By Jim Wilson

The time has come. The decision has been made; you are going to leave corporate life, buy that franchise and be your own boss. Great! Have you thought about how you will finance it yet?

To effectively apply for and land a commercial loan for your franchise, you must understand the commercial lending business in order to get the best results. My goal here is to introduce you to commercial lending and provide insight into how banks approve and make loans so that you can approach commercial lending with a better chance of approval.

Maybe the place to start is the bank's perspective on lending money. Most new franchisees are absolutely positive of their eventual success with their franchise business and want the bank to share in that success by approving a loan for the needed capital. From the bank's point of view, however, all loans look the same. A bank's return on a loan to a start-up is the percentage rate charged just like it is on a loan to the biggest corporation in America. The bank only wants to control getting the interest on the loan and getting its money back.

The bank distinguishes borrowers based on how likely the borrower appears to be able to make the payments under the note. And when the likelihood of repayment seems diminished, the bank will look for additional and stronger collateral and guarantees to be sure that if the borrower does not make the payments the bank can get its payments from selling the collateral or from guarantors.

In addition to collateral and guarantors, banks often turn to the United States Small Business Administration (SBA) for a guaranty on the loan. The SBA, by providing a guaranty of 80-85% of the total loan balance, makes it easier for a bank to approve a small business borrower that does not present the best package for a loan. If the borrower fails to make loan payments, the bank turns to the SBA for payment of up to 80-85% of the initial loan, thereby lessening the risk the bank is taking on a new franchise owner.

SBA loans have a number of attributes that must be understood to be used successfully by a small business owner. The first is that the SBA does not lend money; it only guaranties a portion of the loan so that the bank can more easily take the risk in making the loan to a small business. If the loan fails, the most the bank will lose is the portion not covered by the SBA guarantee. And the SBA is not frivolous in granting its guarantees. If approved for an SBA guaranteed loan, the SBA will take security interests in business furniture, fixtures and equipment; will ask for personal guarantees of the principals of the business (generally anyone holding in excess of 20% of the equity of the business); and will take a security interest in the business principals' personal homes. If the loan fails, the SBA will recover against any or all of these assets to recover the money they pay to the bank on the loan under the guaranty.

Applying for a business loan requires that the business owners or managers develop a full plan for how much money they will need, how the money will be spent, and what the return to the business will be after the money is spent. In looking at start-ups, the necessary costs normally include build-out/renovations of the business site, furniture fixtures and equipment ("FF&E"), inventory, salaries and working capital. Considering a franchise restaurant for example, there might be build-out of $50,000, FF&E including kitchen equipment of $150,000, initial inventory of $30,000, three months of salaries of owner/manager, four cooks, eight wait staff at $80,000 and $25,000 of working capital for a total of $335,000.

Banks with an SBA guarantee will likely lend about 80% of the total project, or in this case $268,000, leaving the owners to input $67,000 of the capital required. Generally at this point, small business owners begin to panic. Coming up with $67,000 in cash seems like trying to come up with the whole $335,000. Understanding how the banks and others look at some of the project costs can greatly improve the situation however.

The first thing to consider under the circumstances is the build-out of the restaurant. Depending on the demand for real estate, a landlord will sometimes provide build-out, or at least a portion of build-out, in exchange for higher rent payments. If the rent for the restaurant was originally $3,000 per month, the landlord might provide $40,000 of the build-out for a $400 per month increase in rent on a ten-year lease. Now the restaurant owners have decreased the project costs to $295,000 and the cash down payment (20%) to $59,000.

The next change the new restaurant owner might consider is leasing the FF&E instead of buying it. There can be very good practical business reasons to lease instead of owning FF&E. If technology is constantly improving in your business such that equipment needs to be replaced regularly, leasing can be a better alternative to purchasing because the equipment can have a fixed period of usefulness in your business before it is replaced by newer technology. If the FF&E is used hard by your staff and customers so that it wears out over a short period, leasing can make it easier to replace equipment on a fixed cycle. If your FF&E has a long life in general or if the technology has a long life cycle, purchasing the equipment can be a better way to invest in your business by investing in the equipment of the business, though.

If the owners of our franchise restaurant do lease the FF&E, however, they will reduce their project costs by $150,000 to $185,000 and if they also get $40,000 in build-out costs from their landlord the project costs are now $145,000 and cash required is $29,000. Start-up costs can be further reduced by negotiating payment terms on some of the inventory needed to get the restaurant opened.

Do not be mistaken that these kinds of changes come without a price. The build-out change will increase monthly rent payments; the equipment lease payments now represent a monthly payment that was not part of the business plan at first. Of course, the loan payment is now lower too. The business now must make a higher cash flow each month to support these payments, but the cash to get started is less.

Many factors will affect the analysis of making these changes in a business plan. What are the expected trends in interest rates? How long is the lease on the FF&E and what king of buy-out provisions exist at the termination? These are just some of the aspects one must consider in gauging financing options for a franchise.

Jim Wilson is a small business attorney in Richmond, VA. He helps people start, buy/sell and finance businesses, purchase franchises and franchise their existing businesses. Jim graduated from the U.S. Naval Academy (1980) and the University of Richmond Law School (1992). Email: Jim@Wilsonstoyanoff.com.

Labels: Franchise Opportunity

Courtesy of the Bureau of Consumer Protection, Federal Trade Commission

A-1 Pay phones. $160K (thousand) per year potential … Premium locations.

Huge profits. Distribute candy mints, part-time, full-time …

Work 6 hours/week. Earn 45K+/year. Must sell!

Big $$. No competition. Low investment.

It's easy to see why ads for business opportunities like these appeal to consumers looking to make extra money: They promise good pay for little effort. But, as many consumers who have answered these ads have learned -- and the Federal Trade Commission (FTC) has found -- many business opportunity promotions are nothing but scams that take consumers' money up front and fail to deliver on the promises.

If you're a prospective business owner, what can you do to make sure this doesn't happen to you? First, do your homework, including getting pre-investment information in writing. Under the FTC Franchise Rule, most potential business purchasers have the right to receive information about the earnings potential of a business opportunity. Most legitimate business opportunity promoters don't hesitate to give this information.

Second, research other aspects of the business' performance. One way to do that is to personally interview other people who have bought into the program.
The Usual Suspects

Spotting fraudulent business opportunities is no easy task, but there are certain clues: One may be the type of business opportunity being advertised. Fraud is most often associated with vending machine, display rack, pay phone, medical billing, work-at-home, and some Internet-related business opportunities.

Promotions for fraudulent business opportunities often appear in the classified pages of daily and weekly newspapers and magazines, and online. They also may be marketed in television infomercials and commercials.

The ads use similar bait: Good pay (say, $160,000 a year) in a short period (weeks or months) for little effort. They trumpet an ideal work situation -- the ability to set your own hours, be your own boss, and work from home.

What the ads don't say is that the people behind these so-called business opportunities aren't really interested in helping you run a successful business: They're interested only in getting your money. To get you to buy in, they may mislead you about the business opportunity's earnings potential and promote a "phantom" opportunity that has little chance of succeeding -- for example, a business with little or no market. They may doom your chances of success by providing cheap, low-quality or out-dated merchandise; poor quality equipment (such as defective pay phones and vending machines) and locations that get little foot traffic, like rural gas stations, out of-the-way snack shops or stores in deserted strip malls.

While fraudulent business opportunities prey on consumers, they also harm legitimate businesses. To evade the law, promoters of fraudulent business opportunities often jump from one city to the next, leaving behind unpaid bills for newspaper ads, office rent, phone bills, mail delivery, and other services.
An Ounce of Prevention

If you're considering a business opportunity, do your homework first:

* Look at the ad carefully. If it claims buyers can earn a certain income, then it also must give the number and percentage of previous purchasers who achieved the earnings. If an earnings claim is there -- but the additional information isn't -- the business opportunity seller is probably violating the law.
* Get earnings claims in writing. If the business opportunity costs $500 or more, then the promoter must back up the earnings claim in a written document. It should include the earnings claim, as well as the number and percentage of recent clients who have earned at least as much as the promoter suggested. If it's a work-at-home or other business opportunity that involves an investment of under $500, ask the promoter to put the earnings information in writing.
* Study the business opportunity's franchise disclosure document. Under the FTC Franchise Rule, most business opportunity promoters are required to provide this document to potential purchasers. It includes information about the company, including whether it has faced any lawsuits from previous purchasers or lawsuits alleging fraud. Look for a statement about previous purchasers. If the document says there haven't been any previous purchasers but the seller offers a list of references, be skeptical: the references probably are phonies.
* Interview each previous purchaser in person, preferably where their business operates. The FTC requires business opportunity promoters to give potential purchasers the names, addresses and phone numbers of at least 10 previous purchasers who live the closest to the potential purchaser. Interviewing them helps reduce the risk of being misled by phony references.
* Contact the attorney general's office, state or county consumer protection agency and Better Business Bureau both where the business opportunity promoter is based and where you live to find out whether there is any record of unresolved complaints. While a complaint record may indicate questionable business practices, a lack of complaints doesn't necessarily mean that the promoter and the business opportunity don't have problems. Unscrupulous dealers often change names and locations to hide a history of complaints.
* If the business opportunity involves selling products from well-known companies, call the legal department of the company whose merchandise would be promoted. Find out whether the business opportunity and its promoter are affiliated with the company. Ask whether the company has every threatened trademark action against the business opportunity promoter.
* Consult an attorney, accountant or other business advisor before you put any money down or sign any papers. Entering into a business opportunity can be costly, so it's best to have an expert check out the contract first. If the promoter requires a deposit, ask your attorney to establish an escrow account where the deposit can be maintained by a third party until you make the deal.
* Take your time. Promoters of fraudulent business opportunities are likely to use high-pressure sales tactics to get you to buy in. If the business opportunity is legitimate, it'll still be around when you're ready to decide.

Reporting Possible Fraud

If you suspect a business opportunity promotion is fraudulent, report it to:

* the state attorney general's office in the state where you live and in the state where the business opportunity promoter is based.
* your county or state consumer protection agency. Check the blue pages of the phone book under county and state government.
* the Better Business Bureau in your area and the area where the promoter is based.
* the FTC. File a complaint online at www.ftc.gov or call toll-free 1-877-FTC-HELP (1-877-382-4357).

The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the market place and to provide information to help consumers spot, stop and avoid them. To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357). The FTC enters Internet, telemarketing, identify theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundred of civil and criminal law enforcement agencies in the U.S. and abroad.

Source: Federal Trade Commission, Consumer Protection Bureau

Labels: Franchise Opportunity

by Patricia Schaefer

"Traditional marketing says fill a need and you'll be successful. America has a huge need to eat healthy and no one's filling that need in the fast food market... not really." So says Jaynie Smith, author of Creating Competitive Advantage and president of Smart Advantage, Inc.

Smith is right about the huge need for Americans to eat healthy: According to the National Center for Health Statistics, 66.5 percent of adults are overweight or obese; 32 percent of adults obese. Just as alarming if not more so, childhood obesity is escalating; tripling since the 1970's. 17 percent of adolescents and 19 percent of children are overweight.

Increasing demands, legislation and litigation directed at America's fast food industry is now at fever pitch. Every day headlines abound on the issue of our fast food giants and the customers and food they serve:

* "America's Deadly Junk Food Addition"
* "Wendy's Significantly Cuts Trans Fats"
* "NYC Councilman Proposes Limiting Fast Food"
* "KFC Sued for Unhealthy Fat"

When Smith says there's a need and niche for healthy food in the fast food market, there's good reason to listen. Clients who take her Smart Advantage workshop typically increase their company revenues by double digit growth within six to 12 months after completion. True to her book title, Smith does in fact know a thing or two about creating that "competitive advantage."

"If someone would create a chain with healthy food, and I don't just mean healthy food that tastes bad (like junky iceberg lettuce) - but healthy food that tastes wonderful -- they would have complete competitive advantage in a new niche," says Smith. "And there is a niche completely unserved out there in the fast food market."

Take the beleaguered fast food chain KFC. Their latest conundrum is a recent lawsuit targeting its use of cooking oil with trans fat, today's "dirty word" in the world of healthy eating. Although reviewing alternative oil options, KFC has yet to find another oil that produces as good a taste. In contrast, Wendy's -- often referred to as the "fast food innovator" -- just announced that it is cutting trans fat from its menu, switching to a new blend of corn and soy oil in August. Wendy's will be the first fast food chain to switch from trans fat to a healthier oil.

Smith says there are a couple of things KFC and other fast food franchises can do to create a competitive advantage. One is they can offer their customers an option in menu items; for example, the traditional KFC chicken or "KFC light ('only three grams of fat')." The second solution according to Smith is for fast food franchises to have a separate stand-alone chain that has healthy offerings that taste good.

"Statistics show that it is the higher educated, higher income people who most focus on being healthy," noted Smith. "Therefore, if you have a product chain that differentiates its product to be healthier, price would not be an issue because these are the folks who want to eat healthier and they'll pay for it. I know when I'm in an airport I don't care what it costs if I can find something healthy."

Past fast food chain attempts at "healthy" have had mixed results. Do you remember McDonald's McLean Deluxe hamburger introduced in 1991? The low-fat McLean burger's taste was certifiably terrible and was subsequently withdrawn from McDonald's menu. Subway on the other hand has had great success with their "Subs with 6 grams of Fat or Less" campaign (by the way, they also contain no trans fat). A recent try of their 5-grams-of-fat Sweet Onion Chicken Teriyaki sub was very pleasing to the palate. Toasted and customized with added veggies, it is heartily recommended. With 26,044 restaurants in 84 counties, Subway's success in part is due to the fact that it promotes and provides "an alternative to traditional greasy fast food."

So, tell me. It's the year 2010. You walk into a Boston Market. From these two menu offerings (the second is presently fictional), which would you choose?

* Meatloaf with a side of creamed spinach and sweet potato casserole, and cornbread (1420 calories and 79 grams of fat)?

OR

* Grilled Salmon with a side of seasoned roasted vegetables and a basil-chive red potato mash (471 calories and 15 grams of fat)?

When looking at today's fast food calories and nutritional values it's no wonder then that the Food and Drug Administration (FDA) recently issued a report on away-from-home foods, with recommendations on how restaurants and carry-out chains can help prevent overweight and obesity. These recommendations include:

* Increase the availability of lower-calorie products, menu items and meals.

* Shift the emphasis of marketing. The marketing of lower-calorie and less-calorie-dense food should increase accompanied by a reduction in marketing that highlights higher-calorie (or calorie-dense) foods or encourages large portions.

* Strengthen and/or create education and promotion programs regarding away-from-home foods that promote the consumption of fruits, vegetables, no- and low-fat milk and milk products, whole grains, and foods low in saturated fats and trans-fatty acids.

* Away-from-home food establishments should provide consumers with calorie information in a standard format that is easily accessible and easy to use.

"If somebody would get both down; the fast and the food -- the fast and the "good" food down -- then you'd really have something," says Smith. "You'd have a competitive advantage that none of them could catch in the short term."

Let's hope -- for the future health and wellbeing of the American public -- that someone out there is listening.

Copyright 2006, Attard Communications, Inc.

You can read an excerpt from Jaynie Smith's book, Creating Competitive Advantage on BusinessKnowHow.com.

To find out more about Smart Advantage, Inc. or Jaynie Smith's book Creating Competitive Advantage, go to www.smartadvantage.com.

Labels: Franchise Opportunity

By Michael H. Seid and Kay Marie Ainsley, Managing Directors
Michael H. Seid & Associates, LLC

Question: Three friends and I have decided to pool our investment dollars and buy some franchises. Our backgrounds are financial, sales, and business administration. We have investigated several different franchise opportunities and have enough money to either buy six to 10 locations from a single franchise or one to two locations from three different franchises. Our question: Is it better to own several units of one franchise or to own one or two of several franchises?

Answer: You may find that some of the franchisors you are considering will not allow you, under their standard agreements, to own or operate other businesses while you are a franchisee of their system. Many will not offer to sell you a franchise if they know in advance that your full attention, at least in the beginning will not be focused on their brand, especially if your team is going to be working on several new concepts at the same time. Make certain that all of the options you expect to have actually exist.

Putting that all aside, it sounds as though you have put together a formidable management team. Unfortunately there is no "right" or single answer to your question. There are pros and cons to each option and you are going to have to make some trade offs in making your decision.

Many franchisors offer an area development plan to those potential franchisees who are willing to commit to opening a specified number of units within a defined territory and in accordance with an agreed upon schedule. They often provide several benefits in exchange for the franchisee's commitment. Typically, these incentives include some of the following:

* An exclusive territory for a defined period of time
* Reduced opening fees -- generally you will find that initial fees are reduced on a sliding scale. The more units you commit to often will determine the "average" fee you will pay.
* Reduced royalty if the franchisee provides support to their own units
* Reduced royalty based on total sales volume
* Ability to open additional units within the territory during the term of the agreement with no or lowered initial fees once the initial development obligations are met.

With multiple units you may be able to realize significant operating efficiencies:

* Shared labor among the locations you own
* Commissary and internal warehousing and distribution costs
* Purchase and other cost of goods benefits
* Advertising efficiencies
* Critical mass benefits including location and lease considerations from landlords
* Improved operations because of the ability to establish a strong internal management and training infrastructure

These are just a few of the benefits multi-unit operators can achieve. In addition to these benefits, owning several units of a single franchise often enables you to provide a career path for key employees. This in turn eases the burden on staff recruitment and can increase your employee retention rates.

You're also going to be "a bigger fish in the franchisor's pond." With more locations, you may have a louder voice with your franchisor and more influence among your fellow franchisees.

Of course, you will be putting all your eggs in one basket. Remember that not all franchisors are created equal. Some franchisors succeed while others disappear from the marketplace. It will be very important to evaluate both the consumer demand for the product or service you will be offering and the stability and track record of the franchisor.

Some franchise systems are truly only geared to single unit ownership. They cannot support either paid unit management or the establishing of a back-of-house support organization to run the multiple locations. Either the bottom line is insufficient to support both the royalty and other payments to the franchisor or the royalty or other payments to the franchisor are too high for successful multi-unit operations. You need to be certain that the franchisor you select has a system designed to allow profitable operation by a multi-unit owner.

Selecting multi-concepts will definitely allow you to spread your risk. You may also pick up intelligence and skills in one business that will improve your performance in another business. And, you may realize a higher overall return with a diversified portfolio -- one really hot concept can make up for a lack of performance elsewhere.

The multi-concept option may work best if the concepts you select either:

* Are within the same general industry; i.e., food, clothing, technology
* Create synergy among themselves; i.e., pre-school and children's clothing, elder care and home services
* Are all service businesses or have other similar attributes that can be leveraged over the brands; or
* The different brands have differing seasonality that can improve your internal cash flow

By leveraging concepts you may be able to create efficiencies that can be used across brands. This will likely be in areas of administrative support (payroll, etc.) and warehouse and distribution, among others.

In addition to gaining experience from one brand that can be used on the other, you may be able to maximize real estate. Landlords like to work with tenants that can deliver multiple concepts. They can subdivide larger space to fit your multiple brands or can simply appreciate the fact that you can deliver to them efficiencies that are not possible from single-concept tenants.

If you decide on the multi-concept option, we would suggest that you read your agreements very carefully to make sure the franchisor allows you to operate other businesses during the term of your agreement. Make certain that your definition of competing business and the franchisor's are the same. Have a qualified franchise attorney work with you to coordinate and provide guidance on the differing requirements of the various franchisors. These types of transactions tend to become complicated.

One last piece of advice: Learning how to run any new business and managing the opening of that new business generally requires more time, effort, money and skills than anticipated. While your team may bring many talents and skills to the new business, getting one concept off the ground before you take on another concept is going to be essential.

Remember to:

* Select compatible opportunities
* Stay geographical
* Look for seasonality benefits
* Develop your support infrastructure to leverage across brands if possible
* Pace your investments and development obligations
* Make certain that each concept can sustain its Return on Investment independent of contributions from the other
* Get great business and legal support to give you guidance in specialized areas

Take your time and Good Luck.

Michael H. Seid & Associates, LLC (MSA) is a domestic and international franchise advisory firm. Seid is also the co-author of Franchising for Dummies. To find out more about MSA and the services they provide, go to www.msaworldwide.com.

Labels: Franchise Opportunity

Source: U.S. Small Business Administration

The franchise contract, like the Uniform Franchise Offering Circular (UFOC), is a very important document. The contract is probably the most important document in the transaction process. It is a legal commitment which is binding on both the franchisor and franchisee. In the franchise contract, the franchisor's promises must be presented to the franchisee in writing and subjected to careful scrutiny. During this stage of the buy/sell process, the franchisee must have competent legal advice regarding the meaning and effect of the contract.

When reviewing the contract, you and your attorney, will need to determine if it confirms what you have been told. If you find improprieties in the contract at this point, you may decide to withdraw from the transaction before committing your time, energy and money to an agreement that may not be beneficial for you. If, however, you choose to continue with the process, you may be able to negotiate favorable terms, but remember by signing the contract, you are legally bound by the provisions of the agreement.

The franchise contract consists of two main parts: 1) the purchase agreement and 2) the franchise or license agreement. For convenience, occasionally the franchise transaction is split into two stages. When this happens, some franchise companies have two contracts, one for each stage, rather than a single contract. While it isn't necessary to have two contracts, it can be the better method where there is a comprehensive equipment and initial services package.

The purchase agreement of the contract covers:

* the franchise package
* the price
* the services to be provided.

The franchise or license agreement covers:

* the rights granted to the franchisee
* the obligations undertaken by the franchisor
* the obligations imposed upon the franchisee
* trade restrictions imposed upon the franchisee
* assignment/death of franchisee
* termination provisions.

A brief explanation of each agreement follows.
PURCHASE AGREEMENT

1. The franchise package. Consists of an equipment or inventory list. This list must contain all the items the franchisee has been told to expect. Some franchise companies regard this list as being confidential and stipulate in the contract that it must be so treated.

2. The price. The price and the manner of payment will be specified. This may be cash on signature, although rare. More often a deposit is required on signature with payment of the balance to follow on delivery of the equipment or at other stages of the transaction.

3. The services to be provided. This section outlines or lists the franchisor's responsibilities to the franchisee. Those services the franchisor is required to provide the franchisee before he or she is ready to open for business are called the initial services. Those services the franchisor provides periodically are called continuous services. A more detailed explanation of the services provided by the franchisor are included in the next section on the license agreement.
FRANCHISE OR LICENSE AGREEMENT

1. The rights granted to the franchisee. The franchisee will be given the right as it applies to particular circumstances. As a franchisee there are certain rights that are extended to you.

Your rights include:

* use of trademarks, trade names and patents of the franchisor.
* use of the brand image and the design and décor of the premises developed by the franchisor.
* use of the franchisor's secret methods.
* use of the franchisor's copyright materials.
* use of recipes, formulae, specifications and processes and methods of manufacture developed by the franchisor.
* conducting the franchised business upon or from the agreed premises strictly in accordance with the franchisor's methods and subject to the franchisor's directions.
* guidelines established by the franchisor regarding exclusive territorial rights.
* rights to obtain suppliers from nominated suppliers at special prices.

2. The obligation undertaken by the franchisor. This item in the contract tells prospective franchisees what the franchisor will do for them both before and after start-up. That is why this item frequently refers to specific contractual obligations detailed in the franchise agreement, which is attached to the UFOC.

3. The obligations imposed upon the franchisee. Certain obligations are required of you by the franchisor. These obligations include:

* to carry on the business franchised and no other business upon the approved and nominated premises.
* to observe certain minimum operating hours.
* to pay a franchise fee.
* to follow the accounting system laid down by the franchisor.
* not to advertise without prior approval of the advertisements by the franchisor.
* to use and display such point of sale advertising materials as the franchisor stipulates.
* to maintain the premises in good, clean and sanitary condition and to redecorate when required to do so by the franchisor.
* to maintain the widest possible insurance coverage.
* to permit the franchisor's staff to enter the premises to inspect and see if the franchisor's standards are being maintained.
* to purchase goods or products from the franchisor or his designated suppliers.
* to train your staff in the franchisor's methods to ensure that they are neatly and appropriately clothed.
* not to assign the franchise contract without the franchisor's consent.

4. Trade restrictions. The restrictions imposed upon a franchisee may prohibit him or her from carrying on a similar business except under franchise from the franchisor, taking staff away from other franchisees, carrying on a similar business in close proximity to other franchised businesses within that chain, and continuing, after termination of the franchise contract, to use any of the franchisor's trade names, secrets, and so forth.

5. Assignment/death of the franchisee. The franchisee should ensure that in the event of death his/her personal representative or dependent will be able to keep the business going until one of them can qualify as a franchisee, and that arrangements can be made to keep the business going until a suitable assignee can be found at a proper price.

6. Termination provisions. The termination of a franchise is an event heavily regulated by the franchise laws of 17 states. Franchise relationship laws in many states specify the conditions under which a franchisor may terminate or refuse to renew the franchise, imposing a standard of "good cause," "reasonable cause" or "just cause" as defined by those laws. Minimum advance notice usually has an opportunity to cure the default and avoid terminations; notice ranges from five days to 90 days. Many states also specify circumstances under which the standard notice and cure requirements need not be met.

In view of the close working relationship that must exist between the franchisee and franchisor all provisions must be stated clearly in the contract. In this transaction, no small print should exist. Make sure, if possible, the franchise contract contains provisions that are favorable for both you and the franchisor.

Understanding the Franchise Contract reprinted from and courtesy of the U.S. Small Business Administration (from the SBA's Workbook entitled "Is Franchising for Me?")

Labels: Franchise Opportunity

By Lori Kiser-Block

Statistics show that your chances for success as an entrepreneur are greater if you start your new business as a franchisee rather than opening a business all on your own. However, there are times when even franchise systems aren't successful and around for the long term. Of course there are no guarantees but you can boost your chances for finding a franchise with stability by doing some additional research.

A franchise company usually begins when someone has a desire to bring a product or service to a wider audience. One or more units, often called company stores, are opened so the product or service can be tested, refined, retested and improved. Once the company stores have experienced some success, the company will begin early franchising efforts.

Opening the first 10-25 franchised units is often the most difficult phase for a franchisor. The company will have to learn how the concept works in a variety of locations and with a variety of franchisees. Marketing can be tried on a larger scale and there are hundreds of details to be modified, changed, refined and locked down.

Once this initial group of franchisees experiences financial success, the franchisor will open up franchising to a larger group. If you are a risk taker, feel free to jump in at any of the earlier stages of a franchisor's development. If you'd rather avoid risk, confine your research on potential franchise opportunities to those companies that have survived the initial stages and have at least 25 or more successful franchise operations in place.

Yes, there are companies that are solid gold from inception. But as a general rule, the earlier you get involved in any business, the greater the risk. Not only that, by joining an established company you will also avoid many of the bumps along the road. A franchise that has reached a modest number of successful franchisees will have added sufficient infrastructure to support you and the marketing/branding efforts will help draw customers to your location.

By focusing your search on those companies that have reached this stage of development, you can increase your chances of success in finding one that will be around for the long term.
Validating the Franchise

Another way to increase your chances of franchisee success is to talk to the existing franchisees in a system. This cannot be overemphasized. The very best way to learn about a franchise system is to talk to a variety of franchisees and ask them very pointed questions, such as, "Have you reached your financial goals as a franchisee?" You want to find out actual earnings, not pie-in-the-sky expectations. New franchisees are notorious for having unrealistic expectations about the profitability their business will experience, until they've actually been in business for awhile.

The next question to ask existing franchisees is about the overall attitude of the franchisor about the business itself. What you want to see here is an attitude from the franchisor that their success is based on the success of the franchisees. In general, the more the franchisor is willing to help the individual franchisees become successful, the greater the longevity of the company.
Support from Franchisor

Once you've talked to existing franchisees and gotten good feedback about the company you will want to take a close look at the infrastructure of the franchise company. Your success as a franchisee will depend on the dedication and expertise of the operational support people so find out how long they've been with the franchisor and what previous experience they've had. Your conversations with existing franchisees should help you learn whether these people are competent and accessible but you will also want to talk to these support people yourself to be assured of compatibility. The operations and support people are there for your benefit and you want to make sure you will get your money's worth out of the association.

While there are no guarantees that a franchised company will be around for the future, there are ways to position yourself for a greater chance of success. When doing your research, keep in mind that a company that has reached at least a modest number of units (a minimum of 25 is suggested) will have a better chance of long-term survival than one that is new to franchising. If that company also has happy and successful franchisees and the right attitude toward mutual success, then you should feel comfortable the company has a very good chance of survival.

When making a decision as important as purchasing a franchise, you definitely want to be sure that the company will be around for the long term and that you will get the full benefits of being part of a franchise system. The bottom line is that just like any business, franchise companies can also fail. However, you can minimize your chances of joining a franchisor that won't be around by doing a complete and thorough investigation of the company. This will take more work on your part but your reward is that you will be better protected from buying a franchised business that might go under.

Lori Kiser-Block is Vice President of FranChoice, a national network of franchise consultants that provide free guidance and advice to qualified individuals in the United States searching for franchise opportunities that match their personal interests and financial qualifications.

Labels: Franchise Opportunity

by Patricia Schaefer

What have you personally found has been the best thing about being a franchise owner? What have you personally found has been the worst thing about being a franchise owner? Was there anything that surprised you about being a franchise owner?

These are the survey questions Franchise Trade asked franchisees across the U.S. Franchisees are from franchise systems large and small, in a variety of industries, and located in all regions of the nation. All responses were anonymous so franchisees would feel free to "tell it like it is." Accordingly, the names of franchisees and their franchise systems are not given in order to protect franchisees' identities.

What these franchisees had to say is a fascinating snapshot of a frank "unhyped" reality of what it's like to be a franchisee today.
What have you personally found has been the best thing about being a franchise owner?

The price of advertising is cheaper than if I had a business of my own.

The best thing has been the product itself: The brand sells itself, and the product sells itself.

The franchise support system is great. Whenever I have a question, I can just pick up the phone and Support staff are available with the answers.

The whole system of the franchise has been great. Everything is ready to use from beginning to end. No headaches.

The best thing about being a franchisee is working for myself.

The research the franchisor has already done and the fact that it's a proven method is great.

The support from Corporate is the best.

There are several great things about owning my franchise:

* I get to dance for a living.
* I can do all the preparation at home -- working around my family obligations.
* I love the community of women that I've met professionally. I love the clients and my fellow instructors.
* The company encourages and provides opportunities for extensive networking.

There is no best thing. Franchising for me has been a bad thing.

Every six months in my previous job, I was worried about being downsized by the large corporation I worked for. The best thing about being a franchise owner is being able to rely on myself, and not having to rely on a large corporation for my job security.

I love the flexibility my franchise allows and being my own boss.

The best thing about being a franchise owner has been the national recognition though collective advertising, and the support system (i.e., if I have a question, can always get assistance).

Having had no prior experience as a business owner, the best thing has been everything that comes with buying into a franchise system -- it really helps.
What have you personally found has been the worst thing about being a franchise owner?

I'm required to buy the product line that I sell to my customers from my franchise company. I feel the costs are unfairly high for the products, so my revenues are lower than I would have liked or expected.

The worst thing is my territory -- I don't have enough. If I had more territory, I could be earning more.

Just because you buy a "franchise" doesn't mean that their product is well-known in your particular area. Although you're buying into a brand, it can be somewhat like starting from scratch in your own business. It's been tough for me to brand a product that virtually no one in my area knows about. There's a whole range of franchise brand awareness; from a brand like McDonalds to other lesser-name brands. I've needed to spend more dollars on marketing than I anticipated.

I don't really have a worst thing. The only negative I could say is that as a franchisee, you have one more check above you; you have to answer to someone else. The few times I have heard from Corporate about a customer complaint, it's been easily resolved, so I really haven't had a problem.

The start-up costs were higher than expected, and taxes on small business are very discouraging.

Revenues aren't as good as I expected. I took over a franchise from another franchisee, and in hindsight realize I didn't know all the questions to ask this franchisee in terms of specific details regarding incoming revenues. There's a fairly short period of time -- a window -- to perform research. I did have an accountant, but feel I still needed better guidelines when looking through records.

The limitation in local advertising has been the worst thing. Having a well-known brand, national awareness and word-of-mouth is great. Things though are different on the local level. If I advertise in my local newspaper, someone else in the franchise also has their territory in the paper's distribution area. My solution has been to advertise only within my territory; i.e., sending mailings only to particular zip codes.

The money is bad:

* We pay 20% off the top to the corporation.
* The rent for commercial space in my area is prohibitive.
* Clients pay a relatively small amount to take classes.

I feel I was misled by Corporate. This industry is very expensive. I didn't get the right information -- the costs, everything. I have to buy from a particular vendor and the costs are exorbitant.

In business for just over a year, I'm not making nearly as much as I expected. I do though anticipate revenues to get better within the next year or two.

The worst thing has been the employee turnover.

The royalty structure is pretty costly. I've been a franchisee for 13 years, and at first I felt like I was getting something for my money. After a few years, though, I didn't need anywhere near the same level of support and now I feel like I'm not getting my money's worth.

Following requirements, whether I like it or not, has been the worst thing; i.e., where the advertising fees I pay to Corporate are spent.
Was there anything that surprised you about being a franchise owner?

What surprised me was the degree of control the franchisor has over us (the franchisees). I find the degree of control excessive.

Temper your enthusiasm. I did my research: great idea, great product, and people I surveyed loved the idea. Additionally, my research showed that business was pouring in to the already established corporate stores. But there's a difference between people liking the idea and buying the product (which has a significant price tag). With my franchise being four hours away from Corporate stores, brand recognition is practically nil and revenues thus far have been less than I anticipated. A big surprise.

I was pleasantly surprised with the level of support that the franchisor provides. Everything is ready for the franchisee, with the franchisor as a helping and guiding force.

I was surprised by how much we have to pay in taxes as a small business.

No surprises. I did a lot of research. I like the structure and support of a franchise, and like working with a large corporation. The franchisor sends mentors out; I can call my sister stores -- it's like a family.

The franchisor was very clear about their policies, so nothing was a surprise.

I was surprised by the amount of work required to produce and keep producing classes.

There was nothing that surprised me about being a franchise owner.

I was surprised by how expensive everything is. I have to buy from Corporate -- everything is overpriced.

Prior to purchasing this franchise, I had only been an employee. I had no experience supervising other employees. I was very surprised to find how difficult it is to select, supervise and motivate employees so that they will perform necessary tasks to my satisfaction.

Nothing really surprised me. It's pretty much what I expected.

I was surprised to find that being a franchise owner in a good franchise system does not guarantee results. I have found that it is the franchisee's own skills, ambition and abilities that are the strongest factors in determining the success of a franchise.

Nothing comes to mind as far as surprises.
A few findings and conclusions

Most of the franchisees I was unable to reach were absentee owners, and there were many. Their managers were running the daily operations, and owners I was told came in to the store, for example, only "on Thursday mornings." Business experts often cite the risks of absentee ownership, but it appears that absentee owners comprise a significant portion of today's franchisees.

The individuals who cited franchise support as being "the best thing" were from both newly and long-established franchise systems. This is encouraging news for franchisees seeking to purchase a franchise that's a "new kid on the block."

Many of the "worst things" franchisees named were things that probably could have been found out had they done their homework a little better. In fact, many franchisees admitted that "in hindsight," they could have done a better job of getting all the needed facts about the franchise.

Based on our findings, it would serve prospective franchisees well to thoroughly research potential franchises, and then some -- preferably with the assistance of a qualified franchise attorney and a good accountant. Although no research is perfect, special attention to calculating realistic earnings, limits or restriction on product purchases, territory, advertising costs and assessing royalty fees may be a good place to start.

Copyright 2006, Attard Communications, Inc.

Labels: Franchise Opportunity

by Patricia Schaefer

"Historically unprecedented." That's what Darrell Johnson, President and CEO of FRANdata, says about the fact that about 50 percent of all franchise units are now owned by multi-unit franchisees. FRANdata has been tracking for years the incidence of multi-unit franchising. Johnson and others agree that multi-unit franchising is one of the industry's most dominating growth trends.

As the growth of multi-unit and multi-concept franchising intensifies, it is becoming part of the amazing evolution and maturation of U.S. franchising. A number of today's franchisees are highly experienced and savvy business professionals who are strategically building their own small franchise empires. At the same time, more and more franchise systems are seeking multi-unit development agreements as the best and sometimes sole way to grow their franchise concepts.
Factors contributing to the rise of multi-unit franchising

Profitability

Increased profitability for both franchisor and franchisee is a strong contributing factor toward the steady rise in multi-unit franchising.

An SBA Office of Advocacy April 2007 report on Income and Wealth shows that multiple business owners are "the most prosperous small business group, with nearly three-fourths of them classified as high income and nearly one-half classified as high wealth."

For the period from 1989 to 2004, this SBA report shows multiple business households increasingly earning a higher percentage of income and wealth. "In 2004, they constituted nearly 18 percent of all small-business-owning households; however, they now earned nearly 35 percent of total household income and held 47 percent of the wealth of small-business-owning households." This up from 16 percent in 1989; with 30 percent of total household income and 38 percent of wealth.

Eric Stites, President of Franchise Business Review, says, "multi-unit operators tend to be more sophisticated investors with stronger business backgrounds and more experience, and they tend to maximize the profits from their business better than owner-operators." Multi-unit candidates also have deeper pockets, adds Stites, which he says actually lowers their risk of failure during startup.

Dunkin' Donuts franchisee Gulam Choudhury, who started out 19 years ago as a single-store owner, says he is reaping far more profits now as a six-store multi-unit franchisee. Furthermore, Choudhury says having more than one store affords him certain savings that would not have been available with one store. For example, his five Long Island, New York, stores all share one kitchen: "I didn't have to build a kitchen in each additional store. This was a tremendous savings."

Today, Dunkin' Donuts offers its franchise investment opportunities to only those who can purchase development agreements for five or more restaurants. This, says Lynette McKee, Vice President of Franchising for Dunkin' Brands, is part of "an aggressive national expansion plan that will ultimately triple Dunkin' Donuts to 15,000 U.S. [restaurants] by 2020."

"Our expansion plan is made possible by working with qualified, experienced franchisees who will help us grow at the pace and in the places we want," says McKee. "Therefore, moving forward, we are moving away from a single store model to expectations that our franchisees will sign multi-unit store development agreements."

Like Dunkin' Donuts, a growing number of franchise brands are seeking vigorous and optimal expansion with multi-unit operators only. Certainly, it is easier and more cost-effective to interact with and manage, for example, 50 franchisees who own 250 units rather than 250 single-unit franchisees.

Business owners with a wealth of experience and knowledge

Many established franchise owners are finding multi-unit and multi-concept franchising as the next challenging and rewarding step in their franchise career. These savvy entrepreneurs have the know-how, confidence and ambition to successfully expand their franchise systems and multiply profits.

The U.S. Census Bureau's most recent Characteristics of Business Owners, released in September of ‘06, shows sixty percent of business owners as 45 years of age and older. With people living longer and healthier, the desire to work stronger than ever, and the aging of baby boomers, business ownership is increasingly appealing to those in this age category -- many of whom have years of experience, knowledge and skills in the business world.

A number of these business owners are former corporate professionals - whether the result of corporate layoffs, downsizing or a yen for their own entrepreneurial endeavor. Many of these individuals have found that their years of sophisticated business experience and acquired financial resources have made them perfect candidates for not only owning their own franchise, but for multi-unit ownership as well. In fact, many say the rise of multi-unit franchising is directly linked to the downsizing of corporate America, starting in the late 1980's.

Cost-effective use of financial, material and human resources

Having multiple units of a franchise can lead to greater overall savings. For example, a multi-unit franchisee with franchises in close geographic proximity could advertise a number of stores at virtually the same cost as one store. In fact, a single-unit franchisee of a popular fitness franchise recently complained about the flip side of this scenario: "If I advertise in my local newspaper, someone else in the franchise also has their territory in the paper's distribution area."

Some other potential savings include:

* Time: When opening additional units, less time is spent with a familiar system than the time it would take to learn an entirely new business, system and procedures.
* Staffing: Staffing problems or shortages can be assuaged with the ability to share employees amongst stores. Opportunities for advancement may also be more readily available, thus reducing turnover; i.e., Store manager positions for skilled employees striving for higher positions and pay.
* Greater Discounts on Equipment and Supplies: If a franchisee is not required to purchase all supplies or products from the franchisor or specific source, significant savings may be gained with the purchase of items in greater bulk.

Is multi-unit franchising right for everyone?

Not every franchisee is cut out for multi-unit franchising. It takes considerable financial resources, commitment, drive, and is certainly not suitable for an inexperienced business owner.

And achieving success as a single-unit franchisee does not always equate to achieving success with multiple units. A franchisee that takes on multiple units too soon can become overwhelmed and eventually bankrupted. There's also a chance that subsequent units may underperform and ultimately lower the average profit of each.

Stites of Franchise Business Review says for the average franchisee and owner-operator, multi-unit franchising is not very realistic. "They typically don't have the capital to make it happen. That's why systems that are focused on multi-unit operations target a completely different individual -- someone with business ownership experience and/or executive level management experience and a good amount of capital. This is typically going to be someone who is 40+, a successful business owner already or a senior level manager coming out of the corporate world, with a net worth of $500,000+ and enough liquid capital to float themselves for a couple of years until their business is profitable (Again, owner-operators usually need to start earning some cash within six to 12 months)."

At Dunkin' Donuts, McKee says they are looking for multi-unit developers with a strong organization and the ability to manage stores effectively and successfully. "Respect for the franchisee-franchisor relationship is vital as well. We stay in constant contact with our franchisees, from advisory council meetings to frequent visits to the market. Because we have no corporate-owned stores, and all new product testing is done in concert with our franchisees, that trust level with franchisees is critical. Finally, any candidate for multi-unit franchising should share the customers' own passion and love of the brand. At Dunkin', our franchisees have a loud voice in the direction of our operation unlike many other franchise organizations, and it is extremely important that they understand that we represent not just a stop for something to eat and drink, but a daily ritual for millions of people."

Successful multi-unit franchisee Choudhury says, "If you want to be a multi-unit franchisee, you have to work hard and love what you do. You have to love your business like you love your own child."

Patricia Schaefer is a staff writer for Franchise Trade. She can be reached by email at pschaefer@businessknowhow.com

Labels: Franchise Opportunity