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Franchise Information

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PROS & CONS :: GLOSSARY :: THINGS TO CONSIDER
QUESTIONS TO ASK THE FRANCHISOR :: COMMONLY ASKED QUESTIONS :: FRANCHISE HIGHLIGHTS

Industry Pros and Cons

PROs

• The marketplace has already been checked out by the franchisor and determined the system to be successful.

• The franchisor utilizes collective buying power and passes on the discounts to you

• Local and national advertising for the franchise operation as a whole is supplied by the franchisor.

• Supervision, training programs and consulting are readily available from the franchisor.

• Ongoing research and development is provided by the franchisor.

CONs

• You have to pay the franchisor royalties even when not making profits.

• The contract with the franchisor must be renewed after a certain period of time.

• There is a lack of flexibility because business methods are dictated by the franchisor.

• The franchisor's problems are also your problems.

• You may be forced to buy products supplied by the franchisor rather than the most cost effective product available.

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Glossary

Acknowledgement of Receipt
The final page of an Offering Circular, which once signed, indicates your reception of documents on a specified date.

Agreement
The franchise "contract."

Arbitration
A dispute mediating process in which each side selects their representative, in addition to the participation of a chosen third (impartial) individual.

Area Development Rights
Your entitlement to open several franchise locations in a specified area.

Assignment /Fees
The monthly fees paid to the franchise company in order to support corporate marketing and advertising. This fee is typically a percentage of your gross revenues.

Business Format Franchise
A type of franchise that establishes you as a business owner, who offers distinguishable products and services in the marketplace.

Capital Required
The amount of cash you are required to have available.

Default
To discount the manner in which you agreed "to perform."

Designated Supplier
Approved, chosen suppliers of products and services - all of who meet the requirements of a particular franchise company.

Disclosure Document
Also referred to as an "Offering Circular," this is the FTC required background and contractual information presented to you by franchise companies.

Earnings Claims
Assertions of specific acquired sales levels or profitability levels declared by franchise companies.

Exclusive Territory
The "territory" offered to you by a franchise company, which prevents the franchisor from establishing any other location within your designated area.

Federal Trade Commission (FTC)
The federal agency, based in Washington, D.C., regulating a variety of trade practices, including the franchise industry.

Franchise
The rights you acquire to offer specific products or services under explicit guidelines at a certain location for a declared period of time.

Franchise Fee
The amount of money you pay to the franchisor to acquire the franchise. This gives you the limited rights to their proprietary information (i.e., trade name, trademark, etc.).

Franchisee
The operator or owner of one more franchises.

Franchisor
The company owning / controlling the rights to grant franchises to potential franchisees.

FTC Rule 436
Passed in 1979, this law regulates the franchise industry by setting forth "disclosure" requirements and prohibiting franchisors from making earnings claims.

Industry
The category of business that a specific franchise belongs to; an all-encompassing area of business that incorporates several different sectors.

Initial/Ongoing Training
The initial and all subsequent training offered to franchisees in the operations of a specific business.

Initial Investment
Typically considered as the initial cash investment required for you to begin a franchise. This can include the franchise fee and other "startup" expenses you may sustain, but may not be reflective of your total investment.

Master Region
A significantly large territory obtained by a franchisee with the objective of subdividing and reselling individual franchise locations.

Net Worth
Total assets, once you've subtracted your total liabilities.

Non-Compete Clause
Some franchise agreements exclude you from competing in any way with the franchised company upon termination, non-renewal or other sale or transfer.

Offering Circular
Also referred to as the "Disclosure Document" and "Uniform Franchise Offering Circular (UFOC)," this document provides background information from over 20 different categories as well as a copy of the proposed franchise agreement.

Operations Manual
Generally consists of several volumes, it contains all pertinent information regarding the operation of a distinct franchise.

Product Format Franchise
Once the rights to market a product or service have been acquired, and they do not constitute the majority of all that you offer, you have a "product franchise."

Public Figure Involvement
The nature of the agreement between a well-known public figure and a franchisor must be disclosed, when regarding the endorsement of a franchised product/service.

Renewal
When pertaining to the context of a franchise relationship, it refers to your signing a new franchise agreement once the prior agreement expires.

Sector
The categories included within a broader scope of franchise opportunities, otherwise known as the Industries. The sector permits for a more detailed look into the franchise you desire, as well as easing the search process.

Start Up Costs
The required amount of money the franchisor will request that you - a new franchisee - have to invest in the new franchise unit it its earliest stages of development.

Uniform Franchise Offering Circular (UFOC)
Also referred to as the "Disclosure Document" and "Offering Circular," this document provides background information from over 20 different categories as well as a copy of the proposed franchise agreement.

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Things to consider

• Who is the franchisor?

• Is the franchisor well known and firmly established?

• What is the financial condition of the franchisor and its system?

• What type of experience do the people representing the franchisor possess?

• Do I have a complete understanding of the business?

• What type of experience do I need to run this franchise?

• What type of commitment is required on my part to run this business?

• How much is it going to cost to get into this franchise system?

• What are the future costs for continuing my right to operate this franchise?

• Am I required to purchase any products or services from the franchisor directly?

• What are the terms and conditions under which the franchise relationship can be terminated or renewed?

• How are other franchisees in the same system doing?

• How many franchisees have left the system during the past few years?

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Questions to ask the franchisor

Purchasing a franchise is a big decision and you will have a lot of questions. Many of your questions should be focused on the franchisor. After all, you're considering investing in their business. Remember not to be afraid to ask, you want to have all the details before taking the next step.

First, you should set up an interview with the potential franchisor. Your focus should be to get a good understanding of the franchise while evaluating its strengths.

• Determine what assistance the franchisor provides. Do they assist with training, store design, location construction, site selection, and feasibility studies?

• Conduct your own demographic study to get an understanding of the audience within the market area.

• What type of support will the franchisor provide once your franchise has opened its doors?

• After the initial investment, will there be additional financial obligations requiring working capital?

• Does the franchisor offer any form of financing?

• Find out how many franchises have been sold to investors in the state you will be operating in during the last 12 months, and how many have opened a franchised business in that time.

• What type of territorial restrictions and protections have been set up by the franchisor?

• Is the franchisor planning on expanding within your state? Are they focusing on any specific locations?

• What arrangements are established through the franchisor in terms of product supply?

• Ask to see a current price sheet.

• Ask to review the books of a current operating franchise.

• Ask if the franchisor has been forced to terminate any of its franchisees and detail the reasons for this decision. Have any franchisees failed or gone bankrupt?

• Are there any current lawsuits pending or past judgments against the franchisor?

• What steps are taken to settle disputes between the franchisor and franchisees.

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Commonly asked questions

1. "What is Franchising?" Franchising is a method of distributing products or services through a proven concept. An initial investment is required of the franchisee paid to the franchisor, which grants the franchisee the right to utilize their trademarks, trade name, marketing plan and business concepts.

2. "Is franchising right for me?" The concept of franchising affords individuals to be in business for themselves, not by themselves. Franchisors have established standards and rules, sometimes making decisions that you might not agree with. If you desire to own your own business and be your own boss, then there may be a place for you in franchising. Before you invest, do your homework and investigate. Ensure that you understand the franchise model and that it is one with which you agree with. A priority for success in a franchise is to follow the proven concept and programs the franchisor trains you on.

3. "Why would I want to buy a franchise?" Franchises have the highest success rates and the lowest failure rates of any business in North America today! More than 95% of all franchises are still in business after five years because they all come with built-in proven success formulas used by franchisees across the country. When you purchase a franchise you will receive on-going support in marketing, training and management guaranteed by your agreement with the franchisor.

4. "What can a franchise do for me that I cannot do for myself?" A franchise is already a functioning business system. As a franchisee you can step into an already established concept, with much less risk for failure. Most importantly, it provides you with brand recognition and often times the Franchisor provides financing and national accounts, so you can start out with cash flow and quicker profits.

5. "Why should I pay royalties?" Royalties are what makes the formula work. What would it cost you to hire a management, marketing, advertising and customer support team? The answer is…a lot more that the typical owner would ever spend! How much would you put back into the business? You certainly couldn't hire this group for under 10% and the vast majority of all royalties are between 4 and 8%. The strength of royalties is that instead of the individual owner footing the bill to run his or her business, the expense is shared with all of the franchisees within the organization.

6. "How much money can I make?" Franchising allows the buyer the perfect way to get this answer. All franchisors supply to their prospects a complete list of their franchisees with names and phone numbers and they will require the prospects to call as many of these franchises as possible. This is part of your homework and is important because it allows the buyer to ask all of the "important questions", such as: How much of a profit can I make? What was the length of time did it take for you to get your business up and running? Were there any surprises that I need to know about? Many franchisors have printed earning claims in their UFOC documents but they will still insist that all interested prospects call the franchises and get the "real answers" or detailed information needed to make your decision.

7. "What kinds of business lend themselves to franchising?" Practically every business form you can imagine lends itself to franchising.

8. "What is a Uniform Offering Circular (UFOC)?" This is the document supplied by the franchisor to prospective franchisees that describes in detail the franchise offering. It should be the main point of the initial review of the franchise. Based on the law, it supercedes and overrules anything that is printed or said by other franchise literature and the sales persons representing the franchisor. In other words, if the sales person tells you one thing and the UFOC tells you something different, the UFOC takes precedent or is final.