Tuesday, March 3, 2009
Thursday, February 19, 2009
When The Economy Goes Downhill, Franchising Booms
More companies are discovering how solid franchising is and are thriving even when the economy isn't.
Ken Hollowell, President of National Franchise Services, Inc. stated, “In today's tough economy, scores of skilled and educated individuals are finding themselves without jobs. In many cases, these newly laid-off individuals have been in the workforce long enough to have a solid skill set and enough money saved up-or a strong enough credit history-to go into business for themselves. Many will choose franchising”.
The franchising sector continues to prove its place in the U.S. economy. According to the International Franchise Association, the franchise sector grew by more than 18 percent from 2001 to 2005. During that time, franchising brought more than 140,000 new businesses and 1.2 million new jobs to the U.S. economy.
Particularly attractive in a slower economy is the likelihood for success franchising offers. The U.S. Department of Commerce assessed the failure rate for franchises as a miniscule 5 percent or less per year, with 86 percent still operating after five years. Estimates of failure for independent businesses indicate that 68 percent do not survive the first five years.
A survey conducted by ABC News, The Washington Post and Stanford concluded that 94 percent of people say they're willing to make changes in their lives in order to help the economy and businesses are positioning themselves to take advantage of this new consumer mind-set.
National Franchise Services, Inc. recently launched a national marketing campaign to open 25 franchise offices in selected cities to for the promotion of its services. National Franchise Services provides consulting services to both companies desiring to expand into franchising developing their business or concept either regionally or worldwide and those individuals looking to purchase a franchise business. The company also provides non-traditional funding for small to medium businesses through one of the best kept secrets in business funds, Reg D 504 Private Placement Offerings. To learn more about this effective method of funding, visit www.regd504.com.
For more information about franchising, check National Franchise Services’ site at www.nfsdev.com. For information on National Franchise Services, visit www.nationalfranchiseservices.com or call 407-443-1476.
Ken Hollowell, President of National Franchise Services, Inc. stated, “In today's tough economy, scores of skilled and educated individuals are finding themselves without jobs. In many cases, these newly laid-off individuals have been in the workforce long enough to have a solid skill set and enough money saved up-or a strong enough credit history-to go into business for themselves. Many will choose franchising”.
The franchising sector continues to prove its place in the U.S. economy. According to the International Franchise Association, the franchise sector grew by more than 18 percent from 2001 to 2005. During that time, franchising brought more than 140,000 new businesses and 1.2 million new jobs to the U.S. economy.
Particularly attractive in a slower economy is the likelihood for success franchising offers. The U.S. Department of Commerce assessed the failure rate for franchises as a miniscule 5 percent or less per year, with 86 percent still operating after five years. Estimates of failure for independent businesses indicate that 68 percent do not survive the first five years.
A survey conducted by ABC News, The Washington Post and Stanford concluded that 94 percent of people say they're willing to make changes in their lives in order to help the economy and businesses are positioning themselves to take advantage of this new consumer mind-set.
National Franchise Services, Inc. recently launched a national marketing campaign to open 25 franchise offices in selected cities to for the promotion of its services. National Franchise Services provides consulting services to both companies desiring to expand into franchising developing their business or concept either regionally or worldwide and those individuals looking to purchase a franchise business. The company also provides non-traditional funding for small to medium businesses through one of the best kept secrets in business funds, Reg D 504 Private Placement Offerings. To learn more about this effective method of funding, visit www.regd504.com.
For more information about franchising, check National Franchise Services’ site at www.nfsdev.com. For information on National Franchise Services, visit www.nationalfranchiseservices.com or call 407-443-1476.
So You Want To Franchise
In my 30 years of marketing many different franchises and having consulted with 1000’s of franchisors and developing over 800 separate franchise businesses, I have come to the conclusion that most consultants and marketing people try to complicate franchising way too much.
FACTS ABOUT FRANCHISING
More than 8 million people are employed by franchise businesses, with an average of 8 to 14 employees per business. From 1975 to 1988, the total number of people employed in franchising nearly doubled, from 3.5 million to 7 million, and the number of persons employed per business increased 80% from 8 to 14. Franchised businesses create more than 170,000 new jobs each year.
According to the U.S. Commerce Department, fewer than 5% of franchises was terminated on an annual basis. In a study by Arthur Anderson & Company of 366 franchise companies, nearly 97% were still in business after 5 years. In contrast, a study by the U.S. Small Business Administration revealed that 62.2% of all new businesses failed within their first 6 years of business.
There are an estimated 8,000 franchise companies operating in the U.S. doing business through more than 600,000 retail units.
75 industries use franchising to distribute goods and services to consumers. Average initial investment level for nearly 8 out of 10 franchises, excluding real estate, is less than $250,000.
More than $1 trillion in annual sales is produced from franchise businesses and the 49% of all retail sales in the United States is from franchising.
THE HISTORY OF FRANCHISING
The origins of franchising can be traced back to the middle ages (400 A.D. – 1500 A.D.). At that time, it was an accepted practice for local governments to offer important persons, even high-church officials, a license granting them the right to maintain civic order and to make special tax assessments. Courts or lords could also grants rights to others to operate ferries, hold markets, and perform the business activities today carry out by professionals and craft guilds. The licensee (or franchisee) would pay the licensor (franchisor) a specific fund from the tax revenues collected or assessments made and in return receive military or other forms of protection.
Queen Isabella of Spain probably used (invented) a franchising system when she award Christopher Columbus a “franchise” in 1492 to develop travel and trade with the new world. It is fascinating that from the new world franchising would be introduced and re-established in the 20th Century.
Additional progress was made during the early 19th century in England when tavern and pub owners, while experiencing financial hardship, turned to brewing companies for financial assistance. The tavern and pub owners in return for financial assistance were required to purchase all of their beer from that specific brewer.
In the United State, franchising developed in the 1850’s when the Singer Sewing Machine Company formed a franchise in 1851. Agents were commissioned to demo, sell, and repair the Singer line.
In the late 1889, Robert Metzger was the first franchisee of Ford…before him; Fords were sold directly from the manufacturing plant. Ford began establishing dealers.
Rexall Drug stores – 1902
Western Auto – 1909
Howard Johnson – 1925
McDonalds – 1955
Kentucky Fried Chicken – 1955
International House of Pancakes – 1959 IHOP
And many more today…over 8,000 franchisors.
THE FEDERAL TRADE COMMISSION RULE ON FRANCHISING
As of October 21, 1979, FTC Rule 436 governs the offering of a franchise within the United States. Any company developing itself as a franchisor MUST comply with this rule. In addition to the FTC Rule, there are 15 States that require strict compliance to their State Laws governing the offering of a franchise.
In brief summary, a franchise is defined by the Rule as any business offering a contract or agreement whereby there is the licensing of a trade mark, logo, commercial symbol, in the body of the agreement there are significant controls or assistance being offered and the franchisor is being paid $500 or more during the first six months of the business being opened. Since that nearly covers most business opportunities, the franchisor must provide 10 business days prior to the required signing of the contract or agreement or the receipt of any money a full disclosure address specific items required by the Federal Trade Commission Rule 436.
Listed before are the 23 Items that must be addressed using the Uniform Franchise Offering Circular document:
Item 1. FRANCHISOR, ITS PREDECESSORS AND AFFILIATES
Some of the information that a franchisor is required to reveal in a FDD, such as disclosure of bankruptcies and lawsuits in the franchisor's past, may be embarrassing and detrimental to the sale of franchises. If a franchisor were to transfer its franchise operations to a related company with a clean bill of health, it could evade these disclosure requirements. To make this impossible, numerous disclosures about "predecessors" and "affiliates" are required in Item 1.
Item 2. BUSINESS EXPERIENCE
In some FDD’s, biographies of the franchisor's key people only cover the last five years and do not mention educational background. This is because some franchise examiners will not approve an offering circular unless the franchisor deletes all non-required information from its Item 2 biographies, not because all franchise executives have a maximum career span of five years and no education.
Item 3. LITIGATION
Franchisors and their personnel must tell prospective franchisees about lawsuits and arbitration proceedings brought against them. But they do not have to tell prospective franchisees about actions they have brought to collect debts owed to them by franchisees who have lost money trying to follow their franchised systems.
Item 4. BANKRUPTCY
Among other things, any franchise executive who has filed bankruptcy within the past ten years has to tell all in Item 4. Often, however, the requirement catches some poor man who is an employee of a franchisor and is just trying to quietly live down a personal bankruptcy.
Item 5. INITIAL FRANCHISE FEE
In Item 5 the franchisor has to disclose whether the initial franchise fee is uniform. Supposedly, this lets a prospective franchisee know that he is getting as good a deal as everyone else. In reality, the required disclosure is not effective. This is because it is only applicable to franchisees currently buying franchises. If the price was different in the past or changes in the future, these facts do not have to be revealed. The exception is California, which obliges franchisors fill out a form each time it sells a negotiated franchise and attaches these forms to the back of its offering circular. Virtually every FDD says that the initial franchise fee is nonrefundable. This means that the franchisor does not have to give a franchisee's money back if he gets cold feet, fails to locate financing, or, as is often the case, cannot find a satisfactory site. It does not mean that franchisors never refund these “nonrefundable” fees (because they often do), but only that a franchisee should not rely on it. If the franchise agreement does not require the franchisee to pay the initial fee until the franchise is ready to open for business, or if the initial fee will be paid into escrow, this means that the state is worried about the franchisor's ability to survive. No franchisor sets its agreement up this way voluntarily. The state must have required it to defer or escrow the fee as a condition of registration. Just because the state is concerned, however, does not mean the State is correct.
Item 6. OTHER FEES
These fees are listed in this section.
Item 7. INITIAL INVESTMENT
This chart is supposed to give a franchisee a realistic notion of how much money he needs to get up and running with the franchisor's system. Although the chart is supposed to be based on actual data, many franchisors base it on their "experience" instead (in other words, they guess). Franchise litigation histories show that the figures in Item 7 are often highly optimistic. Prospective franchisees should test the reality of these figures by pricing key expenses, such as rental of office space.
Item 8. RESTRICTION ON SOURCES OF PRODUCTS AND SERVICES
The franchisor is supposed to disclose, in Item 8, whether it takes kickbacks from suppliers in return for requiring franchisees to buy from those suppliers. The franchisor is also supposed to disclose whether it makes money on the franchisee's purchases from vendors the franchisor designates or recommends. However, the FDD guidelines on this subject are phrased so confusingly that many franchisors are not sure what is required and therefore the responses may be inaccurate.
Item 9. FRANCHISEE'S OBLIGATIONS
These obligations are listed here.
Item 10. FINANCING
In this Item, the franchisor is supposed to tell the franchisee all about the financing it provides or arranges for the franchisee to obtain from someone else. Franchisors hate to answer all the detailed questions in Item 10 because of the work required and require knowledge of esoteric matters such as how to calculate APR. So they answer Item 10 by saying they don't offer or arrange financing. The fact that the same financial source has funded 9 out of every ten franchised store build-outs in their systems is apparently just a coincidence. If a franchisee expects to need financing and no information about it appears in Item 10, he should get the information in writing, even if it is just a letter from the franchisor's bank.
Item 11. FRANCHISOR'S OBLIGATIONS
This is the part of the offering circular where the franchisor is supposed to describe in detail everything it is going to do for its franchisees. However, the disclosures are primarily directed toward revealing what the franchisee has to do, instead. This isn't the franchisors' fault. The Guidelines for preparing a FDD are set up this way. Part of this section concerns computer equipment. The franchisor is required to disclose whether it can “independently” access a franchisee's computer data via modem and examine the franchisee's data without contractual restriction. In the section on advertising, the franchisor is required to reveal how much of the advertising money paid by franchisees it can use to reimburse itself for operating the advertising fund. Many franchisors take no compensation at all, contributing more to the advertising fund than the franchisees do. Even though many franchisors promise franchisees to use their expertise to help the franchisees find good business locations, careful reading of Item 11 of most offering circulars reveals that the franchisor has no responsibility at all for site selection. Instead, the franchisee has to get the franchisor's permission to develop a given site, but cannot hold the franchisor responsible if the site turns out to be bad.
Item 12. TERRITORY
If the franchisor can build a competing outlet or grant a franchise right on top of another franchisee's location, it is supposed to be disclosed in Item 12. If a franchisor can compete with its own franchisee by selling its branded product in supermarkets or other outlets at a lower price than its nearby franchisee can afford to charge, Item 12 should say so.
Item 13. TRADEMARKS
If a franchisor's name turns out to belong to someone else, and that someone else sues the franchisee for infringement because the franchisee uses the name, does the franchisor have to defend the franchisee? If the franchisee is forced to change its signs, stationery, advertising, and so on, will the franchisor reimburse the franchisee for the expense? This information is contained in Item 13.
Item 14. PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION
Patent, copyright and proprietary information is contained here.
Item 15. OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS
The obligation to participate in the actual operation of the franchise business is contained here.
Item 16. RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
The restrictions on what the franchisee may sell is contained here.
Item 17. RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION
The renewal, termination, transfer and dispute resolution terms are contained here.
Item 18. PUBLIC FIGURES
If a famous person recommends that franchisees buy a particular franchise, the franchisor is supposed to reveal in Item 18 how much it paid the famous person for making the recommendation.
Item 19. EARNINGS CLAIMS
Does anyone make any money with this franchise? If so, the figures can be presented in Item 19. If the franchisor has something to brag about, this is where it should do it. If the franchisor does not give any information in Item 19, you have to ask yourself, why not? The answer is that franchise lawyers spent years telling franchisors how dangerous it is to provide earnings information in case they are sued, so that some franchisors who should be proud of their franchisees' financial performance are afraid to tell anyone.
Item 20. LIST OF OUTLETS
Item 20 tells prospective franchisees how many franchises a franchisor has sold and how many of the franchised businesses have survived. If this Item shows there have been lots of terminations, a person might conclude that it is hard to stay in business in this business.
Item 21. FINANCIAL STATEMENTS
The last three years of audited financial statements are contained here. Does this franchisor have enough cash to provide the benefits to franchisees that it says it will? The financial statements referenced in Item 21 and attached as an exhibit should provide an answer. If the letter from the auditor at the beginning of the financial statements contains a "going concern" notation--a statement that continued operation of the franchisor's business is in question, watch out! Read the footnotes to the financial statements.
Item 22. CONTRACTS
All contracts that the franchisee must sign are contained here.
Item 23. RECEIPT
The franchisor will ask you to sign this to prove you received the FDD.
STEP-BY-STEP PROCEDURES FOR FRANCHISE DEVELOPMENT
Corporate Structure - It is recommended that a new corporation be formed for the purposes of franchising. Since an audit must be prepared, a newly formed corporation can safe thousands of dollars in this area. Also, for liability reasons, a new corporation may be advisable.
Trade Name - The cornerstone of a franchise is the trademark, commercial symbol, logo and/or slogan. To achieve the necessary registration from the U.S. Trademark & Patent Office it takes from 12 to 18 months to receive.
Uniform Franchise Offering Circular - The Federal Trade Commission requires that all franchisors provide a prospective buyer with the necessary disclosure documents in compliance with Rule 436 of the FTC. This document is usually 50 to 60 pages and address 23 Items of disclosure. The FDD document must be updated and be current within 90 days at all times.
Audit - The FTC requires a audit of the financial condition of the franchisor corporation annually. Registration States will require updates every 90 days in addition to the annual audit.
Web Site - Instead of the preparation of printed promotional materials which can be extremely costly and often times outdated within months, franchisors are developing websites that contain all the necessary information concerning the franchise opportunity. The Confidential Franchise Application Form is part of the website. Printed materials are optional.
Manuals - Most franchisors provide 2 sets of manuals to their franchisees. Development Manual which is all of the pre-opening things requirements that must be completed by the franchisee before the business can be opened. Then the Operations Manual is the day-to-day procedures, policy, and guidelines of the business.
Training - The training program is always on-going, but the initial franchisee training is usually provided at the national headquarters of the franchisor for 5 days. Then a field representative will usually be available for another 3 days after the business is opened.
Field Support - It is necessary to inspect the operations of a franchisee on a regular basis to ensure quality control standards.
Registration States - There are 15 States that require registration of your FDD before marketing is allowed within their States. There are fillings required also.
Marketing/Advertising - To find qualified potential franchisees, various methods are employed through the media to reach these individuals.
WHY COMPANIES FRANCHISE?
There are two primary reasons why owners of businesses want to franchise or even a combination of these two reasons: 1) because they want to share their business with others, and 2) because they want to enjoy the financial rewards of franchising.
A company that is only worth $100,000 to $250,000 can be valued at over $100 million dollars within 3 to 5 years after franchising. I will not go into this at this moment, but always explain to all clients of National Franchise Services how this works.
FACTS ABOUT FRANCHISING
More than 8 million people are employed by franchise businesses, with an average of 8 to 14 employees per business. From 1975 to 1988, the total number of people employed in franchising nearly doubled, from 3.5 million to 7 million, and the number of persons employed per business increased 80% from 8 to 14. Franchised businesses create more than 170,000 new jobs each year.
According to the U.S. Commerce Department, fewer than 5% of franchises was terminated on an annual basis. In a study by Arthur Anderson & Company of 366 franchise companies, nearly 97% were still in business after 5 years. In contrast, a study by the U.S. Small Business Administration revealed that 62.2% of all new businesses failed within their first 6 years of business.
There are an estimated 8,000 franchise companies operating in the U.S. doing business through more than 600,000 retail units.
75 industries use franchising to distribute goods and services to consumers. Average initial investment level for nearly 8 out of 10 franchises, excluding real estate, is less than $250,000.
More than $1 trillion in annual sales is produced from franchise businesses and the 49% of all retail sales in the United States is from franchising.
THE HISTORY OF FRANCHISING
The origins of franchising can be traced back to the middle ages (400 A.D. – 1500 A.D.). At that time, it was an accepted practice for local governments to offer important persons, even high-church officials, a license granting them the right to maintain civic order and to make special tax assessments. Courts or lords could also grants rights to others to operate ferries, hold markets, and perform the business activities today carry out by professionals and craft guilds. The licensee (or franchisee) would pay the licensor (franchisor) a specific fund from the tax revenues collected or assessments made and in return receive military or other forms of protection.
Queen Isabella of Spain probably used (invented) a franchising system when she award Christopher Columbus a “franchise” in 1492 to develop travel and trade with the new world. It is fascinating that from the new world franchising would be introduced and re-established in the 20th Century.
Additional progress was made during the early 19th century in England when tavern and pub owners, while experiencing financial hardship, turned to brewing companies for financial assistance. The tavern and pub owners in return for financial assistance were required to purchase all of their beer from that specific brewer.
In the United State, franchising developed in the 1850’s when the Singer Sewing Machine Company formed a franchise in 1851. Agents were commissioned to demo, sell, and repair the Singer line.
In the late 1889, Robert Metzger was the first franchisee of Ford…before him; Fords were sold directly from the manufacturing plant. Ford began establishing dealers.
Rexall Drug stores – 1902
Western Auto – 1909
Howard Johnson – 1925
McDonalds – 1955
Kentucky Fried Chicken – 1955
International House of Pancakes – 1959 IHOP
And many more today…over 8,000 franchisors.
THE FEDERAL TRADE COMMISSION RULE ON FRANCHISING
As of October 21, 1979, FTC Rule 436 governs the offering of a franchise within the United States. Any company developing itself as a franchisor MUST comply with this rule. In addition to the FTC Rule, there are 15 States that require strict compliance to their State Laws governing the offering of a franchise.
In brief summary, a franchise is defined by the Rule as any business offering a contract or agreement whereby there is the licensing of a trade mark, logo, commercial symbol, in the body of the agreement there are significant controls or assistance being offered and the franchisor is being paid $500 or more during the first six months of the business being opened. Since that nearly covers most business opportunities, the franchisor must provide 10 business days prior to the required signing of the contract or agreement or the receipt of any money a full disclosure address specific items required by the Federal Trade Commission Rule 436.
Listed before are the 23 Items that must be addressed using the Uniform Franchise Offering Circular document:
Item 1. FRANCHISOR, ITS PREDECESSORS AND AFFILIATES
Some of the information that a franchisor is required to reveal in a FDD, such as disclosure of bankruptcies and lawsuits in the franchisor's past, may be embarrassing and detrimental to the sale of franchises. If a franchisor were to transfer its franchise operations to a related company with a clean bill of health, it could evade these disclosure requirements. To make this impossible, numerous disclosures about "predecessors" and "affiliates" are required in Item 1.
Item 2. BUSINESS EXPERIENCE
In some FDD’s, biographies of the franchisor's key people only cover the last five years and do not mention educational background. This is because some franchise examiners will not approve an offering circular unless the franchisor deletes all non-required information from its Item 2 biographies, not because all franchise executives have a maximum career span of five years and no education.
Item 3. LITIGATION
Franchisors and their personnel must tell prospective franchisees about lawsuits and arbitration proceedings brought against them. But they do not have to tell prospective franchisees about actions they have brought to collect debts owed to them by franchisees who have lost money trying to follow their franchised systems.
Item 4. BANKRUPTCY
Among other things, any franchise executive who has filed bankruptcy within the past ten years has to tell all in Item 4. Often, however, the requirement catches some poor man who is an employee of a franchisor and is just trying to quietly live down a personal bankruptcy.
Item 5. INITIAL FRANCHISE FEE
In Item 5 the franchisor has to disclose whether the initial franchise fee is uniform. Supposedly, this lets a prospective franchisee know that he is getting as good a deal as everyone else. In reality, the required disclosure is not effective. This is because it is only applicable to franchisees currently buying franchises. If the price was different in the past or changes in the future, these facts do not have to be revealed. The exception is California, which obliges franchisors fill out a form each time it sells a negotiated franchise and attaches these forms to the back of its offering circular. Virtually every FDD says that the initial franchise fee is nonrefundable. This means that the franchisor does not have to give a franchisee's money back if he gets cold feet, fails to locate financing, or, as is often the case, cannot find a satisfactory site. It does not mean that franchisors never refund these “nonrefundable” fees (because they often do), but only that a franchisee should not rely on it. If the franchise agreement does not require the franchisee to pay the initial fee until the franchise is ready to open for business, or if the initial fee will be paid into escrow, this means that the state is worried about the franchisor's ability to survive. No franchisor sets its agreement up this way voluntarily. The state must have required it to defer or escrow the fee as a condition of registration. Just because the state is concerned, however, does not mean the State is correct.
Item 6. OTHER FEES
These fees are listed in this section.
Item 7. INITIAL INVESTMENT
This chart is supposed to give a franchisee a realistic notion of how much money he needs to get up and running with the franchisor's system. Although the chart is supposed to be based on actual data, many franchisors base it on their "experience" instead (in other words, they guess). Franchise litigation histories show that the figures in Item 7 are often highly optimistic. Prospective franchisees should test the reality of these figures by pricing key expenses, such as rental of office space.
Item 8. RESTRICTION ON SOURCES OF PRODUCTS AND SERVICES
The franchisor is supposed to disclose, in Item 8, whether it takes kickbacks from suppliers in return for requiring franchisees to buy from those suppliers. The franchisor is also supposed to disclose whether it makes money on the franchisee's purchases from vendors the franchisor designates or recommends. However, the FDD guidelines on this subject are phrased so confusingly that many franchisors are not sure what is required and therefore the responses may be inaccurate.
Item 9. FRANCHISEE'S OBLIGATIONS
These obligations are listed here.
Item 10. FINANCING
In this Item, the franchisor is supposed to tell the franchisee all about the financing it provides or arranges for the franchisee to obtain from someone else. Franchisors hate to answer all the detailed questions in Item 10 because of the work required and require knowledge of esoteric matters such as how to calculate APR. So they answer Item 10 by saying they don't offer or arrange financing. The fact that the same financial source has funded 9 out of every ten franchised store build-outs in their systems is apparently just a coincidence. If a franchisee expects to need financing and no information about it appears in Item 10, he should get the information in writing, even if it is just a letter from the franchisor's bank.
Item 11. FRANCHISOR'S OBLIGATIONS
This is the part of the offering circular where the franchisor is supposed to describe in detail everything it is going to do for its franchisees. However, the disclosures are primarily directed toward revealing what the franchisee has to do, instead. This isn't the franchisors' fault. The Guidelines for preparing a FDD are set up this way. Part of this section concerns computer equipment. The franchisor is required to disclose whether it can “independently” access a franchisee's computer data via modem and examine the franchisee's data without contractual restriction. In the section on advertising, the franchisor is required to reveal how much of the advertising money paid by franchisees it can use to reimburse itself for operating the advertising fund. Many franchisors take no compensation at all, contributing more to the advertising fund than the franchisees do. Even though many franchisors promise franchisees to use their expertise to help the franchisees find good business locations, careful reading of Item 11 of most offering circulars reveals that the franchisor has no responsibility at all for site selection. Instead, the franchisee has to get the franchisor's permission to develop a given site, but cannot hold the franchisor responsible if the site turns out to be bad.
Item 12. TERRITORY
If the franchisor can build a competing outlet or grant a franchise right on top of another franchisee's location, it is supposed to be disclosed in Item 12. If a franchisor can compete with its own franchisee by selling its branded product in supermarkets or other outlets at a lower price than its nearby franchisee can afford to charge, Item 12 should say so.
Item 13. TRADEMARKS
If a franchisor's name turns out to belong to someone else, and that someone else sues the franchisee for infringement because the franchisee uses the name, does the franchisor have to defend the franchisee? If the franchisee is forced to change its signs, stationery, advertising, and so on, will the franchisor reimburse the franchisee for the expense? This information is contained in Item 13.
Item 14. PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION
Patent, copyright and proprietary information is contained here.
Item 15. OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS
The obligation to participate in the actual operation of the franchise business is contained here.
Item 16. RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
The restrictions on what the franchisee may sell is contained here.
Item 17. RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION
The renewal, termination, transfer and dispute resolution terms are contained here.
Item 18. PUBLIC FIGURES
If a famous person recommends that franchisees buy a particular franchise, the franchisor is supposed to reveal in Item 18 how much it paid the famous person for making the recommendation.
Item 19. EARNINGS CLAIMS
Does anyone make any money with this franchise? If so, the figures can be presented in Item 19. If the franchisor has something to brag about, this is where it should do it. If the franchisor does not give any information in Item 19, you have to ask yourself, why not? The answer is that franchise lawyers spent years telling franchisors how dangerous it is to provide earnings information in case they are sued, so that some franchisors who should be proud of their franchisees' financial performance are afraid to tell anyone.
Item 20. LIST OF OUTLETS
Item 20 tells prospective franchisees how many franchises a franchisor has sold and how many of the franchised businesses have survived. If this Item shows there have been lots of terminations, a person might conclude that it is hard to stay in business in this business.
Item 21. FINANCIAL STATEMENTS
The last three years of audited financial statements are contained here. Does this franchisor have enough cash to provide the benefits to franchisees that it says it will? The financial statements referenced in Item 21 and attached as an exhibit should provide an answer. If the letter from the auditor at the beginning of the financial statements contains a "going concern" notation--a statement that continued operation of the franchisor's business is in question, watch out! Read the footnotes to the financial statements.
Item 22. CONTRACTS
All contracts that the franchisee must sign are contained here.
Item 23. RECEIPT
The franchisor will ask you to sign this to prove you received the FDD.
STEP-BY-STEP PROCEDURES FOR FRANCHISE DEVELOPMENT
Corporate Structure - It is recommended that a new corporation be formed for the purposes of franchising. Since an audit must be prepared, a newly formed corporation can safe thousands of dollars in this area. Also, for liability reasons, a new corporation may be advisable.
Trade Name - The cornerstone of a franchise is the trademark, commercial symbol, logo and/or slogan. To achieve the necessary registration from the U.S. Trademark & Patent Office it takes from 12 to 18 months to receive.
Uniform Franchise Offering Circular - The Federal Trade Commission requires that all franchisors provide a prospective buyer with the necessary disclosure documents in compliance with Rule 436 of the FTC. This document is usually 50 to 60 pages and address 23 Items of disclosure. The FDD document must be updated and be current within 90 days at all times.
Audit - The FTC requires a audit of the financial condition of the franchisor corporation annually. Registration States will require updates every 90 days in addition to the annual audit.
Web Site - Instead of the preparation of printed promotional materials which can be extremely costly and often times outdated within months, franchisors are developing websites that contain all the necessary information concerning the franchise opportunity. The Confidential Franchise Application Form is part of the website. Printed materials are optional.
Manuals - Most franchisors provide 2 sets of manuals to their franchisees. Development Manual which is all of the pre-opening things requirements that must be completed by the franchisee before the business can be opened. Then the Operations Manual is the day-to-day procedures, policy, and guidelines of the business.
Training - The training program is always on-going, but the initial franchisee training is usually provided at the national headquarters of the franchisor for 5 days. Then a field representative will usually be available for another 3 days after the business is opened.
Field Support - It is necessary to inspect the operations of a franchisee on a regular basis to ensure quality control standards.
Registration States - There are 15 States that require registration of your FDD before marketing is allowed within their States. There are fillings required also.
Marketing/Advertising - To find qualified potential franchisees, various methods are employed through the media to reach these individuals.
WHY COMPANIES FRANCHISE?
There are two primary reasons why owners of businesses want to franchise or even a combination of these two reasons: 1) because they want to share their business with others, and 2) because they want to enjoy the financial rewards of franchising.
A company that is only worth $100,000 to $250,000 can be valued at over $100 million dollars within 3 to 5 years after franchising. I will not go into this at this moment, but always explain to all clients of National Franchise Services how this works.
Monday, October 29, 2007
WHO IS THE IDEAL FRANCHISEE?
by Ken Hollowell - Mr. Hollowell is one of the nation's leading franchise developers and consultants.
The success of franchising partly depends on the selection franchisors make of their franchisees. Nearly all franchisors have a specific profile of who they are looking for to be part of their franchise network and system. However, there are general profiles that need to be evaluated.
The Age
The general age range for a potential franchisee is between 35 and 55 years of age. That is not to say a younger or older person could not qualify for a franchise but generally speaking the average franchisee is in his early 40’s. Franchisors are careful when it comes to lack of life experiences which can be found in younger individuals. With older individuals, the franchisor is careful because of health reasons and energy that older individuals may lack.
The Background
Franchisees come from all walks of life. Depending on the specific franchise business and the profile of the franchisor will often depend on the background of the franchisee. The average potential franchisee is coming from corporate America from middle to upper management. Because of the stress, uncertainty of their career, and possibly no potentials of advancement, the potential franchisee is ready to go out on his own.
Male
Although in recent years more and more females are buying franchises, the male is still the majority when it comes to a franchise. As more franchises are developed with women in mind the tide will turn.
Financial Ability
The average franchisee will only have a portion of what it takes to purchase the franchise and will require some assistance in financing the franchise business. This will be a challenge for each franchisor unless they have already acquired the assistance and cooperation of funding companies. The easiest funding is equipment packages. Also the SBA is a preferred way to fund a franchise business.
Education
The potential franchisee has attended either a Junior College or graduated from a College or University. Teachers are among one of the professions that seem to lean towards a franchise business in their later years.
Martial Status
The potential franchisee is usually married with 2 children. One of the motivating factors of buying a franchise is the future education of the children and advancing in the lifestyle desired of the family.
The success of franchising partly depends on the selection franchisors make of their franchisees. Nearly all franchisors have a specific profile of who they are looking for to be part of their franchise network and system. However, there are general profiles that need to be evaluated.
The Age
The general age range for a potential franchisee is between 35 and 55 years of age. That is not to say a younger or older person could not qualify for a franchise but generally speaking the average franchisee is in his early 40’s. Franchisors are careful when it comes to lack of life experiences which can be found in younger individuals. With older individuals, the franchisor is careful because of health reasons and energy that older individuals may lack.
The Background
Franchisees come from all walks of life. Depending on the specific franchise business and the profile of the franchisor will often depend on the background of the franchisee. The average potential franchisee is coming from corporate America from middle to upper management. Because of the stress, uncertainty of their career, and possibly no potentials of advancement, the potential franchisee is ready to go out on his own.
Male
Although in recent years more and more females are buying franchises, the male is still the majority when it comes to a franchise. As more franchises are developed with women in mind the tide will turn.
Financial Ability
The average franchisee will only have a portion of what it takes to purchase the franchise and will require some assistance in financing the franchise business. This will be a challenge for each franchisor unless they have already acquired the assistance and cooperation of funding companies. The easiest funding is equipment packages. Also the SBA is a preferred way to fund a franchise business.
Education
The potential franchisee has attended either a Junior College or graduated from a College or University. Teachers are among one of the professions that seem to lean towards a franchise business in their later years.
Martial Status
The potential franchisee is usually married with 2 children. One of the motivating factors of buying a franchise is the future education of the children and advancing in the lifestyle desired of the family.
Why Franchisors Insist On The Franchise Application
by Ken Hollowell
You've done your homework, looking at various business opportunities including the possibility of buying a franchise. Whether it's a franchise for a large well known franchisor or a franchisor just starting to sale franchises, there's a process you must get through in order to actually become a franchisee.
The first step in that process is the application. This seemingly simple act of filling out a form or questionnaire is where many would-be franchisees get derailed. For those of us on the franchisor end of the business, the application is a very important first step in a "weeding out" process that helps us determine whom we will talk with further and whom we will simply send a polite "no thank-you" response.
The initial franchisee application is designed to tell us something about the applicant. We need to know a lot more than where you live, what jobs you've held and how much money you have in the bank. We are really looking to learn, at a glance, what type of person you are, so we can attempt to evaluate if you can succeed as a franchisee.
We want to know if you truly are motivated and how much you want to run your own business, since opening a franchise of any type is hardly a cakewalk. We need to get a sense of your people skills. As a franchisee running a large format digital printing service operation such as Grafix Stop, you must be able to deal smoothly and effectively with employees and customers alike.
As is the case with any reputable franchisor, we are not in business to simply take in franchise fees. Instead, we are looking for people who will succeed in running and building their individual franchise businesses and, in turn, help expand our company's revenues and reputation.
To aid us in that search, there are five key criteria we evaluate as we review applications. Since our criteria are similar to those of most good franchise companies, understanding what we look for and why can help you successfully get through the first part of becoming a franchisee - filling out the franchise application.
The decision to pursue an applicant past the initial application step is derived from a number of factors.
Some are simple and straightforward, while others are subtle and difficult to quantify or explain in simple terms.
1. Is the applicant a "people person?"
We look at the applicant's background to see what kind of work they've done. Experience in retailing, customer service or any area where there's interaction with the public is a plus. Fully describe work you've done where you've interacted with others, whether co-workers, subordinates or customers.
MONEY MATTERS
2. What is the applicant's financial situation?
Franchise fees can vary considerably, from a few thousand dollars to tens or hundreds of thousands. But the franchise fee is only a part of the financial equation. The applicant will also have to have funding available to cover rent, furnishings, inventory, staffing, advertising and promotion, taxes and literally dozens of other expenses, large and small. Starting a business is a costly undertaking.
For the typical Grafix Stop franchise, for example, we look for an applicant to have in the range of $45,000 to $50,000 available to cover the franchise fee (ours is $20,000) plus startup and initial operating expenses.
This does not mean we expect an applicant to have that amount sitting in the bank, ready to write a check. Most franchisors consider the applicant's full range of resources. While we expect some of it will come from personal savings, we know money can also come from family and friends in the form of personal loans or gifts.
Some may come from secured bank loans, or it may come from a home equity loan. All these resources and others are viable. Give a good indication of various financial resources that are available to you, so we can see that your new venture will be properly funded.
We also, of course, look at the applicant's financial history. Having a bankruptcy in your past is not an automatic rejection. We know people can get into financial difficulty for any number of legitimate and uncontrollable situations.
What does send up a red flag, however, is a pattern of financial mismanagement, which might be reflected in a bankruptcy along with other factors in the applicant's financial profile.
The application is an important first step for franchisors in the "weeding out" process.
Save yourself and us time and awkwardness by being forthright in how you fill out the financial portion of the application. All franchisors run credit checks, and it's better if we hear about past financial situations from you first, rather than having a credit check be the first time something is brought to our attention. If there are financial situations that might need explaining, it's best to do so in an attachment to the initial application you send us.
3. Is the applicant willing and able to take direction?
We can sometimes get an indication of an applicant's willingness and ability to accept direction from the jobs they have held and how long they've held them. If it's not obvious from your job title, then explain how your job responsibilities demonstrate this.
4. Is the applicant a self-starter?
Like willingness to take direction, indication of a self-starter can sometimes come from the type of jobs the applicant has held and how quickly he or she advanced up the ladder. Success in certain types of jobs, such as independent sales, might also suggest the person is motivated.
5. Does the applicant believe in our system?
This may not be easy to detect in an initial written application. But if the applicant shows us that he or she has done their homework, looked into our business and likes what they see, that is a good sign.
It's important to remember that in seeking a franchise, you are in a highly competitive situation. Franchise companies constantly receive inquiries and applications from potential franchisees. During tough economic times such as these, the competition gets even tighter as many more people look into franchising as a way to try to secure their future.
ACCENTUATE POSITIVE
We can't award a franchise to everyone who applies, even if they have sufficient financing. Since there may be dozens of applicants who, on paper, meet our criteria, anything you can do to make yourself stand out in a positive way will help your cause.
Do what you can to make us invite YOU in for a face-to-face meeting over the other qualified candidates.
Here are some things that make us take a closer look at an application:
Neatness. This may seem like a trivial point, but neatness does count. We are not English teachers grading exams, but we do want to be able to easily read your application. Excessive sloppiness might be taken as a sign that you are careless or the application is not important enough to you to take the proper care in filling it out.
If your handwriting is sloppy or childlike, ask a spouse or friend to fill it out for you. Hard as it may be to believe, we once received an application with answers written on coffee-stained napkins and scraps of paper. Needless to say, that applicant was not called in for a personal interview.
Thorough, thoughtful answers. We don't mind taking a few minutes to learn more about you, your background and skills, and your business aspirations. Except where the questions obviously call for a simple yes or no answer, try to provide thorough responses.
Showing enthusiasm for the franchise business can boost an applicant's chances.
Short of writing a book in response to each question, you should take as much space as you need to fully explain and SELL yourself. It's ok to put some answers on a separate typed page if a thoughtful response will not fit into the space allotted.
Just be sure to clearly indicate to us that the answer is on a separate sheet, and on that sheet clearly indicate what question is being answered.
If you can convince us that you are a good risk, there's a good chance you will succeed in getting a franchise. Then, with lots of hard work, long hours and a bit of luck, you'll be on the way to what can be a satisfying and rewarding business experience.
You've done your homework, looking at various business opportunities including the possibility of buying a franchise. Whether it's a franchise for a large well known franchisor or a franchisor just starting to sale franchises, there's a process you must get through in order to actually become a franchisee.
The first step in that process is the application. This seemingly simple act of filling out a form or questionnaire is where many would-be franchisees get derailed. For those of us on the franchisor end of the business, the application is a very important first step in a "weeding out" process that helps us determine whom we will talk with further and whom we will simply send a polite "no thank-you" response.
The initial franchisee application is designed to tell us something about the applicant. We need to know a lot more than where you live, what jobs you've held and how much money you have in the bank. We are really looking to learn, at a glance, what type of person you are, so we can attempt to evaluate if you can succeed as a franchisee.
We want to know if you truly are motivated and how much you want to run your own business, since opening a franchise of any type is hardly a cakewalk. We need to get a sense of your people skills. As a franchisee running a large format digital printing service operation such as Grafix Stop, you must be able to deal smoothly and effectively with employees and customers alike.
As is the case with any reputable franchisor, we are not in business to simply take in franchise fees. Instead, we are looking for people who will succeed in running and building their individual franchise businesses and, in turn, help expand our company's revenues and reputation.
To aid us in that search, there are five key criteria we evaluate as we review applications. Since our criteria are similar to those of most good franchise companies, understanding what we look for and why can help you successfully get through the first part of becoming a franchisee - filling out the franchise application.
The decision to pursue an applicant past the initial application step is derived from a number of factors.
Some are simple and straightforward, while others are subtle and difficult to quantify or explain in simple terms.
1. Is the applicant a "people person?"
We look at the applicant's background to see what kind of work they've done. Experience in retailing, customer service or any area where there's interaction with the public is a plus. Fully describe work you've done where you've interacted with others, whether co-workers, subordinates or customers.
MONEY MATTERS
2. What is the applicant's financial situation?
Franchise fees can vary considerably, from a few thousand dollars to tens or hundreds of thousands. But the franchise fee is only a part of the financial equation. The applicant will also have to have funding available to cover rent, furnishings, inventory, staffing, advertising and promotion, taxes and literally dozens of other expenses, large and small. Starting a business is a costly undertaking.
For the typical Grafix Stop franchise, for example, we look for an applicant to have in the range of $45,000 to $50,000 available to cover the franchise fee (ours is $20,000) plus startup and initial operating expenses.
This does not mean we expect an applicant to have that amount sitting in the bank, ready to write a check. Most franchisors consider the applicant's full range of resources. While we expect some of it will come from personal savings, we know money can also come from family and friends in the form of personal loans or gifts.
Some may come from secured bank loans, or it may come from a home equity loan. All these resources and others are viable. Give a good indication of various financial resources that are available to you, so we can see that your new venture will be properly funded.
We also, of course, look at the applicant's financial history. Having a bankruptcy in your past is not an automatic rejection. We know people can get into financial difficulty for any number of legitimate and uncontrollable situations.
What does send up a red flag, however, is a pattern of financial mismanagement, which might be reflected in a bankruptcy along with other factors in the applicant's financial profile.
The application is an important first step for franchisors in the "weeding out" process.
Save yourself and us time and awkwardness by being forthright in how you fill out the financial portion of the application. All franchisors run credit checks, and it's better if we hear about past financial situations from you first, rather than having a credit check be the first time something is brought to our attention. If there are financial situations that might need explaining, it's best to do so in an attachment to the initial application you send us.
3. Is the applicant willing and able to take direction?
We can sometimes get an indication of an applicant's willingness and ability to accept direction from the jobs they have held and how long they've held them. If it's not obvious from your job title, then explain how your job responsibilities demonstrate this.
4. Is the applicant a self-starter?
Like willingness to take direction, indication of a self-starter can sometimes come from the type of jobs the applicant has held and how quickly he or she advanced up the ladder. Success in certain types of jobs, such as independent sales, might also suggest the person is motivated.
5. Does the applicant believe in our system?
This may not be easy to detect in an initial written application. But if the applicant shows us that he or she has done their homework, looked into our business and likes what they see, that is a good sign.
It's important to remember that in seeking a franchise, you are in a highly competitive situation. Franchise companies constantly receive inquiries and applications from potential franchisees. During tough economic times such as these, the competition gets even tighter as many more people look into franchising as a way to try to secure their future.
ACCENTUATE POSITIVE
We can't award a franchise to everyone who applies, even if they have sufficient financing. Since there may be dozens of applicants who, on paper, meet our criteria, anything you can do to make yourself stand out in a positive way will help your cause.
Do what you can to make us invite YOU in for a face-to-face meeting over the other qualified candidates.
Here are some things that make us take a closer look at an application:
Neatness. This may seem like a trivial point, but neatness does count. We are not English teachers grading exams, but we do want to be able to easily read your application. Excessive sloppiness might be taken as a sign that you are careless or the application is not important enough to you to take the proper care in filling it out.
If your handwriting is sloppy or childlike, ask a spouse or friend to fill it out for you. Hard as it may be to believe, we once received an application with answers written on coffee-stained napkins and scraps of paper. Needless to say, that applicant was not called in for a personal interview.
Thorough, thoughtful answers. We don't mind taking a few minutes to learn more about you, your background and skills, and your business aspirations. Except where the questions obviously call for a simple yes or no answer, try to provide thorough responses.
Showing enthusiasm for the franchise business can boost an applicant's chances.
Short of writing a book in response to each question, you should take as much space as you need to fully explain and SELL yourself. It's ok to put some answers on a separate typed page if a thoughtful response will not fit into the space allotted.
Just be sure to clearly indicate to us that the answer is on a separate sheet, and on that sheet clearly indicate what question is being answered.
If you can convince us that you are a good risk, there's a good chance you will succeed in getting a franchise. Then, with lots of hard work, long hours and a bit of luck, you'll be on the way to what can be a satisfying and rewarding business experience.
A Practical Look At Franchising!
By Ken M. Hollowell
About Ken Hollowell - Mr. Hollowell is one of the nation's leading franchise consultants and developers with over 30 years track record. Mr. Hollowell has developed over 750 different franchise businesses to date. His knowledge and skills is unquestionably a benefit to all of his clients.
There comes a time in the evolution of every business that a decision needs to be made concerning whether or not to expand to reach a larger marketplace and, if so, the best method to achieve that goal.
Franchising, which is one method of expansion, has become increasingly popular in the past three decades. There is no doubt as to its success but the important questions are whether it is right for you and whether you are ready to be a franchisor. To help you answer those questions, let’s explore what being a franchisor requires, mentally, physically and financially.
You first need to understand that franchising is a business in and of itself. Your existing business (the underlying concept which you want to franchise) is another business. It is necessary, therefore, for you to begin adjusting your thinking to the new business at hand. It is, of course, advantageous to have a unique or superior product or service concept to offer to the public; however, it will not hold up well without a good franchise system built around it. Conversely, some less than outstanding concepts have made a name for themselves as a result of a superior franchise system.
The single most important aspect of any franchise system is the trademark or service mark which is being licensed to the franchisee. Your first priority should be to design a unique mark by which your franchise system and its products or services will be identified. You then must search the files of the federal government and the states in order to determine whether anyone else is presently using the same or a similar mark. If you have a green light, you must proceed to secure a registration of that mark for yourself. Your franchise agreement must protect your interest in those marks and you must set up strict and well enforced standards for the franchisee to follow so as not to endanger those marks.
The offer of a franchise is subject to state and federal regulations. The penalties for failure to comply with those laws can be damaging both to our pocketbook and your reputation. You must present prospective franchisees with a specially prepared disclosure document (known as an offering circular) in strict compliance with those regulations at least ten business days before they sign the franchise agreement or pay you any money. There are also fifteen states which may require you to register the offering and submit the disclosure for review before marketing can occur within their
jurisdictions. Furthermore, any form of advertising which is used to solicit a prospective franchisee must comply with governmental regulations.
There is more to being a franchisor than simply having a franchise agreement and an offering circular. The franchisees who receive that disclosure and eventually sign the agreement must be trained to operate an outlet in an organized manner. Therefore, an operations manual must be prepared and a training program should be in place. A staff of qualified individuals who will run the franchisor’s organization and train the franchisees must be assembled. Once again, remember that franchising is a different business. Thus any existing manual which merely outlines the day-to-day conduct of your present business will not be adequate to explain to a franchisee how he or she is to operate your concept. You should develop a program of continual field support to assist franchisees with problems which they may encounter in daily operations of the outlet. The team assigned to that function will also monitor and report on the franchisee’s compliance with your standards. The creation of an aggressive advertising campaign to promote your franchised outlets and the image which you wish them to convey to the marketplace is of utmost importance.
Although federal and state regulations do considerably inhibit your ability as a new franchisor to indicate the income potential of an outlet to a prospective franchisee, it is still wise to have a prototype of the typical outlet in existence in order to indicate the viability of the concept and your actual hands-on experience in its operation.
It is also advantageous from a sales standpoint to have an actual facility which a prospective franchisee can visit since you will be engaged in a new business (franchising), your existing business needs to be secure enough to function without your daily participation. Likewise, do not expect to raid the ranks of your present organization in order to staff the new business. Remember, they must be replaced.
To be a successful franchisor, you must be committed to meet these and other requirements. However, it is very possible for you to do this in an efficient manner with help from individuals experienced in the franchising process – so long as they have your best interests at heart.
You have, no doubt, heard of the fantastic sums of money which a franchisor may gain from a franchise system by way of the initial franchise fee, monthly royalty payments and contributions to the advertising budget from franchisees. Although you may eventually realize great income from your franchise system, the road leading up to that result could be expensive. We believe in teaching the client to do or oversee as much of the work the client is willing to do himself. This will save the client a healthy portion of the fees which some development and consulting firms charge. The major advantage is that the client receives a greater understanding of what franchising is all about and receives first hand training on how to become a quality franchisor, rather than relying on others who may not have your total interest at heart.
Proper franchise development does take time. Depending upon the extent to which you wish to market your offering, you should be prepared to devote six months to one year to that task. Don’t expect to create the necessary documentation overnight and head straight to marketing. You need to be trained to think and act like a franchisor, to learn the new business that you area in and the obligations that it entails and to make intelligent, informed decisions regarding the structure of the franchise system. In addition, registration of your offering with a state regulatory agency can take a good deal of time and patience.
Who should you choose to develop your franchise system? Attorneys will normally only handle the franchise agreement, the offering circular and the registration. Attorneys with a true background in franchising are few in number and high in price. All others will be learning the ropes at your expense – and they charge by the hour. Most attorneys will provide you with a document which may be “legal” but which is rarely constructed from the standpoint of a businessman or a marketing specialist.We take every client and their individual needs seriously. We are dedicated to teaching, informing, educating and training franchisors in how to effectively and professionally become the best franchisor possible. Our basic philosophy is to teach the client to do as much as he can, while providing expert assistance in those areas the client decides not to accomplish himself. We think that’s keeping your best interests at heart.
About Ken Hollowell - Mr. Hollowell is one of the nation's leading franchise consultants and developers with over 30 years track record. Mr. Hollowell has developed over 750 different franchise businesses to date. His knowledge and skills is unquestionably a benefit to all of his clients.
There comes a time in the evolution of every business that a decision needs to be made concerning whether or not to expand to reach a larger marketplace and, if so, the best method to achieve that goal.
Franchising, which is one method of expansion, has become increasingly popular in the past three decades. There is no doubt as to its success but the important questions are whether it is right for you and whether you are ready to be a franchisor. To help you answer those questions, let’s explore what being a franchisor requires, mentally, physically and financially.
You first need to understand that franchising is a business in and of itself. Your existing business (the underlying concept which you want to franchise) is another business. It is necessary, therefore, for you to begin adjusting your thinking to the new business at hand. It is, of course, advantageous to have a unique or superior product or service concept to offer to the public; however, it will not hold up well without a good franchise system built around it. Conversely, some less than outstanding concepts have made a name for themselves as a result of a superior franchise system.
The single most important aspect of any franchise system is the trademark or service mark which is being licensed to the franchisee. Your first priority should be to design a unique mark by which your franchise system and its products or services will be identified. You then must search the files of the federal government and the states in order to determine whether anyone else is presently using the same or a similar mark. If you have a green light, you must proceed to secure a registration of that mark for yourself. Your franchise agreement must protect your interest in those marks and you must set up strict and well enforced standards for the franchisee to follow so as not to endanger those marks.
The offer of a franchise is subject to state and federal regulations. The penalties for failure to comply with those laws can be damaging both to our pocketbook and your reputation. You must present prospective franchisees with a specially prepared disclosure document (known as an offering circular) in strict compliance with those regulations at least ten business days before they sign the franchise agreement or pay you any money. There are also fifteen states which may require you to register the offering and submit the disclosure for review before marketing can occur within their
jurisdictions. Furthermore, any form of advertising which is used to solicit a prospective franchisee must comply with governmental regulations.
There is more to being a franchisor than simply having a franchise agreement and an offering circular. The franchisees who receive that disclosure and eventually sign the agreement must be trained to operate an outlet in an organized manner. Therefore, an operations manual must be prepared and a training program should be in place. A staff of qualified individuals who will run the franchisor’s organization and train the franchisees must be assembled. Once again, remember that franchising is a different business. Thus any existing manual which merely outlines the day-to-day conduct of your present business will not be adequate to explain to a franchisee how he or she is to operate your concept. You should develop a program of continual field support to assist franchisees with problems which they may encounter in daily operations of the outlet. The team assigned to that function will also monitor and report on the franchisee’s compliance with your standards. The creation of an aggressive advertising campaign to promote your franchised outlets and the image which you wish them to convey to the marketplace is of utmost importance.
Although federal and state regulations do considerably inhibit your ability as a new franchisor to indicate the income potential of an outlet to a prospective franchisee, it is still wise to have a prototype of the typical outlet in existence in order to indicate the viability of the concept and your actual hands-on experience in its operation.
It is also advantageous from a sales standpoint to have an actual facility which a prospective franchisee can visit since you will be engaged in a new business (franchising), your existing business needs to be secure enough to function without your daily participation. Likewise, do not expect to raid the ranks of your present organization in order to staff the new business. Remember, they must be replaced.
To be a successful franchisor, you must be committed to meet these and other requirements. However, it is very possible for you to do this in an efficient manner with help from individuals experienced in the franchising process – so long as they have your best interests at heart.
You have, no doubt, heard of the fantastic sums of money which a franchisor may gain from a franchise system by way of the initial franchise fee, monthly royalty payments and contributions to the advertising budget from franchisees. Although you may eventually realize great income from your franchise system, the road leading up to that result could be expensive. We believe in teaching the client to do or oversee as much of the work the client is willing to do himself. This will save the client a healthy portion of the fees which some development and consulting firms charge. The major advantage is that the client receives a greater understanding of what franchising is all about and receives first hand training on how to become a quality franchisor, rather than relying on others who may not have your total interest at heart.
Proper franchise development does take time. Depending upon the extent to which you wish to market your offering, you should be prepared to devote six months to one year to that task. Don’t expect to create the necessary documentation overnight and head straight to marketing. You need to be trained to think and act like a franchisor, to learn the new business that you area in and the obligations that it entails and to make intelligent, informed decisions regarding the structure of the franchise system. In addition, registration of your offering with a state regulatory agency can take a good deal of time and patience.
Who should you choose to develop your franchise system? Attorneys will normally only handle the franchise agreement, the offering circular and the registration. Attorneys with a true background in franchising are few in number and high in price. All others will be learning the ropes at your expense – and they charge by the hour. Most attorneys will provide you with a document which may be “legal” but which is rarely constructed from the standpoint of a businessman or a marketing specialist.We take every client and their individual needs seriously. We are dedicated to teaching, informing, educating and training franchisors in how to effectively and professionally become the best franchisor possible. Our basic philosophy is to teach the client to do as much as he can, while providing expert assistance in those areas the client decides not to accomplish himself. We think that’s keeping your best interests at heart.
High Risk Investments Can Mean High Returns
HIGH RISK INVESTMENTS CAN MEAN HIGH RETURNS
By Ken Hollowell*
With all of the investment opportunities that are available, how does a private investor make the selection of who, what and when to invest in a particular project? If you speak with an average private investor and ask how they made the decision to invest, they will tell you they rely on their instincts as much as their due diligence. Of course they investigate management looking at past history, achievements, successes and accomplishments along with the overall business concept that must make sense are taken into consideration. Paying attention to the benefits of investing is extremely important too. But it’s that feeling in the pit of the stomach that seems to cause the decision. Does it feel good?
All private investors are looking for that “home run” investment opportunity that will provide them with a return on investment of ten times or more the initial investment within a short period of time. How often does a home run occur? More often than most private investors realize.
When the Body Shop needed a small amount of seed capital to launch the distribution of their body care products, Ian McGlinn invested $8,000 in the company. He knew the potentials were there for a home run, but not the magnitude of the potentials. When he exited the company he had earned $80 million.
When Steve Jobs, Co-founder of Apple Computer needed funding and found an individual who invested $91,000 no one would have thought that years later that investor would realize $154 million. When Thomas Alberg wrote his check for $100,000 to Amazon.com in their conceptional stages, there was a feeling that he was on to something big. His return was over $26 million years later.
What are the possibilities of you finding a company that is in a startup mode that you can invest in that can give you the kind of return that others have enjoyed? They are out there and if you understand and know how to evaluate and rely on your intuition you too can reap the rewards and prosperity of a private investor.
*Ken Hollowell has been a leading consultant and developer in the field of franchising. Mr. Hollowell began preparing Private Placement Memorandums for his franchise clients 27 years ago and today writes, consults and provides guidance to 50 to 60 companies annually in the raising of funds.
By Ken Hollowell*
With all of the investment opportunities that are available, how does a private investor make the selection of who, what and when to invest in a particular project? If you speak with an average private investor and ask how they made the decision to invest, they will tell you they rely on their instincts as much as their due diligence. Of course they investigate management looking at past history, achievements, successes and accomplishments along with the overall business concept that must make sense are taken into consideration. Paying attention to the benefits of investing is extremely important too. But it’s that feeling in the pit of the stomach that seems to cause the decision. Does it feel good?
All private investors are looking for that “home run” investment opportunity that will provide them with a return on investment of ten times or more the initial investment within a short period of time. How often does a home run occur? More often than most private investors realize.
When the Body Shop needed a small amount of seed capital to launch the distribution of their body care products, Ian McGlinn invested $8,000 in the company. He knew the potentials were there for a home run, but not the magnitude of the potentials. When he exited the company he had earned $80 million.
When Steve Jobs, Co-founder of Apple Computer needed funding and found an individual who invested $91,000 no one would have thought that years later that investor would realize $154 million. When Thomas Alberg wrote his check for $100,000 to Amazon.com in their conceptional stages, there was a feeling that he was on to something big. His return was over $26 million years later.
What are the possibilities of you finding a company that is in a startup mode that you can invest in that can give you the kind of return that others have enjoyed? They are out there and if you understand and know how to evaluate and rely on your intuition you too can reap the rewards and prosperity of a private investor.
*Ken Hollowell has been a leading consultant and developer in the field of franchising. Mr. Hollowell began preparing Private Placement Memorandums for his franchise clients 27 years ago and today writes, consults and provides guidance to 50 to 60 companies annually in the raising of funds.
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