Define Franchise
This by the way is among the great advantages of owning a franchise.A franchise offers a number of immediate advantages over starting from scratch. Should consider going the route of a franchise.
Is Owning A Franchise An Option?
The franchise company reserves rights to acquire your entire business at below wholesale prices if their contract is not followed precisely. 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 NightmareAn example of a franchise company in trouble that failed to meet basic threshold standards is iSOLD It, an eBay drop-off store franchise. Then the magic of franchise marketing; took over. The concept was never proven in the marketplace before franchise efforts began, violating the most basic Franchise 101 precept. 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 INVESTMENTIn general, don't expect a franchise that requires a five-figure initial franchise investment to produce a six-figure income. Is the total initial franchise investment range (including working capital) $125,00 or less; and the maximum investment less than $200,000? 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. The vast majority of work out of your home concepts produce marginal income at best.FRANCHISE MANAGEMENT EXPERTISEDoes 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)? A seasoned franchise management infrastructure must be in place. Hardly an income level to recoup or justify the franchise investment. 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. 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. A number of franchise salespersons have told persons asking this question: "the franchise laws don't allow us to answer that question." Due to the ploys of the franchise salesperson, too many franchise investment decisions are based on emotionalism. Although there’s a franchise lawsuit pending, it’s yet another case of “franchise fever” - this time attacking a professional no less. TRUE FRANCHISE VALUEBuying 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. 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. 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. 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. The franchise companies ignore both studies by Dr. Bates, pretending they never happened. For example, some franchise companies use misleading success statistics to sell their franchises. 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. I remember evaluating an existing franchise for a client. I asked the current owner of the franchise if his business was successful. 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 50% or more of the franchise fee you’re paying the franchise company. (2) Franchise brokers definitely do NOT have your best interests in mind. 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. 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 LAWSThe franchise disclosure laws, while requiring franchise companies to give you certain, limited information, don’t come close to protecting your interests. You’d think this type of information would be required by franchise disclosure laws, but it’s not.FRANCHISE REGISTRATION LAWSDon’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. 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. 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. 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. 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.
For more information, visit the Franchise Foundations Website.
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