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WHAT IS FRANCHISING?
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name or advertising symbol and an individual or group seeking the right to use that Identification in a business. The franchise agreement governs the method for conducting business between the two parties. Although forms of franchising have been in use since the Civil War, enormous growth has occurred more recently. Industries that rely on franchised businesses to distribute their products and services touch every aspect of life, from automobile sales and real estate to fast foods and tax preparation.
In its simplest form, a franchisor owns the right to a name or trademark and sells that right to a franchisee. This is known as product/trade name franchising. In the more complex form, known as business format franchising, a broader and ongoing relationship exists between the two parties. Business format franchises often provide a full range of services, including.
• Site selection.
• Training.
• Product supply.
* Marketing plans.
* Financing.
Generally, a franchisee sells goods or services that are supplied by the franchisor or that meet the franchisors quality standards.
Why invest in a franchise rather than just starting my own business?
Every study ever done on the success rate of new start-up businesses concludes the same thing...: Starting a new business is high risk. Most studies show that over 90% fail within three years. The primary reason that the failure rate is so high is because the owners have to go through the learning curve of operating that specific type business. Unfortunately, the market place is not very tolerant of the inexperienced individual trying to learn how to operate a new business. If you can't compete in the market place, you get eaten by the sharks very quickly, you go bust, you lose money, your credit, your home, your reputation and sometimes even your family. Failing in business can be a horrible experience. Unfortunately this happens to thousands of people every year in the U.S., and it is unnecessary. Unless you have considerable experience in the specific type business that you are considering going into, it is very probable that you will fail.
Business format franchising is as close as you are going to come in today's market place to a guarantee of success. All the studies done thus far have found that franchised new business startups rarely fail and when they do it is typically because the franchisee did not stick to the franchisors' systems. In all human endeavor there is involved a learning process . This learning process requires going through a series of trial and error encounters wherein knowledge is gained by trying and failing, trying and failing again and again and eventually trying and succeeding. This process is generally called the learning curve. In the context of franchising, the franchisor has already gone through the learning curve and has learned the secrets of success for that specific business. In business format franchising, all that has been learned by going through the curve is transferred to the franchisee. This is fundamentally why you invest in a franchise, to minimize risk and give yourself the best possible chance to succeed.
Each of our clients participate in an in-depth interview and is asked to complete our confidential questionnaire. The more we get to know your experience, skills, goals, and financing capability, the better we'll be able to guide you to a franchise opportunity that is right for you from all perspectives.
Another reason why it is prudent to invest in a franchise is that a franchise investment can be thoroughly researched before any significant expenditures are made. With a new business startup (non-franchise) you are always operating in the dark. No matter how much research you do it is very difficult to get a handle on so many aspects of the new business. With a franchise the franchisor is a wealth of information about the business from how to prepare a pro forma to the best personality traits for the business. But the most important information comes from the existing franchisees. With a good systematic approach you can get answers to nearly all the really key questions. Such as, Do you feel that you were properly trained, how long did it take before you reached break even, what is your annual return on investment, how do you feel about the day to day duties of the business and if you had it to do over, would you do it again?
You can in a very real sense try the business on before you buy to make sure it is a good fit for you. Another very important reason to invest in a franchise is intertwined into it's basic nature. Franchising inherently leads to rapid growth, because the franchisees provide the expansion capital. There are few restraints to growth in franchising. As a franchise system expands into hundreds of units many positive things begin to happen. The name begins to become well known because people see it everywhere. Most people associate size with success. The bigger the franchise the better it must be. The large number of units enables the franchise to advertise heavily, which tends to increase sales. A synergy begins to be created in which success begets success. The franchise begins to squeeze out competition through it's sheer size. The franchise can buy products in large quantity at significant discounts which it passes on to the franchisees. The synergy just grows and grows. A recent Gallup Poll of franchisees found that over 94% considered themselves successful and that over 75% would buy their franchise again if they had it to do over. The same poll also found that the average pre-tax gross income was $ 124,290.
In summary the primary reason you should invest in a franchise as opposed to starting up a non-franchised new business, is to minimize risk and significantly enhance your chances of success.
Why use Pelachi Consultants and not go directly to the Franchisors?
Quite simply to save time, money and potential aggravation! The investment required for any Franchise is outlined in the UFOC document. That investment is exactly the same whether you utilize us or not. Our fees are paid by the Franchisor, much as a Realtor's fees are paid by the seller. We provide all the information a potential business owner needs to find the best opportunity that fits their goals, plus we already know many of the safest, strongest and most lucrative opportunities in business today, a task that can take months for someone outside the industry to learn. If you are serious about investing in a Franchise business of your own, why not utilize every resource available?
Do I need specific industry experience to successfully own a franchise?
No, in fact most companies are looking for people with no experience in their industry. This is because they want their business operator to focus on running the business and not performing the labor their concepts require. Franchisors need people who can be effective in areas such as motivating employees, generating sales, and running the day-to-day operations as efficiently as possible. The franchisee role is typically one of management rather than labor.
How soon can I get my business started?
This depends almost completely on you. The franchise consultation process can be completed easily within a few days if you are responsive and motivated. After you begin investigating opportunities, most clients can find a great match for them within one to three months. After you select the right business for you, it will typically take anywhere from 1 month to 6 months for your actual business to open for operation.
How much capital do I need?
Solid, proven Franchise programs are available in a wide range of investment options. Typically, if you have $20-$50,000 of liquid capital available and the ability to finance an additional $100-$150,000 you would qualify for most franchise programs.
How do I finance a franchise?
In order to receive financing, a business must apply for the credit to a source such as a bank, commercial lender or leasing company. With proper planning and guidance, you can greatly influence the financing institution's credit decision on whether or not to extend you the amount of credit on the terms you desire. Since the credit source most likely knows little, if anything, about your business, it is your responsibility to educate them and get them to look favorably on your application.
Have A Business Plan
A well conceived, comprehensive business plan is crucial. You must clearly and convincingly communicate what you intend to accomplish and how you plan to achieve your goals. The experience of writing the business plan forces you to become more focused about your specific business.
Be Complete And Thorough
A lender will give you an application to complete. Answer it in detail, ALL the questions; fill-in ALL the blanks; provide COMPLETE addresses, etc. In most cases, your application and supporting documents are all a potential creditor may see of you. If you don’t care enough to provide all the information requested, why should the lender think you are going to pay enough attention to detail to make your business succeed: It may become tedious, but everything is requested for a reason. Plus, complete applications get expedited processing; incomplete ones get laid aside for later follow-up. In which pile would you rather have your application?
Know How Much You Need And For What Purposes
Be specific. It is up to you to know these things, not the lender to guess.
Be Realistic
Optimism is expected, but unrealistic expectations create skepticism. Explain how you will use the financing requested and how it will benefit the business. Be sure you don’t make exaggerated claims as you will most likely lose credibility.
Show How You Will Pay The Loan Back
Build repayment into your financial projections. Your likelihood of repayment is the ultimate consideration in evaluating your request. Collateral is important, but lenders would rather have repayment. Prove, on paper at least, that you can generate the revenues to cover your operating costs with enough left over to pay the loan and your living expenses/salary.
Cover The Downside
Most businesses don’t’ operate exactly as planned. Identify any weaknesses or potential problems in your business and address contingency plans and resources, as well as an exit strategy.
Have A Stake In The Business
With the possible exception of your family, no one is likely to provide 100% financing. Why should anyone else take a chance on you if you’re unwilling to invest your own resources?
Put Yourself In The Lender’s Shoes
Lenders want to make loans that will be paid back. The evaluate your personal and business credit history; your ability to repay based on credible financial projections in your business plan, and your collateral, among other things. If you were a lender, would you give your business this loan?
Be Persistent
If you application is rejected, don’t give up. This gives you an opportunity to fix whatever was lacking. If you have put an honest, thoughtful effort into your search for financing, people will help you get it. That includes people you may be tempted to blame for not approving your request. Don’t think “rejection” think “ constructive criticism”.
Frame Of Mind
Obtaining financing is not easy. Learning how to prepare a business plan and financial projections can be time consuming and frustrating - but the point is you are learning. The knowledge you gain in the process will be invaluable to you in the constant refinement that any business undergoes in both the planning and operational stages.
Talk with the Franchisor
Franchisors have dealt with the financing issue numerous times. They can provide timely and accurate guidance about sources, availability and the application process.
What levels of franchises are there?
Single-unit Franchises
A franchisee has the right to operate one franchise unit. Most franchisees enter the world of franchising by owning one unit. It is a great way to get in and understand the system before taking on more units.
Territory: The franchisee may have a small radius of exclusive territory to operate within. If it is a retail store, the area of exclusivity may be a two or three mile radius around the store. If it is a home-based business the area may consist of a few specific zip codes.
Level of participation:
The franchisee is very involved with almost all operations of this type. Even if it is a semi-absentee owned business, the franchisee will want to be present at the business and be as hands-on as possible.
Typical liquid capital required:
$25,000 to $60,000 initial out-of-pocket investment required on a total investment of $100,000 to $200,000.
Multi-unit Franchises
The franchisee acquires more than one unit of the franchise, usually at reduced franchise fees. The risk is lower because the franchisee can take advantage of the economies-of-scale theory; by spreading costs across multi-units, the locations may be more successful. A good sign of the health of the franchise is if many of the franchisees are multi-unit owners.
Territory:
There is usually no exclusive territory where the franchises must be set up. The franchisee may have one unit in one part of town with a surrounding radius of exclusivity, and another unit in another part of town 15 miles away or even in another county with its exclusive radius of operation.
Level of participation:
The franchisee is less involved with each of the units operations, but will be managing multiple operations and will need to have some level of supervision in each unit. If many units are opened, a general manager and additional administrative and training staff may be needed. The franchisee is more of a general manager when many units are involved.
Typical liquid capital required:
$50,000 to $70,000 initial out-of-pocket capital is required to take care of mostly the initial franchise fees. The rest of the investment is usually financed when each unit is opened.
Area Development Franchises
This license usually grants the franchisee the right to open a certain number of franchises in a given area. There is usually a production schedule where the franchisee must open a certain number of franchises during a certain period. The franchisee has an exclusive area where no other franchisees can be allowed to open a franchise.
Territory:
The franchisee maintains an exclusive geographic territory as long as the opening schedule is maintained. The territories range from a small city to parts or all of a larger city.
Level of participation:
The franchisee will be very involved in the beginning stages of the first location to make sure it is successful. The franchisee will also need to be looking for qualified real estate to open the next few locations. Once several locations are open, the franchisee will need additional assistance to manage several units.
Typical liquid capital required:
$60,000 to $120,000 initially to secure the area, pay all franchise fees, and have additional start-up capital. The franchisee will then need to be able to finance the rest of the start-up costs for each of the franchises, as they open.
Master Franchises
A Master Franchisee, sometimes called a Regional Developer, has the rights to a larger area than that of an Area Developer. The Master Franchisee, in addition to opening franchises at a much reduced franchise fee and royalty, can also sell unit franchises, multi-unit franchises and area development franchises and make a nice return on the sale. The master usually receives a part of the royalty and franchise fee paid by each franchisee. There may be additional income available from distribution of products through the franchisees in the area and possibly even some real estate interest. The master becomes somewhat of a sub-franchisor for the area, without having experienced all the trial and error the original franchisor did. The master franchisee will usually want to open and operate at least one unit (pilot location), for income and use as a training center. Master franchises are rare; most franchisors do not offer them. However, when they are available they usually sell quickly. The income available from a master franchise is extremely lucrative. The initial investment is low compared to the type of value you can build in the master franchise area. The flexibility is also the greatest at this level.
Territory:
Usually is a large metropolitan area, an entire state or even several states or country. It is an exclusive area and will remain exclusive as long as the master franchisee meets the development schedule of franchises in the territory.
Level or participation:
The master franchisee will usually set up and operate at least one unit and use a manger to manage it while working on selling other "sub-franchises" and assisting them in operating properly. Very rarely is a master franchisee "hands on" in a unit franchise. They tend to spend more of their time operating like a business consultant or coach to their franchisees to help them become successful.
Typical liquid capital required:
$100,000 to $250,000 is needed to acquire the territory and for initial liquid capital to start the area. Financing will be secured for the start-up of the unit franchise.
How do I select the best franchise for me?
Franchising is a wonderful way to go into business for yourself....but not by yourself. So many things have already been established for your benefit: branding, marketing, processes, products, systems, etc. Building a business through franchising has been so successful that franchised businesses generate jobs for more than 18 million Americans and account for 9.5 percent of the private-sector economic output, according to a study released by the International Franchise Association Educational Foundation.
If you are convinced that you want to investigate franchising for your next career move, how do you go about finding just the right one?
This is one subject about which much as been written. Everyone has their own version of what you need to do to find that one, perfect concept for you and for your market. At Pelachi Consulting, helping people find their ideal franchise opportunity is what we do. As a result, we have worked with thousands of people looking to find the right franchise and realize their dreams.
Here then is our recommended approach of determining what to look for in a franchise that will meet your needs, expectations and goals:
STEP 1
Before you start looking at franchises, take stock of that most important component of the equation—YOU.
What skills, experience and interests do you have?
Consider your past jobs and determine what you liked best and least about them; then make a list of your strengths and weaknesses.
How much money can you invest and how much would you like to make?
Are you comfortable managing others or would you prefer to work alone?
Where do you want to work? Are you willing to relocate?
What hours are you willing to work while the business ramps up and what lifestyle expectations do you have after the business is established?
How do you feel about selling and the sales process?
By starting with a list of what you have to offer and what you need from a business, you can create a strategy and model for your research.
STEP 2
Keep an open mind. Whether (at Step 1) you use a resource like us or do your own franchise research via the Internet, it is best to keep all options open when considering a franchise.
An inexperienced person may approach the process by thinking, "Well, I love donuts. How about a donut franchise?" And after spending days or weeks of research on Krispy Kreme, Dunkin' Donuts and others, the individual may find he doesn't have the required capital, the territory he wants is not available, and he'd have to give up weekends if owning a food franchise.
Another ineffective way to begin your franchise research is to lock yourself in to one or two concepts. If you think, "I'll only look at ice cream and exercise franchises," you may miss finding that that gem of a concept that would mesh perfectly with your needs.
With thousands of franchise companies available, keeping an open mind is the best strategy you can employ to get on the ground floor of that new, hot concept or to find something that will really take off in your market.
STEP 3
Let's say you've found an assortment of franchises that look promising. What do you do next?
Contact the franchisors and request information about their concepts. You will probably get call from someone in the franchise development department who will gauge your interest and advise you if the territory you seek is available. You will want to thoroughly view the web site information and any brochures and videos they send you.
Keep notes on your impressions. Are their materials professional and up-to-date? Are you treated courteously by a friendly and knowledgeable member of the corporate office? Are your questions and concerns answered to your satisfaction?
What you see from the company at this time may be an indication of the type of support you would receive as a franchisee in their system.
STEP 4
Your next step is to read the company's UFOC (Uniform Franchise Offering Circular), a document every franchise in the United States is required to provide. From this you will learn the history of the company, the training and marketing programs, and what costs, royalties and fees you will be required to pay.
Some franchisors also provide earnings claims in the UFOC that will help you estimate the potential of the business.
The UFOC is full of information about the franchise and it clearly explains the responsibilities of the franchisee (you) and the franchisor. Your UFOC review and understanding is a very significant part of the research process.
By paying attention to what you discover in a company's UFOC, you can weed out franchises that just don't measure up. Some warning signs of a franchise that is facing challenges are extensive litigation with franchisees or a closing rate of units greater than what's being opened.
STEP 5
We consider this step to be of monumental importance when judging the likelihood of finding happiness in a particular franchise: CALL EXISTING FRANCHISEES!
Existing franchisees are your best source of information for finding out what really happens in a business on a day-to-day basis. You can ask what they like and dislike about the business, if they are happy with corporate support, and even get a feel for the type of earnings a franchise makes.
Gather a variety of opinions and you'll get a clear picture of not only the franchise itself but of how you'd fit into the organization. That is why this step is so significant to your being able to make a definitive decision.
STEP 6
When you've made it this far, it's time to go to Discovery Day (an on-site meeting with a franchisor). At this meeting you will be introduced to the top people in the home office and you may make a visit to a local franchisee, allowing you to ask even more questions and maybe to get some hands-on experience with the business.
Discovery Days are very interesting and exciting. When you leave, you will have a good understanding of the franchise. Don't forget that this is a two-way street. They'll be evaluating you as thoroughly as you evaluate their business.
STEP 7
The last step, of course, is making the final decision. Like any major decision, you will be filled with anticipation and anxiety, excitement and fear. Those are very normal feelings, experienced by everyone.
What are some of the Benefits and Responsibilities of Franchise Ownership?
There are a number of aspects to the franchising method that appeal to prospective business owners. For example, easy access to an established product and a proven method of operating a business reduces the many risks of opening a business. In fact, U.S. Small Business Administration and U.S. Department of Commerce statistics show a significantly lower failure rate for franchised businesses than for other business start-ups. The franchisee purchases not only a trademark, but also the experience and expertise of the franchiser's organization. However, a franchise does not ensure easy success. If you are not prepared for the total commitment of time, energy and financial resources that any business requires, you should stop and reconsider your decision to enter the franchise business.
A franchise typically enables you, the investor or "franchisee," to operate a business. By paying a franchise fee, which may cost several thousand dollars, you are given a format or system developed by the company ("franchisor"), the right to use the franchisor's name for a limited time, and assistance. For example, the franchisor may help you find a location for your outlet; provide initial training and an operating manual; and advise you on management, marketing, or personnel. Some franchisors offer ongoing support such as monthly newsletters, a toll free 800-telephone number for technical assistance, and periodic workshops or seminars.
Additional Sources of Information?
Before you invest in a franchise system let us help you, investigate the franchisor thoroughly. We will assist you in reading the company's disclosure document and speaking with current and former franchisees, We can provide experienced guidance in obtaining the correct:
Lawyer and Accountant
Investing in a franchise is costly. An accountant can help you understand the company's financial statements, develop a business plan, and assess any earnings projections and the assumptions upon which they are based. An accountant can help you pick a franchise system that is best suited to your investment resources and your goals.
Franchise contracts are usually long and complex. A contract problem that arises after you have signed the contract may be impossible or very expensive to fix. A lawyer will help you to understand your obligations under the contract, so you will not be surprised later. Choose a lawyer who is experienced in franchise matters. It is best to rely upon your own lawyer or accountant, rather than those of the franchisor.
Banks and Other Financial Institutions
These organizations may provide an unbiased view of the franchise opportunity you are considering. Your banker should be able to get a Dun and Bradstreet report or similar reports on the franchisor.
Better Business Bureau
Check with the local Better Business Bureau (BBB) in the cities where the franchisor has its headquarters. Ask if any consumers have complained about the company's products, services, or personnel.
Government Departments
Several states regulate the sale of franchises. Check with your state Division of Securities or Office of Attorney General for more information about your rights as a franchise owner in your state.
Federal Trade Commission - FTC
The FTC publishes information that may be of interest to you, including business guides - www.ftc.gov.
