FOUR TIPS TO STARTING A SUCCESSFUL FRANCHISE

Have a successful model. It is impossible to create a franchise program without having at least one successful operation, a pilot, if you will. It is not feasible to think that if your core business loses money and is unsuccessful, that a franchisee will be any different.

INTRODUCTION TO FRANCHISING
FOUR TIPS TO STARTING A SUCCESSFUL FRANCHISE

By Cambridge Who’s Who Lifetime Member and Contributing Author Harold Kestenbaum

My name is Harold Kestenbaum, and I am a franchise attorney. Many of you may want some information about what a franchise attorney does. I realize that franchising is not a well-known sector of the legal profession unless you work in the industry as either a franchisor or a franchisee. Here is how I became involved in franchise law.

In 1977, at my third job out of law school, I worked for a solo practitioner in Manhattan who represented many corporate clients, some of whom were publicly traded. One company happened to find the opportunity to franchise their business. One day my boss said to me, “Kestenbaum, I need you to learn about franchising opportunities, so that you can handle our franchise client.” Not knowing what in the world he was talking about (I had done everything but franchise law up until then) I found every book I could on business franchising information (there was no Internet in 1977) and for the next four years I immersed myself in franchise law. When New York State passed a new franchise registration law in 1981, I decided that it was time for me to become a solo franchise attorney and resigned my position. I have been practicing franchise law ever since.

Based on my years of franchise experience, I wrote a book, So, You Want to Franchise Your Business, that delves into the opportunity a company embarks on the franchise path. It includes the dos and the don’ts of how to franchise your business. In my book, my co-author, Adina Genn, and I discuss what makes a company have the right opportunity for franchising and how to go about turning a successful business into a franchise company. Here are a few key tips from my book:

1. Have a successful model. It is impossible to create a franchise program without having at least one successful operation, a pilot, if you will. It is not feasible to think that if your core business loses money and is unsuccessful, that a franchisee will be any different. It is imperative that your franchisees be successful, otherwise franchising opportunities will not work.

2. Make sure your business model is replicable. You must be able to build clones of your operation, otherwise, the system will not work. Have you ever seen a McDonald’s without the infamous golden arches? That is just one example, but it goes beyond the look. It is the method of operation that must be duplicated in order to have the opportunity to franchise.

3. Attain capital for your franchise. You must have capital in order to roll out the franchise program. You cannot believe that franchising will cure your cash flow issues, you need to have money in order to roll out the program. Do not view the program as a way to fund an undercapitalized business model.

4. Prove your model works! The concept that you are trying to franchise must be lucrative. You must demonstrate that your concept works before you try to offer it to the public as a franchise. If the business model is a failure, your franchisees will inevitably fail as well. Franchising can be a wonderful business opportunity, but your initial model must work first, otherwise franchising will not be possible.

Why franchise your business? That is a very good question. But to those of us in the business, the answer is quite obvious. If you want the opportunity to grow your business beyond one or two stores, and you cannot afford to build more units at, for example, $500,000 each, then what better way to grow than to let a franchisee buy a franchise and build the unit himself or herself for that amount, and you simply receive the weekly royalty of 5% or 6% of gross revenues? Franchising is a vehicle for growth using the capital and human resources of someone else (the franchisee). How great is that? It is simple, yet complex. The franchising relationship goes much deeper than building the unit and collecting royalties. It is a starting place for companies that want to grow but do not have the internal capital or human resources, like Starbucks, to do it by themselves.
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Franchises and Basic Concepts of Business

Franchises and Basic Concepts of Business

Franchising is not a business in itself. It is a business strategy. Its a business system.
Dennis Schooley

In order to truly understand the concept of Franchising, an exploration of the basic concepts of business is required. There is no magic in that. It just makes sense in order to provide clarity about the Franchising strategy.

Franchising is not a business in itself. It is a business strategy. Its a business system. That’s a significant distinction that isn’t always clear. McDonalds is in the fast food business – although many people feel they are really in the real estate business, while others think they’re in the entertainment business. Regardless of that discussion, they are not in the business of Franchising. Schooley Mitchell Telecom Consultants is in the business of telecom consulting. Ramada is in the business of operating properties. Snap-On Tools is in the business of selling tools. Each company uses Franchising as its strategy to penetrate and dominate the marketplace. However, their core business relates to the products and services provided to their customers, using the Franchising strategy to deliver those products and services in a consistent manner. A more in depth discussion of the Franchising concept will follow, but first we need to delve into the basic concepts of business.

If someone says to you that they’re in the business of Franchising, they don’t really get what they’re doing. Its all about the customer, and if the focus is not on the customer and their needs, then something is awry. Customers don’t need a Franchise. They need hamburgers, telecom consulting, hotel rooms and tools. So therefore Franchisors are not in the business of Franchising.

It has to be about the customer doesn’t it? After all, the customer pays for everything. They pay for salaries, they pay the rent, they pay the utilities, they pay for the costs of delivering the product or service, and they pay the profit. In businesses using the Franchising strategy, the customer pays the royalties, the customer pays for the development of the system, including support and operations, and they pay for everything the business does in its day-to-day activities, both Franchisor and Franchisee.

At Schooley Mitchell, we have a credo that says that ‘Good is the Enemy of Great’. It’s not absolutely original, but we hope our approach is just that. First of all, if greatness is to be achieved, focus must be completely on the customer. We have to continue to strive to have our customers clamor for our services. If we’re satisfied with being good at it, we’ll never be great. I want to be great. We want to be great. Our focus must be entirely on the customer to achieve that goal.

Purpose of Business

O.K, so let™s look at the purposes and objectives of business, regardless of whether the goal is to be good, or great. I dont think anyone has a goal to be bad, so well leave that one out. First of all, the basic purpose of business is to make money. It is not about your way to give back to humanity. That™s a charity. People that wish to be in business for themselves are doing so in order to make money. That shouldn™t be a surprise to anyone.

So how do all businesses make money? As stated above, they focus on the customer. Therefore, the purpose of daily activities, the objectives of business, are to get new customers, satisfy those customers, keep the customers, and grow business, either with, or through those customers.

Get, satisfy, keep, and grow. There you have it. These are the purposes of business. They form the first set of four in a concept we have developed at Schooley Mitchell called our 4 By 4 Concept. The other four will be discussed at a later point. You can’t think of a transaction that happens in business that isn’t aimed at one of these four things. The key is to understand that they are four distinct things, and they each require distinct strategies designed to achieve excellence in all four areas if greatness is to be achieved.

Get

Most people ‘get’ this one. This is sales and marketing. Peter Drucker said there are only two things that create value in business – sales and innovation. The rest are costs.

I would suggest that many companies tend to become happy with their existing suite of customers. Or they land the ‘big one’ and all is good. I would also suggest that if there are not constant strategies put in place to continue to get new customers, to get new blood, then stagnation will follow. Landing the ‘big one’ can actually put the business in a very precarious position. It’s called over-trading. If the business relies too heavily on one source for its revenues it can be in big trouble if something goes wrong with that customer.

The solution to over-trading, and to keep generating a steady stream of new customers in order to keep any business vibrant and moving forward, is to implement great ‘get’ strategies. And never quit. That’s certainly not rocket science, but it is a basic tenet of long term survival.

General Motors should have been trying to figure out how to ‘get’ Japanese customers in the 1970’s. That would have led them to understand how to ‘keep’ North American customers. Enough said.

Satisfy

A lot of people really miss the boat on this one. I actually saw a truck drive by me recently that had a slogan on the side in proud, bold letters that said ‘We Deliver Satisfied Customers’. They seemed to be quite proud of the fact that they actually provided what they sell. All customers for all businesses expect to be satisfied or they wouldn’t complete the business transaction in the first place. Boasting that customers are satisfied is like saying, ‘we don’t rip you off’. Well, big deal and thank you.

Satisfaction must be a given. It is required for survival. It is certainly one of the four main purposes or objectives of business, but it is so often misunderstood. Satisfaction is what people buy, so they expect it to be delivered. Michael Vickers, one of our Sales & Marketing instructors at Schooley Mitchell, says that ‘Whatever company, in whatever industry, sets the standard in customer service, moves the bar up for all of us.’ It’s a great message. We must constantly be wary of what customers expect in order to be satisfied, and it’s an ever-increasing standard. However, it’s nothing to brag about. It’s just what you sell.

In a book called ‘If It Ain’t broke – Break It!, Robert Kreigel wrote, “Embrace the unexpected. The only thing that won’t change is that everything will keep changing. Today’s skills, knowledge, and products live fast, get old before their time, and die young. The overnight letter, which was the innovation of the 1980s, is now used only when you’re not in a hurry.” He wrote that message 15 years ago! It’s a clear, and still valid, indication that we need to continually re-tool to meet customer satisfaction goals.

Keep

If satisfaction is a constantly moving target, and satisfaction requires ever-increasing effort and commitment, then to keep customers requires more than just satisfaction. Customers expect satisfaction. They buy satisfaction. People will copy satisfaction. If that’s all that is provided, then it comes down to price, and that’s a losing game no matter what business is at hand. Therefore, strategies are required to provide more than what the customer buys, in order to maintain long-term trusting relationships. Michael Vickers says to “take a standard service offering and up-level it.” That defines the ‘keep’ strategies that a business must employ. Ignoring this one will again create stagnation or denigration.

Grow

Most of us have heard that it is less expensive to do more business with existing customers than to obtain new ones. It is my belief that you must do both.

In order to do more business with existing customers, there have to be consistent strategies in place to educate them about new products and services. In addition, you must understand their business, particularly as it changes, so that it becomes apparent when your products and services can be provided. You must also put practices in play to ask for more business. Complacency is too often the norm when opportunities are in front of us. Companies that implement processes to ensure these things are managed will continue to grow business via the grow strategies.

The grow strategies also include asking existing customers to support you in your business growth through others. It’s surprising how many people would be willing to help if they are requested to do so. Things like referrals, testimonial letters, agreeing to act as a reference, and introductions to their association are all offshoots of this strategy.

So there you have it. These are the four basic objectives of any business. Business needs strategies and formulas to continually get new customers, satisfy them, which is an allusive and demanding standard, keep them, which requires more than delivering what you get paid for, and grow business with them or with their help. These are the basic concepts of business, and they must be at the heart of every good business, and every good Franchise system. Evaluating a Franchise system should include an assessment of how well the Franchisor understands these concepts, and how well they execute strategies to make them happen.

To receive a free copy of an E-Book titled ‘Franchise Opportunity – Making The Right Decision’ by Dennis Schooley, email that request to [email protected]

Dennis Schooley is the Founder of Schooley Mitchell Telecom Consultants, a Professional Services Franchise Company. He writes for publication, as well as for www.schooleymitchell.com, 888-311-6477, [email protected]

Developing a Business By way of a Franchise Opportunity.

Developing a Business By way of a Franchise Opportunity.
Author: Henrietta Brashumi

The most secure and risk-free approach to launch a prosperous company is by way of small business franchising opportunities. On the other hand, building a franchise is just not for anyone. You will require some time to manage to grasp exactly what it entails – specially the selling aspects – when you purchase a enterprise franchise option. Business franchise opportunities are generally growing worldwide. The reason being the business enterprise franchise opportunities along with the franchising model is proven and successful. Listed below are the key methods for identifying and selecting the right business franchise opportunities.

Perhaps the reason why business franchising is indeed lucrative for brandnames like McDonalds and Subway, would be the possibility to expand on this governed way moreover builds up their particular brand name recognition as their community increases. People become utilized to observing the particular branded franchised businesses as well as the proven method ensures consumers should always receive the exact same service and quality regardless of the store they visit.

Despite having less popular brand names, the force of having a greater system powering you offers likely customer trust they are actually not getting through a ‘one man band’. Developing a brand is frustrating and costly. Simply by using a franchise opportunity, your company generally will get instantaneous brand name reputation.

So that you can start your look for the best choice business franchise, the large choice of easiest ways is simply by taking a look at internet business franchise websites. It may assist to will give you good selection of opportunities with effective tools that may help limit your options simply by price, location as well as market place type.

Production Franchises.

Within this kind of arrangement the franchisor permits the franchisee to make its merchandise and promote these folks having its brand name and trademarks. This kind of arrangement is specially frequent inside the beverage and food sector. The franchising business gets a primary monetary fee and with respect to the contract might also receive one more fee for each unit from the product sold.

Business Franchise Ventures.

An enterprise franchise venture is surely an agreement the location where the franchisee acquisitions and distributes merchandise for that franchising company. The franchisor typically locates and offers the customer base for your franchisee to control. One particular business franchise venture could be the vending machines that may be seen in many public areas and workplaces. The franchisee buys the vending machines, maintains them and needs a share from the machines takings.

Product or service Franchises. With this form of franchise the franchising company utilizes the arrangement as being a means for the distribution of the products. The franchisee emerges the authority to utilize name with the franchisor to trade its products. In product franchises the franchisee will probably pay a franchise fee or may alternatively accept get a minimum volume of stock to trade on.

Franchise business programs are lucrative however, not without having their particular obligations. Correct investigation and research have to be completed in order to make sure an excellent partnership while using corporation that maintains the franchise. Once involved, however, you have to be capable to reap the rewards and be associated with the earnings using a franchise opportunity for your family.

Discover the secret facts affiliated along with franquicias rentables by visiting our franchise information internet site at www. franquicias-rentables.org. It is also possible to find out about the greatest and most franquicias exitosas programs.

Buying a Franchise – Evaluating Franchise Investments and Franchise Disclosure Documents – Tips From a Franchise Expert and Franchise Attorney

Author:

Kevin B. Murphy, Franchise Attorney, MBA – Mr. Franchise

Millions of people dream about owning their own business. Having the independence that being your own boss brings, the security that no one can fire you, enjoying a good income – and for the most successful – the accumulation of wealth and prosperity. Unfortunately, the cards are stacked against a new small business making it big – or making it at all. An endless stream of problems makes competition from large, sophisticated chains too intense. Many new start-ups end as failures.

Buying a franchise represents a different approach to starting a business.  For an upfront franchise fee plus ongoing royalty payments, the parent company teaches its business model and methods to the franchised-operator who shoulders all operating and financial responsibilities of the outlet. Some statistics are impressive: it is said over 40of all U.S. retail sales are through franchised establishments. While franchise giants like McDonalds, KFC, H&R Block and Radio Shack are familiar, household names, franchises are available in a wide range of industries. The list of 3,000-plus companies selling franchises span over 100 different industry categories.

American Dream … Or Nightmare?
But just as franchising represents a chance to get rich, it\’s also a chance to get stung. An alarming number of franchised operators make less than the minimum wage, working seven days, sixty to eighty hours a week, pursuing an expensive and elusive American Dream that turns into a nightmare. Since the ongoing franchise royalty payment comes right off the top, as a percentage of gross sales or a fixed minimum amount, the franchise company gets an assured revenue stream, even if its franchised units are operating unprofitably and are sold over and over again to new, unsuspecting buyers. The internet is filled with comments of the many people who lost $250,000 and more on concepts like eBay Drop off stores (iSold It), 30 Minute Fitness concepts (Curves), The UPS Store, etc. Yet many of these companies continue to sell and resell franchises over and over again. How do they accomplish that? Because there are enough people who think they can ‘believe’ their way to success, even with a concept or business that\’s not working in the marketplace. As discussed below, in many cases franchise investment decisions are incredibly based on emotionalism, not on business logic or even common sense.

Ownership And Being Your Own Boss?
Pride of ownership and being your own boss are highly touted phrases in franchise recruitment ads. But these are more fantasy than reality. Although you get all the financial exposure, headaches and stress of business ownership, what do you really own? A franchise owner is merely licensing a trademark (or service mark) from a company that dictates every detail of business operations. So the real boss isn’t you, but the company that sells you their franchise rights . . . and sea of franchise obligations.

Equity Build up?
But at least you’re building up equity, the ownership value of the business as a going concern beyond your investment of money, to compensate for all those years of hard work and long hours – right? Wrong – at least in the world of franchising. The franchise company reserves rights to acquire your entire business at below wholesale prices if their contract is not followed precisely. The acquisition rights provide for predetermined asset-based valuations, like book or liquidation value. These valuation methods provide bare minimum compensation (the used value of some file cabinets, office furniture, equipment, etc.) and are not generally used to determine the selling price of any business.

Absolutely no compensation is paid for established goodwill, the value of a business that is generating $X in profit or cash flow every month after years of effort, investment and expense – thus eliminating the most valuable ownership asset. Of course, you may be able to sell your franchise to a third party for a sales price that includes an earnings-based valuation. But that’s possible only if:
(a) you can find a buyer who is willing to live within the complexities of a franchise relationship, and
(b) you happen to own a franchise that’s showing healthy profits.

What follows is a bottom-line franchise checklist and tips compiled by franchise attorney and franchise expert, Mr. Franchise, based on reviewing over 500 franchise offering circulars and twenty-eight plus years of experience in the franchise industry – including ownership of a very successful franchise. These factors to consider in making a franchise investment will help you eliminate 95% of the companies you are considering. Then, you can concentrate your efforts on the 5% ‘cream’ of the crop’ companies that may deserve consideration. This franchise checklist assumes you’re suitable for and willing to live within the confines of a franchise relationship. It also assumes the franchise company:

(1) has itself successfully operated the concept being franchised for at least five years at multiple locations;
(2) is not plagued by franchise litigation and franchise lawsuits from disgruntled franchise owners;
(3) does not have unusually high franchise attrition rates (owners who have “left the system”); and
(4) has a balanced, fair franchise contract.

SOLD It – An American Dream That Turned Into A Nightmare

An example of a franchise company in trouble that failed to meet basic threshold standards is iSOLD It, an eBay drop-off store franchise. The company started its one and only company-owned store in November of 2003. Just weeks later, on December 10, 2003 they filed an application to sell franchises. The California Department of Corporations didn’t say “What are you thinking? You’ve only been in business a couple weeks, how can you even consider selling franchises?” Nor did they require this be disclosed as a risk factor on the cover page of the Franchise Offering Circular, as it should have. Disclosure responsibilities ultimately rest with the company (and its attorneys), and this will become one of many issues in future franchise litigation.

Instead, the Department simply collected its $675 filing fee and issued an order declaring the franchise registration effective the next day – on December 11, 2003. Then the magic of franchise marketing  took over. By 2006 the company had nearly 200 franchised drop off stores in operation and was touted by Entrepreneur Magazine as #1 in their list of “Top New Franchises for 2007” and #17 on their “Hotter Than Hot” franchise list. Entrepreneur Magazine, which requires franchise companies to submit their FOC’s (Franchise Offering Circulars) for supposed review each year before they’re listed, didn’t consider the high attrition rate (franchise owners leaving the system) or the fact that the audited financials in their FOC showed the company hadn’t operated profitably since 2004 as serious negatives and awarded iSold It the #1 listing for Top New Franchises of 2007. How did all of this happen? It\’s yet another bizarre reality in the world of franchising.

The franchise company\’s audited financial statements for the year ended 12-31-05 showed an operating loss of $1.1 million. Nine months later, in September of 2006, the net operating loss mushroomed to over $4 million.

In its November 3, 2006 Franchise Offering Circular, the table in Item 20 disclosed a total of 10 franchise owners leaving the system, yet a hand count of Exhibit D-3’s “Former Franchisees” revealed a significantly different number – 44. A similar “discrepancy” exists about franchise transfers. Item 20 says 12 transfers whereas Exhibit D-3 discloses 27.

In a long overdue letter distributed to franchise owners on April 5, 2007, CEO Ken Sully painted a dire picture of an American Dream that had turned into a nightmare. Mr. Sully’s letter admitted the company has not been profitable since 2004 (according to the audited financial, the company showed its one and only operating profit of $356,286 in 2004 before the precipitous downward spiral of 2005 and 2006). Over 60 franchised stores have closed and many more are struggling for survival. Mr. Sully observed “Tragically, many individuals who believed passionately in the potential for the category have lost sizable investments, including homes and retirement savings.”

Lost homes and retirement savings? How could such a travesty happen? I counseled a number of persons considering an iSold It franchise and warned all of them against the investment. Fortunately, they followed my advice. The concept was never proven in the marketplace before franchise efforts began, violating the most basic Franchise 101 precept. I also felt the management team lacked strong franchise credentials and the five-day training program was woefully inadequate. Finally, the franchise company was operating increasingly in the red and had a high attrition rate (owners leaving the system). It didn\’t take a lot of brain power to see this was an accident waiting to happen. I predicted the bubble would burst and, sadly, it did.

Common sense could and should have prevented so many people from losing so much. Unfortunately franchise sales persons appeal to emotions (passions and potential, to use Mr. Sully’s terms) and strive to keep common sense and business logic out of the buying equation. If a franchise company is able to obtain a ranking on a media list, the sale is even easier. Reprints of high rankings on lists, like Entrepreneur Magazine, are included in the package given to franchise buyers, who are lulled into a false sense of security and begin to stumble over each other in a rush to sign up before someone else takes their desired territory (another favorite closing technique used to sell franchises).

iSold It! amended its FOC at the end of May, 2007 to add some long overdue risk factor language to the cover page of its Franchise Offering Circular. Hmmmm… maybe they read my comments above and did a little research. The new FOC cover page risk factor language says their “franchise system is still new and unproven.” That’s very interesting. How can they say a franchise system, that’s approaching its fourth anniversary, is “still new?” Maybe they’re looking at things from a ‘how old is our universe’ perspective? The word “unproven” is another play on words. The system is most certainly proven in the sense that many people, to quote Mr. Sully, “have lost sizable investments, including homes and retirement savings.” So why not use this quote directly in their Franchise Offering Circular? Answer: can’t sell any franchises that way.

In an August 31, 2007 Business Week article, CEO Sully claimed it wasn\’t necessary to disclose these risk factors in the FOC. His reasoning: ‘We told everybody that this is sort of like the wild, wild West’ he says. ‘It\’s a brand-new concept and nobody knew for sure where it was going.’ Disclosure was added to the UFOC recently, he says, ‘because of the number of stores that weren\’t understanding the complexity of the business.’ Hello? You don\’t tell your franchise investors after the fact what you were required to disclose in the FOC before they bought so they could make an informed investment decision. That\’s the purpose of franchise disclosure laws. And claiming written disclosure of risk factors in the FOC is not necessary if a prospective buyer hears a salesman\’s verbal wild, wild West story ignores franchise disclosure responsibilities and is really an admission the company failed in this regard. With its amended FOC, the company incredibly continues marching forward with franchise marketing efforts.

Now, let’s consider the franchise checklist and factors to consider before any leap into franchising.

INDUSTRY TREND
Is the franchise in a cutting-edge industry that is doing well currently and is projected to do well in the future despite any economic slowdown? Education and home-improvement services are stable categories. Food is over-saturated generally and, except in exceptional circumstances, is not worth the high investment, long hours, headaches and marginal income.

TOTAL INITIAL FRANCHISE INVESTMENT
In general, don\’t expect a franchise that requires a five-figure initial franchise investment to produce a six-figure income. As with most things in life, you get what you pay for. On the other hand, don’t assume a six-figure investment will lead to a six-figure income level. Be realistic and conservative. Is the total initial franchise investment range (including working capital) $125,00 or less; and the maximum investment less than $200,000? You can find solid companies in this investment range if you\’re willing to look around.

Don\’t forget to consider long-term financial commitments, particularly the real property lease (see discussion below under ‘LEASING AND LOCATION’). Also, the working capital estimate (called “additional funds” in Item 7 of the company’s franchise offering circular) does NOT cover operations up to the break-even point. It only covers a short initial phase (usually only three-months) of operating costs As the break-even point (where revenues cover all operating costs) may not happen for one, two or more years, knowing only what it’s going to take to get you through the first 90 days is not helpful – in fact it may set you up for financial suicide. In many cases, reaching the break-even point can require more reserve funds than the total initial capital investment. Don’t ever forget the name of Item 7 in the Franchise Offering Circular: “Initial Investment.” If you don’t have enough reserve capital to reach the critical break-even point, your entire investment will go down the drain and franchise failure occurs.

One franchise owner in a relatively low investment and low operating cost window cleaning franchise said his biggest surprise was how long it actually took his franchise to be profitable. Going in, he thought it would take 12 to 15 months. It ended up taking twice that time. Fortunately, he had enough reserve capital to make it there, but declined to say what his actual franchise profits or income level were once he reached ‘franchise profitability.’ If you\’re operating just above the break even point and making less than minimum wage, is that anyone\’s definition of success?

REAL BUSINESS
Is this a legitimate retail business, as opposed to a ‘work out of your home’ operation? The vast majority of work out of your home concepts produce marginal income at best.

FRANCHISE MANAGEMENT EXPERTISE
Does the management team of the franchisor (the company selling you the franchise) have executives with demonstrated past achievement and experience in operating a franchise company (not just persons who have sold franchises)? If not, this is a big RED FLAG. Many companies enter franchising and fail to realize they are in a brand new business – one requiring entirely different management skills and abilities to navigate franchise relationships. A seasoned franchise management infrastructure must be in place. If the franchise management team lacks strong franchise credentials, or does not receive ongoing advice from qualified individuals, you might as well take a trip to Las Vegas with the money you\’re intending to invest. Your chances of making vs. loosing money are roughly equal.

NORMAL WORKING HOURS AND DAYS; SUFFICIENT FRANCHISE INCOME LEVEL
Will the nature of the business allow you to work a normal five-day, forty-hour workweek? Life is too short for the seven-day, sixty to eighty hours a week, workaholic lifestyle that destroys health, family and pocketbook. Financially, we\’ve calculated the true hourly rate for franchise owners who work these workaholic hours and discovered many are making far less than the minimum wage. One couple who operated a $200,000 fancy pizza franchise in an upscale mall were shocked to discover they were making fifty cents an hour each. Hardly an income level to recoup or justify the franchise investment. Many more fast-food franchise operators make even less, or operate at a loss until their funds, retirement savings, homes, etc. are exhausted. Buying a franchise in a non-food industry doesn\’t necessarily improve the franchise profit picture. In a 2006 article ‘Mail Boxes Etc. Owners Fighting UPS Conversion,’ a Mail Boxes, Etc. franchise owner who operated his franchise since 1993 reported profits for a typical MBE store like his were $16,000 per year after paying royalty and advertising fees to the franchise company. That calculates out to about $8.33 per hour for a forty-hour work week, approximately the wage of an entry fast-food worker.

Another major shortcoming of disclosures in the Franchise Offering Circular is not telling you how much money the franchises in the network are making. Instead of answering what is the most important question in a franchise investment decision, the franchise disclosure laws make this “optional” for the franchise company to answer or not. If they do answer this critical question, it will be found in Item 19. But don’t hold your breath – more than 90of franchise companies “decide” not to answer this question. It’s another bizarre reality in the world of franchising. Although they collect complete monthly (and in many cases, weekly) financial profit and loss statements from their franchise owners, and know exactly how much their franchises are making (or losing), more than 90decide not to share this information before you buy one of their franchises. A number of franchise salespersons have told persons asking this question: ‘the franchise laws don\’t allow us to answer that question.’ Nothing could be further from the truth.

And just because you’re a business executive making a 6-figure income now, don’t assume this income level will be duplicated in a franchise investment just because the company “approves” your application. One such executive, despite a plethora of negative feedback from current and past franchise owners who’d lost everything, marched forward with her franchise investment in a 30-minute fitness concept. Despite her 6-figure income, she didn’t invest a dime in professional franchise evaluation advice and stated she was taking a leap of faith, hoping to build her wings on the way down. Build her wings on the way down? Sound\’s (and is) crazy, but this happens all the time. Due to the ploys of the franchise salesperson, too many franchise investment decisions are based on emotionalism. Prior business skills, business sense (and even common sense) are short-circuited. Needless to say, if this business executive made a similar investment decision for her corporate employer paying the 6-figure salary, she would be promptly fired.

MINIMUM NUMBER OF EMPLOYEES
Can you operate the franchise business with 6 or fewer employees? Managing dozens (or in the case of some fast-food operations – hundreds) of minimum-wage teenagers who are constantly quitting or simply not showing up for work is a royal pain in the ….. Well, you know what we mean.

LEASING AND LOCATION
For most retail franchises, the triple net lease of the location is the biggest financial commitment, larger than the total franchise investment. Yet, the typical real estate lease and its ramifications are not required disclosure in any Franchise Offering Circular (FOC). For example, an estimate that you\’ll need 2,000 sq. feet of space with expected rental of $5 to $10 a foot per month is normally disclosed in the Franchise Offering Circular’s initial investment table as Leased Real Estate $10,000 to $20,000. A footnote to the investment table may say “assumes 2,000 sq. ft. at $5 to $10 a foot.”

But, that\’s only the beginning of a much longer story. The lease is normally a 5 to 10 year triple-net lease. So, the financial commitment made when the lease is signed is at least $600,000 (at $5/foot for 5 years) to $2,400,000 (at $10/foot for 10 years). And this doesn\’t include substantial, additional obligations to pay all of the landlord’s yearly property taxes, insurance, common area operating expenses, etc. With hundreds of thousands (or even millions) of dollars in financial obligations at stake, personal guarantees and other risks, more than just a warm, fuzzy feeling that everything will work out is necessary.

Key questions to ask here:

(a) is the franchise you\’re considering one that can be operated in a low rent commercial business zone? Avoid franchises requiring the costly expenses and triple-net leases of a visible retail storefront and the extravagant rent associated with areas of high foot traffic, like shopping malls. You\’ll sleep much better at night.

(b) What\’s your total financial commitment under the lease?

(c) Do you have sufficient liquid assets (or a willing, sufficiently liquid third party guarantor) to meet the landlord\’s lease qualification standards?

If you don’t, you might as well forget about investing in the franchise. Or even worse, getting involved in a questionable franchise and business model, then realizing you\’ve made a big mistake – and discovering you\’re on the hook personally for a $500,000 lease obligation.

A related real estate variant is securing a lease with a sufficient term (with renewal options) to recoup your investment and make a profit. In July, 2005, an attorney in her mid-forties purchased an existing ice cream store franchise for $375,000 believing it to be a “once-in-a-lifetime opportunity.” Trading her briefcase for an ice cream scoop, she attended the company’s 11-day Ice Cream University and assumed operations of the ice cream store. Turned out it was an opportunity – but only to inherit a store with numerous problems. These problems included (but were not limited to) a lease that would expire the following summer and a landlord who’d previously announced the lease would not be renewed. Rather than pay the $100,000-plus in relocation costs, the attorney returned to the practice of law, but is still paying off $350,000 remaining on the loan taken out to buy the once-in-a-lifetime franchise opportunity. Although there’s a franchise lawsuit pending, it’s yet another case of “franchise fever” – this time attacking a professional no less. Who would ever commit to paying $375,000 for an existing retail franchise without checking out the l-e-a-s-e? Sound’s like another bad attorney joke, but I can guarantee she’s not laughing. Business fundamentals were ignored or forgotten in the rush to acquire the opportunity of a lifetime. And I’m willing to bet not a dollar was spent on competent, pre-investment franchise advice.

IMAGE AND LIFESTYLE
How does flipping burgers, scooping ice cream and cleaning restrooms fit the image of what you want to do for a living? Investing in a franchise will be the most important financial and psychological decision you ever make. Many prospective franchise owners fail to realize they’ll be wearing virtually every hat at some point, from salesperson to bad-debt collector, from firing employees to bathroom janitor. The franchise owner is usually the first one to arrive in the morning – and the last one to turn out the lights late at night. And you’ll need to forget about corporate perks like paid vacations, paid holidays and sick pay. In their place, substitute financial pressures, unexpected events and money draining out of your savings and retirement accounts. Does the typical working day and responsibilities of the franchise you are considering fit your personal image and desired lifestyle? You can experience some of this BEFORE you invest by working for a couple weeks in an outlet owned by one of the existing franchise owners.

TRUE FRANCHISE VALUE
Buying a franchise from a “blue chip” franchise company that has spent decades and hundreds of millions on advertising to develop their brand can make a lot of sense. These companies have “true franchise value” that compensates for the long-term disadvantages of ongoing royalty and advertising fund payments. Often these additional payments literally mean the difference between earning a profit and operating at a loss. In unknown franchise chains with little or no brand recognition, you the franchise buyer are building their brand from scratch, and are saddled with severe, long-term competitive disadvantages.

In these unknown franchise chains, you have to ask yourself a simple, common sense question. What value is the company giving you that you couldn’t learn on your own by working at one of their locations as an employee for a couple months? Franchise truth be told, what most unknown franchise companies are selling is just a business opportunity – teaching you how to get into a new business venture. But unlike a business opportunity seller that charges a one-time fee to help get you into business, they call it a “franchise” and charge ongoing royalty and advertising fees like they’re a McDonalds or other blue chip franchise company.

The reality is they’re not a McDonalds type franchise – not even close to one. In the majority of these lesser-known franchise chains, you’d be much better off starting an independent business on your own. You can learn most or all of their so-called “secrets” in the franchise interviewing process and by talking to (and possibly working a short time for) existing franchise owners.

FRANCHISE PROFITABILITY & “SUCCESS”
Dr. Timothy Bates’ study released in 1993 by the Entrepreneurial Growth and Investment Institute in Washington, DC (and another study published in 1996) was the first to compare start-up costs, franchise profitability and franchise failure rates for franchised vs. nonfranchised firms. In his analysis of some 7,270 firms over the test period, Dr. Bates found that startup capital for a franchised business averaged $85,293 compared with average startup capital for nonfranchised firms of $30,156. In 1987 nonfranchised firms reported average pre-tax net income of $19,744 as compared to a loss of (-$1,548) for franchised firms. Dr. Bates concluded “Despite their larger revenues, much better capitalization, and their supposed advantages of affiliation with a franchisor parent firm, the franchisees lag behind cohort young firms in profitability and rates of survival.”

The franchise companies ignore both studies by Dr. Bates, pretending they never happened. Instead, other techniques are employed. For example, some franchise companies use misleading success statistics to sell their franchises. Their promotional materials say franchises generally enjoy a 90success rate, compared to less than 20for independent firms. These figures are based on unverified information supplied thirty years ago by a select, non-representative group of franchise companies. A full third of the companies receiving “questionnaires “ elected not to participate. There was no verification of any of the information supplied by the franchise companies, not even random, spot checking. Nor was any effort made to identify franchise companies who, along with the franchise owners in their chain, had gone out of business.

Even more recent “studies” saying nine out of ten franchise owners (90 consider their franchise to be somewhat or very successful also suffer from serious methodological flaws. These were simply telephone surveys of franchise owners who were still in business and asked to say (with absolutely no definition of the term “successful”) whether they felt their business was “very unsuccessful,” “somewhat unsuccessful,” somewhat successful” or “very successful.” Franchise owners who had gone out of business or bankrupt were not included in the survey.

Even if terms are defined and a representative sample obtained, franchise owners can be a quirky group. Hence the need, as in Dr. Bates\’ studies, for review of financial data. I remember evaluating an existing franchise for a client. I asked the current owner of the franchise if his business was successful. He said it was very successful. But his financial statements revealed a different picture. He’d never taken a dollar out of the business for himself, never made a profit in two years of operation, and was on the verge of bankruptcy. Another owner of a bakery franchise, interviewed by Business Week, says being successful in franchising means “adjusting your definition of success.” He says he makes a profit, but declined to say what it is, or if he\’s ever recouped his $250,000-plus initial franchise investment. Incredibly, he insists he\’s in business “for lifestyle reasons, not profit reasons.” Huh? Probably a quote from the company\’s franchise recruitment materials. In the world of franchising “success” and ‘profitability’ are very subjective terms.

FRANCHISE BROKERS WHO FIND YOUR PERFECT MATCH?

Does the franchise you are considering have its own in-house marketing department, or does it utilize outside franchise brokers? The use of franchise brokers is a definite red flag. First, it indicates the franchise company is not very serious about who it lets into the franchise network, or even worse, they\’re desperate to sell franchises. Second, franchise brokers receive a substantial commission up to 50or more of the franchise fee you’re paying the franchise company. Franchise Broker Realities: (1) Their service is definitely not ‘free’ despite these and other similar misrepresentations. It\’s really common sense – how could anyone offer a ‘free’ service and survive in business? Unfortunately, the common sense part of the brain tends to short circuit when the franchise brainwashing process begins. The simple truth is if you buy one of the franchises they\’re hawking, your money goes to the franchise company, then into the broker\’s pocket. If anyone ever calculated how much time they spend to collect their $15,000 or $20,000 commission, it\’s probably a lot more than a brain surgeon earns. (2) Franchise brokers definitely do NOT have your best interests in mind. They will do or say whatever they have to in order to close a deal and earn their commission.

Many franchise brokers claim they will help you find a franchise company that is the perfect match for you. In the beginning it sounds good. There’s some personality testing and review of your personal finances. At the end of the day, it turns out they only represent (and steer you towards) a handful of small franchise companies you’ve never heard of before. A detailed analysis often reveals these highly touted franchises produce mediocre or even below minimum wage financial performance. Yet franchise brokers don\’t mention this, and individuals continue to rely on their recommendations, believing the broker represents them. Nothing could be further from the truth.

Also, many franchise brokers call themselves franchise consultants. A franchise consultant is usually an independent adviser who offers advice to others (usually franchise companies or firms that want to franchise their business) for a fee. This makes their advice more impartial in theory as long as they are not compensated by third parties. Because they are not legally required to disclose actual or potential conflicts of interest, it’s important ask questions. For example, if you\’re using a franchise consultant who is recommending the “best franchises,” are they paid anything by the companies on their list? This could be a commission, kick-back or consulting fee. As mentioned, many franchise brokers call themselves “franchise consultants” to hide their true identity. So, make sure if you’re dealing with a franchise consultant, he or she is not really just a franchise broker in disguise.

FRANCHISE DISCLOSURE LAWS
The franchise disclosure laws, while requiring franchise companies to give you certain, limited information, don’t come close to protecting your interests. For example, as discussed above, Item 7 of the Franchise Offering Circular only requires an estimate of additional funds for 90 days as part of the investment information. But economic reality is you need to know the additional funds you’ll need to reach the break-even point, which can be years away, or your entire “initial” investment will go down the drain. You’d think this type of information would be required by franchise disclosure laws, but it’s not.

FRANCHISE REGISTRATION LAWS
Don’t ever assume that because a company has registered its Franchise Offering Circular in your state, someone at the state has approved or reviewed the document in your favor. Franchise registration is obtained by simply forwarding documents and paying a filing fee – period. In most cases, franchise offering circulars are given an extremely limited review to ensure state-specific disclaimers are present.

I remember filing a registration application for a new franchise company in a state with a reputation for being one of the “toughest” franchise registration law states in the country. After the three-week review period set forth in the statute had gone by, and not hearing anything, I called the examiner assigned to the application. After looking through his files, he finally found my client’s offering circular and application. He apologized for entirely misplacing the file and promised to immediately review the application and call me back. Ten minutes later, he called to say he\’d finished and was making the registration effective that day. Ten minutes of review and the franchise company was given the state\’s green light. This is not an isolated case – it happens all the time.

WHAT STANDARDS MUST A FRANCHISE COMPANY MEET TO SELL FRANCHISES; ARE THERE ANY REQUIREMENTS TO FRANCHISE A BUSINESS?
Incredibly, the answer is – none. There are no minimum standards or requirements to franchise a business except preparing a Franchise Offering Circular. It\’s yet another bizarre reality in the world of franchising.

You and I could have no background in any business, form a new corporation or LLC, capitalize it with only $1, put together a Franchise Disclosure Document and file it with any franchise registration state. While the offering may be subject to an impound or escrow requirement because of the low capitalization ($1), we’d still get “registered” and be able to sell as many franchisees as we want.

In these 14 franchise registration states, we may not be able to receive any money until each franchise actually opened, but simply posting a bond would alleviate this difficulty in the franchise registration states. And in the vast majority of states there are no franchise registration laws, so we’d be able to sell franchises and collect fees with impunity once we compiled our Franchise Offering Circular. The federal FTC Franchise Rule doesn’t protect against this risk either – it only requires disclosure (i.e. provide a Franchise Disclosure Document) and has no registration component or minimum standards for franchise companies.

Basic investor protections and requirements found in both federal and state securities laws for over 50 years were never carried over to franchise investments. While most non-blue chip franchise companies could never even qualify to sell you a single share of stock in their company, they are entirely free to collect unlimited franchise fees, ongoing royalties, equipment and other purchases, as well as cause you to incur financial obligations totaling hundreds of thousands of dollars, or even millions in some cases. This isn’t information you’re likely to find in the glowing articles about franchising and franchise companies prevalent in the media.

CLOSING REMARKS
Remember, you are the only guardian when it comes to your franchise investment. It’s definitely an environment where the phrase “Buyer Beware” applies. So, before you sign on the line and make what will undoubtedly be the most serious financial and emotional commitment of your life, get all the facts and figures.

One couple I counseled after-the-fact, invested $2 million in a new franchise company. The contract they signed gave them no right to terminate, no matter what the franchise company did or didn’t do. Of course, the contract gave the franchise company unlimited termination ability, a right it had exercised. The franchise company’s management team had no one with experience in running a franchise company. Incredibly, the couple had not spent a dime on legal or business advice before investing $2 million. The once friendly franchise company had transformed into a formidable foe and was poised to take over their franchise. Sadly, this happens too frequently in franchise investments. Decisions are made on fuzzy feelings and emotionalism. In an effort to save a couple thousand dollars, franchise investors risk homes, retirement savings, everything they have. Then they scratch their heads in amazement later on after inevitable and often horrific problems develop, wondering how they could have been so nearsighted.

Another indispensable level of inquiry is whether you’re getting true franchise value and whether you’d be better off doing the business on your own. In the overwhelming majority of franchises touted by unknown companies, franchise value isn’t there and doing the same thing independently makes better economic sense and actually decreases the risk of failure.

Finally, and this applies to franchise investments as well as investing in any business venture, develop a plan to succeed but also plan a franchise exit strategy that minimizes financial risk in case things don\’t work out. Both plans need to be thought through before the investment is made. Don\’t wait until problems develop to start thinking about a franchise exit strategy – by then it\’s usually too little, too late.

For more information, visit the Franchise Foundations Website.

© 1990-2008, Kevin B. Murphy, B.S., M.B.A., J.D. – all rights reserved

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About the Author

Known in the industry as Mr. Franchise, Mr. Murphy is an internationally-known franchise attorney, franchise expert, author, and instructor. For the past twenty-eight years he has specialized exclusively in the franchise industry and owned a very successful franchise in the home improvement field. He has written over 30 publications, including four books on franchising and one book on trade secrets. Mr. Franchise has drafted, reviewed and negotiated more than 500 franchise offering circulars and instructs franchise company personnel in best franchise practices. He also teaches franchise, licensing and intellectual property courses to attorneys. Mr. Franchise is a franchise attorney and Director of Operations for Franchise Foundations a San Francisco-based professional law corporation.

Could Franchising Be The Business For Me?

This Article is written and owned by Mario Churchill

Most people are familiar with franchising. For the benefit of those who are not, according to http://wikipedia.com franchising is the system of doing business wherein a franchisor licenses trademarks of a product and tested methods of doing business to a franchisee to receive payment like a percentage from gross per sales or gross profits as well as the annual fees agreed upon, as compensation for the trade secrets shared as part of the franchising agreement. Sometimes legal contracts may vary as to the terms of franchise and may not fit the definition above. Sometimes, the methods on how to do the business may not be part of the franchise or other benefits that other franchising companies give may not be available to others.

The most common franchising companies known to the public would be chain of food stores like McDonald’s which nowadays offer some franchising strategies to reach a wider consumer market. McDonald’s has become a household name since it was able to reach a wider consumer market that is not only limited to the United States and the Americas but to the rest of the world. The success behind McDonald’s becoming a household name and the one of the most known trademarks around the world is due to the system of franchising. Aside from the buildings that McDonald’s rent to the franchisee, it also has a stake on the sales of the franchise and the cost of the supplies charged to the franchisee. To help out in the quality of products and services offered in each food chain, McDonald’s sends a member from the franchisee to their Hamburger University in Oak Brook, Illinois. This is one support benefit that the franchisee would get once they franchise a restaurant for McDonald’s.

Like any business, there are advantages and disadvantages that franchising offer to anyone who wish to venture into it.

Advantages

Popular labels are widely known and are likely to sell. Popular trademarks like McDonald’s are likely to sell than a new restaurant that has not reached a market such as McDonald’s. It is selling a well known product to a consumer market which knows the product being sold.

No need to develop a new product that has not been well researched. Venturing into franchising would allow the franchisee to have access to information that the franchisor have about an existing product and put up a business in a shorter period of time.

Trainings and seminars would be provided to the franchisee about the product. It would be easier to operate and manage the business since there are available trainings and other support methods for the franchisee.

Disadvantages

High standards held by the franchisor raise costs of maintenance in the franchise. Since the standards of the franchisor would definitely be high, sometimes the cost of maintaining a franchise can escalate. Unless the materials used would be second rate and low in cost.

Development of new products might still need to be passed for approval to the franchisor. If the franchisee would like to add a product which they think would be saleable in their market range, the new product has to be approved first by the franchisor and this may take time and it would likely be rejected if it does not meet standards of the trademark.

Profit is limited since the franchisor has stake, most of the time, on the profits of the franchise. Not only does the franchisee have little control of the franchise due to many stakes that the franchisor has on the franchise, the profit of the franchise would also be split between the two. Therefore, there is a limit to how much the franchise would earn.

Even if there are several disadvantages in franchising, still there are advantages. If you think you could handle this kind of business, all I can say is, business is gambling. In any industry there are players and you might be lucky that you would be on top once and sometimes at the bottom. Get to know the game play and start playing to win the game.

About the Author: Mario Churchill is a freelance author and has written over 200 articles on various subjects. For more information on a great business opportunity and learn how to make money checkout his

Source: www.isnare.com

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Franchising in Restaurants

This article is written and owned by Blair Cavagrotti

Franchising in restaurants is one of the biggest opportunities
for someone looking to start their own business
as a franchise.
Almost every day, you probably walk into a franchised
restaurant. You might not even have known – sometimes what you
assume is a branch restaurant is actually a franchise. Fast
food restaurants, in particular, are well known for having
franchise locations that are indistinguishable from each other.
Fast food and full service restaurants are both very profitable
as franchises, and are good for both the business owner and the
local economy.

Franchising allows the business owner to give exceptional
service
to the customer because the company takes care of a lot
of things that a small business might have to deal with, and
name recognition ensures that the franchise owner does not have
to worry
as much as the average small business owner about
losing money. This efficiency and good management frees up the
restaurant or fast food business to take special orders without
difficulty or provide exceptional food at a reasonable price,
for example, in a buffet format. This allows the franchised
restaurant to be the best restaurant possible, while offering
the consumer the consistency that they desire.

Fast food restaurant franchises, in particular,
are well known
for having excellent service and consistent food, because their
operations are controlled by a large company with the ability to
coordinate and streamline everything they do.

Many fast food franchises also operate abroad now. This can
present problems, because restaurants want to ensure that they
have the same quality of food and service as in their home
country. American companies have expanded with great success
internationally, and some foreign fast food restaurants have
made their way to the U.S. However, great care needs to be taken
to ensure that the franchises in the international destination
have sufficient raw materials to produce the food and that staff
and service can be controlled from a distance. Otherwise, the
exceptional service and quality that makes up the company
reputation can be diluted.

Successful restaurant franchises can be extremely popular. For
instance, pizza restaurants are known for having large
franchising networks, and are very successful in the business.
Even though other foods are equally well-liked by consumers,
like pasta, they cannot achieve the status in the industry that
pizza restaurants have without the kind of successful
franchising you see in that industry.

The operations of some of these franchises are so streamlined
that you cannot tell them from a branch location of a
restaurant. Since most people frequent chain restaurants because
they know what to expect from their food, it is very important
for a franchise restaurant to very closely resemble a branch
restaurant. If you are considering starting a restaurant
franchise – keep this in mind. You will be expected to adhere
to company guidelines in terms of the food you make and the way
you manage your company, much more so than with some other
franchise opportunities, which could offer more flexibility in
the way you run your business.


About the Author: Blair Cavagrotti
is in Marketing at
http://www.worldfranchising.com/, a website that provides
franchise information to potential franchise buyers.

Source: http://www.isnare.com


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Successful Restaurant Franchises, click here

Tips For Buying a Restaurant Franchise

This article is written and owned by Robin Gagnon

What are the odds of building a successful restaurant franchise from the ground up and lasting three years? According to a hospitality management professor who studied restaurant failures, it is less than 40%. A professor at Ohio State University authored a study that found 57% of all newly opened franchises will not survive beyond the three year mark. That is only slightly better than independent restaurants that experience a failure rate of 61%. Does this mean you should avoid restaurants altogether? No. A franchise restaurant can represent a great value if you know when to buy and how much to pay. This article will teach you with our three rules for franchise restaurant buyers.

The books and records of an established business tell the true picture of its earnings. If you want a restaurant that has beaten the odds of surviving three years, buy an established restaurant with repeated years of earnings. If a franchise interests you because of the training or the brand, than by all means pursue your dream but do it with our three rules if you want to make money.

The first three years of a franchise often look like this. A new owner learns of a concept and is instantly excited about the potential and ready to build from scratch. A new restaurant franchise can easily cost the new franchisee $350,000 or more. Eager to experience his own restaurant franchise success, the franchise restaurant owner is sure that he is on the way to making millions. A simple review of the math however shows that with franchise fees of 8%, marketing fees of 2%, and rent of 15% all kick in before he buys the food and serves his first chicken wing and beer at an average check price of $8.00. After a tough first year he calls a restaurant broker to sell the franchise restaurant. He is not too happy to learn that with a money losing operation, the most he can expect is about 25% of what he has invested or about $125,000. That pricing is only if he has a good franchise concept and a strong site.

A smart restaurant buyer picks up the pieces of the franchise and becomes owner number too. This owner may still be losing money but he only paid around $100,000 so his cost to acquire is much lower. By year two his sales are beginning to keep pace with his fixed costs. By working hard at the business and operating it himself, he can probably go from losing to making money. By the way, both owners have paid the franchise fees the entire time even while they lost money. Another year into the business, this smart buyer realizes he may not have such a great deal after all. He may be operating in the black but when he adds up the time in the business against his return, he is making less than the federal minimum wage. He calls a restaurant broker to sell the business. By this point, sales have developed to the point that all fixed costs are covered. With add backs, he is only earning $35,000 or so a year.

This is when the franchise restaurant buyer hits his stride and gets the deal. The franchise is now valued on earnings, not hype. The sales cycle has matured and all costs are covered. Buyer number three has a real opportunity in his hands. He owns a good product in the franchise brand. Sales are still growing and the business is profitable. Since buyer number three paid appropriately, the cost of capital is minimal and the business can easily service the debt. While the first two buyers are telling their friends why they would never buy a franchise, the new owner has never been happier. This business cycle of the franchise restaurant ownership demonstrates why buyers follow our Rules of Three in Buying Franchise Restaurants.

#1 Franchise restaurant buyers never want to be first or second to own the restaurant. Owner number three reaps the benefits.

#2 Buy close to the start of year three for the best opportunity. Sales are still trending up and the restaurant is making money. Best of all, there is still opportunity.

#3 Never, ever pay more than three times earnings no matter how great a pitch you get from the franchise or the owner. Opportunity is a lottery ticket but none of us like the odds.

Robin Gagnon is a restaurant broker at We Sell Restaurants and [http://www.wesellrestaurants.com]http://www.wesellrestaurants.com. Robin holds an MBA in Finance. She frequently writes on the topics of restaurants sales, restaurant valuation and financial topics surrounding the buying and selling of restaurants, bars and clubs.

Article Source: [http://EzineArticles.com/?Tips-For-Buying-a-Restaurant-Franchise&id=4055610] Tips For Buying a Restaurant Franchise

Franchise restaurant concepts for sale here

Franchise Financing – What You Really Need to Know


By John M Bauer

Franchise financing for first-time franchisees

Some potential franchise financing sources include the following:

– Personal savings and investments
– Borrowing from friends and family members
– Taking out a small business loan from a local bank or credit union
– Obtaining a second mortgage on your home
– Working with outside investors or investment capital firms
– Obtaining a loan from the U.S. Small Business Administration (SBA)
– Obtaining a loan from Canada Small Business Financing (CSBF

You must come up with the money to be in business!

The statistical truth is that the single most common reason new franchisees (and for that matter, all other types of new businesses) fail is that they did not have enough money going into the investment.

A responsible franchisor will not take on a new franchisee that does not have the appropriate financial resources to get the business off the ground and make it profitable

Determine How Much Money You Need To get Started

Opening a franchise requires a significant financial investment.

If the only benefit you received from joining a franchise system was an accurate estimate of the costs of developing the business, sources for equipment and suppliers, and the knowledge of how much working capital you needed until the business could support itself, the investment in a franchise may still be worthwhile. Because of this helpful start-up information, an experienced and mature franchise system is worth its weight in gold to a new franchisee.

An overall picture of what your start-up costs may look like

Franchisors reduce your time and costs on the learning curve. Franchising succeeds because the franchisors take care of the details you may not even think of.

Total start-up costs vary dramatically, depending on the franchise you select, varying from less than $10,000 to more than $1 million. A typical investment for a single-unit franchisee is usually in the $100,000 to $300,000 range. The franchisors disclosure document, provides you with a list of start-up expenses that will make up your initial investment

Most franchisors want to see a liquid (cash) capital investment of 35 to 50 percent of the total franchise cost (the franchise fee plus all start-up costs). They want to ensure that you have enough money, not only to get started but also to pay your bills, including any principal and interest payments on your loans.

Start-up costs may vary depending on whether you need to own or lease real estate to operate the business. Fixed-based franchises, almost always cost more than a franchise operating from a van or over the Internet.

Initial expenses you should anticipate

The franchise fee, which is the amount you pay the franchisor to offset the franchisor’s cost of locating, screening, negotiating with, and training you. It may also cover the costs involved in site selection and development, promotions, grand-opening events, and ongoing support during your first months of operation.

Franchise fees vary, depending on the franchisor. They can range from $0 (which is very unusual) to more than $100,00. The franchise fee for most franchisors is between $20,000 and $35,000. When comparison-shopping, pay particular attention to what services you will receive for your franchise fee and what other necessary services separate charges. The lowest, most appealing franchise fee may not be the best value.

As you identify a location, you will usually sign a single-unit franchise agreement. What you pay and how the franchisor applies the fee will vary, depending on the agreement.

Other start-up costs include:

Blueprints and professional fees…
Contractor fees…
Costs for finding the right location…
Décor packaging and signage…
Equipment and fixtures…
Freight and sales tax…
Improvements and construction…
Insurance…
Landscaping…
Opening inventory…
Real property and occupancy charges…
Zoning expenses…

In the disclosure document, a franchisor will provide you with a chart and notes concerning your start-up costs for that particular franchise.

John Bauer, a 20-year veteran of franchising, shares his extensive knowledge on his website http://www.whyfranchising.com. Start right. Finish successful. Here’s how.

Article Source: http://EzineArticles.com/?expert=John_M_Bauer
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