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.
Monday, October 29, 2007
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.
Raise Up To $1 Million
THE PERFECT FUNDING – REG D 504
by Ken Hollowell
Mr. Hollowell has provided business consulting and advice for business owners since the mid 70’s. As President of National Franchise Services he has assisted thousands of business owners in the area of franchising of which over 750 different businesses have been developed by his Company. Mr. Hollowell has lectured for the Federal Trade Commission, Small Business Administration, S.C.O.R.E. and has appeared on television over the years as a franchise expert. For several years Mr. Hollowell hosted a radio talk show on franchising whereby he interviewed many franchisors. Mr. Hollowell has also been used as an expert witness in franchise law suits.
Mr. Hollowell prepares 50 to 60 Private Placement Memorandums annually for his clients. His keen marketing skills and talents has benefited his clients in a very high success ratio of his clients receiving funding.
Mr. Hollowell is on 14 Board of Directors of which he is the Chairman of at least 7 of them. In December 2006, Mr. Hollowell was asked to become the CEO and Chairman of the Board for the 17 year old Los Angeles Music Awards.
Rule 504
This rule is considered by many as the perfect answer for the company just starting out that needs to raise less than $1 million but can't afford to go through the whole SEC registration process. Until they grow to a point where they can afford it, Rule 504 offers such companies an out:
An exemption to raise up to $1 million
No disclosure criteria
Few general solicitation and resale restrictions
No limit as to the number or type of investors
Actually, Congress's original intent in 1982 for Rule 504 was to "set aside a clear and workable exemption for small issuers to be regulated by state blue sky requirements, but by the same token, to be subjected to federal anti-fraud provisions and civil liability provisions." Rule 504 exemption is provided for almost any type of organization, including corporations, partnerships, trusts, or other entities. However, it is not applicable to companies already reporting to the SEC (subject to the '34 Act) or investment companies.
You Cannot Exceed $1 Million. The total offering amount under Rule 504 can be up to $1 million in a 12-month period, less the aggregate offering of all securities sold within 12 months before the start of a 504 offering. So, if a company has raised $100,000 in private money in the previous 12 months, it can still raise up to $900,000 without being accused of breaking the rules, or integration.
Generally speaking, there are no specific disclosure requirements under Rule 504 (disclosing what the company is about, what it intends to do, or who is connected with it). This means that, theoretically, an issuer can have a purchaser sign a subscription agreement and purchase stock without any information about the company being disclosed. However, the rule is dependent on the blue-sky laws of each state in which the securities are offered. This means that if a state's blue-sky rules require disclosure, it must be provided regardless of Rule 504.
Rule 504 also provides that at least $500,000 of securities must be sold pursuant to a registration under a state's securities law. Consequently, an offer must comply with the blue-sky laws of each individual state in which it is offered. In many states, this negates the effective simplicity of Rule 504 and the federal government's intent, because many states' blue-sky laws are more restrictive than Reg D.
A word of caution to the entrepreneur--regardless of the amount of disclosure the issuer is willing to provide, Rule 504 does not dismiss the issuer from the federal requirements, nor is there an exemption from the fraud provisions, including the areas of material omissions or misstatements. The penalties for noncompliance are severe, including monetary fines and mandatory jail sentences.
Number of Investors. With its limited disclosure requirements, Rule 504 also allows an issuer to sell securities to an unlimited number of investors. Theoretically, a company could raise $1 million by selling its stock at a penny a share to 100 million different investors. Obviously, the economics are not too attractive, but there's no rule that stops an issuer from selling $500 blocks of stock to 2000 investors. Rule 504 is the only rule under Reg D that permits an unlimited number of investors.
A final note on Rule 504 is that the exemption provides for sales of securities of either debt or equity. This opens the door for combinations of both via convertible debentures. By way of explanation, convertible debentures are a debt issue (debenture) that is convertible to a preferred or, most commonly, common stock at some future date, usually at a predetermined price.
Alternate Exemptions
There are several other rules and exemptions besides the Reg D exemption discussed above. They are worth looking into and are discussed below under the headings of Regulation A and the Small Corporate Offering Registration (SCOR).
As pointed out in the last section, the principal advantage of an exemption from registration is that the buy-and-sell transactions can take place as soon as the parties decide to proceed. It eliminates the necessity of preparing and filing a prospectus with the SEC, and it saves legal costs, plus accounting and registration fees.
Exemptions under the Securities Act of 1933 ('33 Act) are listed as exempted securities and exempted transactions. They can save both time and money. The only drawback is they can take a legal genius to interpret them. They're full of loopholes, and the courts have shown no qualms about ruling against the entrepreneur in their interpretations. Regardless, the end results should make them worth pursuing. But since the whole area of exemptions is so complex, the entrepreneur should not proceed without first seeking the advice of qualified legal counsel to determine the best form of exemption to apply for.
by Ken Hollowell
Mr. Hollowell has provided business consulting and advice for business owners since the mid 70’s. As President of National Franchise Services he has assisted thousands of business owners in the area of franchising of which over 750 different businesses have been developed by his Company. Mr. Hollowell has lectured for the Federal Trade Commission, Small Business Administration, S.C.O.R.E. and has appeared on television over the years as a franchise expert. For several years Mr. Hollowell hosted a radio talk show on franchising whereby he interviewed many franchisors. Mr. Hollowell has also been used as an expert witness in franchise law suits.
Mr. Hollowell prepares 50 to 60 Private Placement Memorandums annually for his clients. His keen marketing skills and talents has benefited his clients in a very high success ratio of his clients receiving funding.
Mr. Hollowell is on 14 Board of Directors of which he is the Chairman of at least 7 of them. In December 2006, Mr. Hollowell was asked to become the CEO and Chairman of the Board for the 17 year old Los Angeles Music Awards.
Rule 504
This rule is considered by many as the perfect answer for the company just starting out that needs to raise less than $1 million but can't afford to go through the whole SEC registration process. Until they grow to a point where they can afford it, Rule 504 offers such companies an out:
An exemption to raise up to $1 million
No disclosure criteria
Few general solicitation and resale restrictions
No limit as to the number or type of investors
Actually, Congress's original intent in 1982 for Rule 504 was to "set aside a clear and workable exemption for small issuers to be regulated by state blue sky requirements, but by the same token, to be subjected to federal anti-fraud provisions and civil liability provisions." Rule 504 exemption is provided for almost any type of organization, including corporations, partnerships, trusts, or other entities. However, it is not applicable to companies already reporting to the SEC (subject to the '34 Act) or investment companies.
You Cannot Exceed $1 Million. The total offering amount under Rule 504 can be up to $1 million in a 12-month period, less the aggregate offering of all securities sold within 12 months before the start of a 504 offering. So, if a company has raised $100,000 in private money in the previous 12 months, it can still raise up to $900,000 without being accused of breaking the rules, or integration.
Generally speaking, there are no specific disclosure requirements under Rule 504 (disclosing what the company is about, what it intends to do, or who is connected with it). This means that, theoretically, an issuer can have a purchaser sign a subscription agreement and purchase stock without any information about the company being disclosed. However, the rule is dependent on the blue-sky laws of each state in which the securities are offered. This means that if a state's blue-sky rules require disclosure, it must be provided regardless of Rule 504.
Rule 504 also provides that at least $500,000 of securities must be sold pursuant to a registration under a state's securities law. Consequently, an offer must comply with the blue-sky laws of each individual state in which it is offered. In many states, this negates the effective simplicity of Rule 504 and the federal government's intent, because many states' blue-sky laws are more restrictive than Reg D.
A word of caution to the entrepreneur--regardless of the amount of disclosure the issuer is willing to provide, Rule 504 does not dismiss the issuer from the federal requirements, nor is there an exemption from the fraud provisions, including the areas of material omissions or misstatements. The penalties for noncompliance are severe, including monetary fines and mandatory jail sentences.
Number of Investors. With its limited disclosure requirements, Rule 504 also allows an issuer to sell securities to an unlimited number of investors. Theoretically, a company could raise $1 million by selling its stock at a penny a share to 100 million different investors. Obviously, the economics are not too attractive, but there's no rule that stops an issuer from selling $500 blocks of stock to 2000 investors. Rule 504 is the only rule under Reg D that permits an unlimited number of investors.
A final note on Rule 504 is that the exemption provides for sales of securities of either debt or equity. This opens the door for combinations of both via convertible debentures. By way of explanation, convertible debentures are a debt issue (debenture) that is convertible to a preferred or, most commonly, common stock at some future date, usually at a predetermined price.
Alternate Exemptions
There are several other rules and exemptions besides the Reg D exemption discussed above. They are worth looking into and are discussed below under the headings of Regulation A and the Small Corporate Offering Registration (SCOR).
As pointed out in the last section, the principal advantage of an exemption from registration is that the buy-and-sell transactions can take place as soon as the parties decide to proceed. It eliminates the necessity of preparing and filing a prospectus with the SEC, and it saves legal costs, plus accounting and registration fees.
Exemptions under the Securities Act of 1933 ('33 Act) are listed as exempted securities and exempted transactions. They can save both time and money. The only drawback is they can take a legal genius to interpret them. They're full of loopholes, and the courts have shown no qualms about ruling against the entrepreneur in their interpretations. Regardless, the end results should make them worth pursuing. But since the whole area of exemptions is so complex, the entrepreneur should not proceed without first seeking the advice of qualified legal counsel to determine the best form of exemption to apply for.
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