Your assignment: Buy a franchise. Step one 1: Take our crash course to find the right franchise for you personally.
Relax, class. Today we will explore how to get and evaluate an excellent franchised business. Not absolutely all of you should hold down employment for all of your working life. Let’s have a show of hands: Who’s imagined owning your own business? OK, that’s the majority of you. Investing in a franchise is one way to make it happen; some even say it is the easiest way. So take down notes, ask questions, and for goodness’ sake, please stay awake!
Lesson No. 1: COULD IT BE in You?
Not everyone who raised her or his hand will be happy as a franchisee. Running a business is tough work, & most franchises need to be run according to an extremely detailed, strict group of guidelines. If you are a high-spirited entrepreneur who would like to do it the right path without following somebody else’s rules, you might like to look for an unbiased business to start out or purchase; owning and owning a franchise may bother you. So the very first thing to do is to learn what you would like out of a business and whether it’ll bring you fulfillment. If you want the idea of owning a business where you cope with customers at your own counter or provide services to businesses, or if you value sales or have writing skills, then keep these skills and preferences at heart when you begin looking through franchise ideas. They’ll assist you to zero in on the proper business for you personally.
If the business you enter is a franchise or not, it requires money to create it happen. Make a summary of your resources, relatives you can method of be investors, your savings as well as your investments. Then go speak to a few bankers. Viewers some banks will lend you money for a business within a federal program where in fact the government promises to repay almost all of the money to the lender if your business goes toes up and you default. Banks love this; it lowers their risk if they lend money to home based business owners. Ask the bankers about SBA loans-read about the SBA’s loan programs, and have a look at a registry program where franchisors and the SBA have teamed up to streamline the application form process.
Lesson No. 2: Get Your Feet Wet
One of the better ways to learn about the types of franchises accessible to you is to attend among the franchise and home based business implies that appear regularly generally in most U.S. cities. The big ones can have up to 400 exhibitors. Attending among these shows is really worth your time and effort. You can kick tires, ask questions, gather brochures and put on ideas.
THE WEB is also a significant way to obtain information. As students, you’re experts at using the net, so you understand that the hype-to-fact ratio will operate on the high side. What’s that? Well, you’re right, that’s also true of franchise industry events, but at least you can speak to real people at a show.
A big portion of the challenge of looking at a franchise gets the hands on information. I’ve got the right news: The franchisor must package the main element investment information and hand it for you in a document called a Uniform Franchise Offering Circular (UFOC). It spoon-feeds you some basic information regarding the franchise investment.
The initial thing to comprehend about the UFOC is that it is actually three documents sandwiched together: 1) a 23-item narrative about the franchise offer, 2) up to 3 years of audited financial statements of the franchisor, and 3) the proper execution of franchise agreement you will be asked to sign. If you are serious about a specific program, you should carefully read this document. It’s amazing just how many franchise investors don’t bother. It’s required for legal reasons to be written in plain English, so you shouldn’t be intimidated. I can let you know that each student who’s completed this class has browse the UFOC and understands its limitations and strengths.
First, consider the UFOC’s attachments. You might have no experience reading a commercial contract or a couple of financials, but these will be indispensable to your professional advisors. Take the contract to an excellent business attorney; let your counselor look over it and explain it for you. If you as well as your attorney conclude there are points you can’t live with, explore negotiating with the franchisor.
Take the financial statements to an accountant trained to judge those numbers. Your basic questions: Does the franchisor have the financial wherewithal to meet up its commitments beneath the franchise agreement? And can it be around for some time? Your accountant may also use Item 7 information to help you by yourself financial planning the investment.
Now turn to the meat of the coconut, the narrative description of the offering. This front part of the UFOC is made to elicit all the important info you need to invest decision, and it’s really organized into 23 separate items. It offers information regarding the franchisor, the investment itself, the franchise system, and the rights and obligations of the franchisor and the franchisee in this program. Let’s break it down:
- Items 1 to 4 address the franchisor and its own background. You will discover a description of the franchise in Item 1, the business enterprise experience of the main element franchisor managers, along with the litigation (Item 3) and bankruptcy (Item 4) backgrounds of the franchisor and key affiliates. Review this information together with your attorney so that you can keep any litigation disclosures in perspective. They are able to tell you a whole lot about the business’s dispute-resolution style.
- Items 5 to 7 will be the money sections. They construct the fees you pay the franchisor for the proper to participate in this program as a franchise owner (initial franchise fee, continuing royalty payments, advertising contributions and any other fees). Item 7 details the franchisor’s estimates of your total investment. Item 7 is presented in chart form and usually contains dollar ranges for types of expenses. You might find multiple chart in Item 7 if the business offers different kinds or sizes of franchised businesses.
- Item 8 describes restrictions regarding the services and products you can purchase and sell through your business. Although you may not think so when you initially read this item, it’s of the most importance to your business. It offers you a concept of just how much of your operation must meet up with the franchisor’s specifications and informs you of arrangements with approved suppliers and whether you’re necessary to purchase inventory from the franchisor.
- Item 10 lets you know if the franchisor provides any financing. Remember that hardly any franchisors do so.
- Item 11 details the obligations of the franchisor beneath the franchise agreement before and once you open. Zero in on the description of working out program. The mark of most good franchisors is a well-thought-out, thorough training curriculum. Training may be the biggest service you’re buying together with your initial franchise fee; get your money’s worth.
- Items 12 to 14 list the intangible rights you’ll receive together with your franchise package: territory rights, trademarks, patents, copyrights and confidential information. Be sure you understand the territory rights. Is your territory exclusive? Can the franchisor or other franchisees contend with you in your territory? You will discover the answers in Item 12. Check Item 13 to see if the primary trademark licensed by the franchisor is federally registered. If not, ask your lawyer if that poses any risks for you.
- Items 15 and 16 let you know in the event that you must participate personally in the franchised business, instead of hiring a manager, and what restrictions are imposed on the clients you can serve or the services and products you can provide.
- Item 17 is an extended chart summarizing the main element provisions of the franchise agreement that relate with renewal, termination, transfer and dispute resolution.
- Item 19 can be an important disclosure item. A franchisor isn’t necessary to provide earnings information to a prospective franchisee, but if it can, it must reproduce the statement in Item 19. This might answer the first question you may ask a franchisor: "How much cash does among these franchises make?" or "What were the common product sales in your stores this past year?" They are loaded questions. You may well be surprised to learn regulations restricts how they could be answered. Most franchisors aren’t able to answer these questions given that they don’t possess earnings information in Item 19 of their UFOCs. My estimate is that about one-third of franchisors provide some kind of earnings statement in the UFOC. Read it with a careful eye, and be sure you review it together with your accountant.
- Item 20 is a statistical picture of the franchisor’s system that lets you know just how many franchisees joined the machine within the last three fiscal years of the business and just how many left. You will also find the contact information for current franchisees and the ones who left previously year. Call as much franchisees since you can; visit several aswell. Inquire further how they like being truly a the main program, how much cash they grossed this past year (only a franchisor is fixed from answering this), and if they would make the same financial commitment if indeed they had it to accomplish yet again.
Someone Get the Lights
The sharp-eyed among you will observe that I’ve overlooked a few items from my discussion. They are lesser disclosure items which will speak for themselves when you crack open the UFOC.
There’s the bell. Many thanks for your focus on this important topic. I wish you all success in your entrepreneurial ventures.
- Go to the FTC’s Internet site. The FTC maintains a good Web site where one can read general guidelines about investing in a franchise and catch through to FTC enforcement activity.
- Check the Franchise Registry. This innovative program can smooth just how for borrowing money beneath the SBA loan guarantee program when you come to get franchise rights. You will find out if a specific franchisor has registered with the program by logging to the Internet site.
- Find out if there are veterans’ benefits. Many franchisors offer special financial incentives for veterans. Find out about the VetFran program here.
- Get franchisee evaluations. Prospective franchisees will get survey results from an online service that asks existing franchisees for his or her opinions about their franchise programs.
- Get help from franchisee associations. There are three national trade associations of franchisees: 1) the International Franchise Association in Washington, DC, that is a trade band of franchisors and franchisees; 2) the San Diego-based American Association of Franchisees & Dealers, which publishes the Fair Franchising Standards; and 3) the Franchisee Association in Chicago. Andrew A. Caffey is a franchise attorney in the Washington, DC, area and an internationally recognized specialist in franchise and home based business law.