And, these guys may never get it.
Back to what you get as a franchisee…
You shouldn’t have to spend weeks (or months) putting together a strategic marketing plan for your franchise business-because in almost every case, it’s already been done.
When you’re ready to open your franchise for business, in a perfect world, the marketing (almost all of it) has already been done. Your Grand Opening should be a huge event-one that’s been highly publicized with the help of the 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 franchising…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!)
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®, Burger King®, 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:
“For 2015, food-related franchises (quick service restaurants, full service restaurants and retail food) are estimated to account for an estimated $341 billion of economic output in United States. In addition, franchises in these categories account for 33% of all franchise establishments in the U.S.”
For more data-including the latest food franchise trends, check out the latest Franchise Direct Food Franchise Industry Report.
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. Starbuckssold 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 Chil 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 thrives anyway.
- 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.
Ok. So, I went off-track a bit. Cry me a river.
Let’s get back to it. Back to the world of franchising.
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.
I was in the food-service business. I talk from experience. It’s a tough business.
FYI: The food franchise sector can be a very lucrative one. Especially if you become a multi-unit owner.
Check out some pros and cons of food franchise ownership from the article I wrote for the SBA.
Food franchises-especially fast food franchises, have been in the news a lot, lately. 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. Check it out. 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. Supposedly, these 25 food franchises-at least in Canada, are.
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. Investment amounts for some of the smaller retail franchises begin around $120,000 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 Marriot 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.
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 including almost-part time ones. Opportunities include tutoring, like Tutor Doctor. If you’re interested in child-care, (and have deep pockets) Goddard Schools and Primrose are two franchises that offer opportunities. Young Rembrandt’s and Abrakadoodle are franchises that offer enrichment programs for children. 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 $80,000-$750,000+.
Health and Fitness
This growing category includes everything from senior-care franchises like Brightstar Healthcare and Synergy Healthcare, to fitness franchises like Snap Fitness and Gold’s Gym. Even franchises that offer therapeutic massages like Massage Envy and Massage Heights are included in this sector of franchising. Investment ranges are $150,000-$900,000 or more. There are lots of multi-unit owners in this sector of franchising.
This relatively new category of franchising features mostly young franchise concepts like Solar Universe, a solar panel design and installation company, Dr. Energy Saver, a residential energy auditing franchise, and LED Source, a distributor of professional and high quality LED Lighting products. Expect investment amounts to be from $75,000-$300,000. As of this writing, interest in green franchise opportunities isn’t what it once was. We’ll see what happens in the future.
There you have it: The main sectors in franchising today.
What will some of the sectors be in 5 or 10 years? Who knows. Maybe there will 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.
Additionally, if you’re convinced that franchise ownership is the right direction to go, you have 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, 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’re 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 3,000 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. I wrote about this in one of my monthly franchise articles I do for The U.S. Small Business Administration’s Community Blog.
“The first thing has to do with skills. 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?
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.
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 here.
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.
Call a couple of franchisees that 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 the franchise location.
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. 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 keep your eye out for his newest 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 Tip: If you don’t get the FDD sent to 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!
You should 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 have to 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.
Franchise Tip: Do not 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. (Not everyone is offered a franchise. But, most people are if they’ve been invited to a Discovery Day.) A Discovery Day should not be attended by people who are just “curious.” 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, he or 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. And, I will. I’ll be your franchise friend. Look
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 In 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. If I didn’t include politics here-and in some of my other articles, you wouldn’t be getting all of me. Make sense?
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. Steve Caldiera, the head of the IFA, seemingly spends most of his waking hours lobbying in D.C.
All you have to do is look at this chart to see who he’s been wining and dining 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. But, my feelings are deeper than that.
The IFA’s egocentric focus isn’t on franchising as much as it’s on creating problems for President Obama and most of the other currently elected Democrats. Just like wonderful fair and always balanced folks over at Fox News, IFA talking points are almost always anti-Obama. To them, it’s always Obama’s fault. And, there’s almost never good alternatives suggested to anything The President proposes. Bash. Bash. Bash. No matter what. I’m actually surprised there hasn’t been an IFA Press Release about Benghazi distributed. (Yet)
That felt good.
But, it isn’t all doom and gloom when it comes to the IFA. They have a nice website. And, their reports are professionally produced and well done.
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.
The Ultimate Guide To The World Of Franchising: Summation
I hope you found the information I provided in this guide to be informative.
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. It’s 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.
Today’s franchisees have risked a lot in order to take control of their lives…to be their own bosses. I commend them, too.
The world of franchising is a big one. And, it’s a great one.