Buying a Franchise

01Sep 2019

Choosing a Green Franchise-1


Choosing a Green Franchise

Deciding on a franchise is always a difficult decision and deciding on a green franchise is no different. The following list provides practical advice on how to choose a green franchise.

 

  1. When deciding on a green franchise, a potential franchisee will need to decide if they want to be part of a franchise that directly aids the environment, such as solar panel installation or green energy or if they want to be part of a franchise that employs green practices and is dedicated to helping the environment.
     
  2. Man-recycling.JPGAn important consideration when looking for a green franchise is The Green America Seal of Approval. Green America is a nonprofit organization which started a certification process for the purposes of allowing consumers, potential business partners and other businesses to recognize a legitimately green business. A business that bears this seal has successfully passed the Green America screening process and has been deemed socially and environmentally responsible.
     
  3. When selecting a green franchise, make sure they are truly green. A lot of “green washing” occurs as franchisors try to profit from the hype without putting forth the effort required to be truly green. In some cases a franchise spends their entire green budget on promoting the fact that they are a green company rather than using the money to implement green practices. Also be aware that some green “awards” displayed may not be legitimate.
     
  4. Ensure that the franchise offers training for the new franchisee and for their staff. This training will not only cover the basics of running the franchise but also teach the staff green practices which should be in place.
     
  5. For a franchisee, an accurate understanding of the costs of a green franchise or the costs involved in going green is essential. It is important that a potential franchisee does a thorough investigation of the franchise to ensure that they are making a good investment in a truly green franchise. Before making any final decisions it is recommended that a potential franchisee consults a franchise lawyer.

 

You and your lawyer have examined the FDD. You’ve done your research about the franchise and the numbers add up. You’ve spoken with other franchisees in the business and like what you’ve heard. You feel ready to sign the Franchise Agreement.
 
As stated before, the Franchise Agreement is a legally binding contract that stipulates in exacting detail the responsibilities and expectations for the franchisor and franchisee.
 
Keep in mind that Franchise Agreements are written to be generally more advantageous toward the franchisor. Once signed, you are legally obligated to uphold all the provisions of the Agreement, so it is absolutely essential that your lawyer review this contract and explain everything to you in plain English.
 
Before signing, compare the Franchise Agreement to the FDD to make sure the franchise offering as outlined in the FDD matches what is stipulated in the Agreement, and, if any verbal promises were made to you, be certain these are written into the Agreement. Once signed, the Franchise Agreement governs your relationship with the franchisor, and any disagreements or misunderstandings will be subject to the terms in the Agreement.
 
Because it is a legally binding contract, there are certain critical elements typically found in all business contracts and some that are unique to franchises. Here are some aspects of the contract that you and your lawyer should carefully scrutinize to be sure you understand all the implications.
 
Who is signing the contract?  First and foremost, be absolutely certain about the identity of the party with whom you are doing business. Is it the parent corporation signing the Agreement or is it a master license owner? Have you investigated the other party’s business track record and reputation? You must know exactly who the other party is that you are going to partner with for the contract term.
 
Duration of the Agreement: Next, be sure that the duration of the Franchise Agreement is clearly stipulated. How long does it last – five, ten, or twenty years? Is it renewable when the initial contract expires? If the contract is renewable, how much will you have to pay? Is it  the full franchise fee or is it discounted for a renewal?
 
Fees: The section detailing fees must be thoroughly examined. Most franchisors require a royalty, which is a percentage of gross/net sales or revenue or a flat fee (some franchises also have minimums).  It is crucial that you understand all the terms related to minimum performance and royalty fees based on revenues.
 
Advertising: Another factor that can impair your profit margin is advertising. Carefully examine your obligations to contribute toward advertising and marketing, and what the franchisor will provide in return. Review this clause so you know just how much from the franchisor’s advertising budget will go toward promoting your business on the local and national levels. How is the advertising capital distributed? This should be clearly defined in the Franchise Agreement.
 
 
Running a franchise.Training: This is another factor that can affect your success and can be costly. Again, the logistics, duration and location should be detailed in the Franchise Agreement. Usually franchisees must pay their own living expenses during training; and these can be prohibitive if the training period is prolonged. For instance, McDonald’s requires a 9 to 18 month training period for new franchisees. Most franchisors will probably not impose that lengthy of a commitment, but be sure you understand how much time and money for expenses you must have for the training period.
 
Operations Manual: As a franchisee, you will need guidance on processes and procedures for running the business. These should be outlined in the Operations Manual, which is basically your business management bible. Find out if you will be given a hard copy or must download it, which is growing increasingly common. How often is it updated? Is their an additional fee or deposit for receipt of the Operations Manual?
 
Trade Dress: One aspect of the contract is unique to franchise operations, and that is “trade dress.” This broadly refers to the logo usage, store image and décor, even clothing worn by employees. Sometimes there are very stringent requirements about trade dress, while others are less formal. Be certain you understand and can meet these guidelines. And, again, who pays for any signage and special fixtures that are part of the trade dress? How often must these be replaced?
 
Hours of Operation: What are the hours of business you are expected to be open? Don’t commit to any requirements about hours of operations unless you are certain you can meet this obligation. If you fail to meet the hours requirement, the contract can be considered breached and your standing as a franchise owner in jeopardy.
 
Procurement and Supplies: Another pivotal element of the Franchise Agreement is the question of supplies and products. Must you buy everything exclusively from the franchisor? And if so, what protections are in place to ensure you are not gouged on prices? Are you allowed to use other items not obtained from the franchisor? Know where your product is coming from, and what is a fair price to be paying for those products.
 
Personnel Policies: All businesses rely on the people who do the work to achieve success. What are the policies regarding staffing? Are there defined methods for recruiting and training staff? What, if any, corporate human resources policies – i.e. sick time, vacation pay, bonuses etc. – must be followed? These should be detailed in the Operations Manual, but be sure to double check so that you fully understand all the franchisor’s personnel practices.
 
Grand Opening: What does the Franchise Agreement stipulate regarding the opening of your business? How much help does the franchisor offer? Will other company representatives be there? Is there specific trade dress and practices that must be used? How much of your initial fee goes toward a “Grand Opening”? What contribution can you expect from the franchisor in regard to public relations, marketing, and advertising? Even though this is a one-time occasion, the way your business debuts can affect its long term success. Know what you are expected to do, and how much help you’ll receive.
 
Create a successful franchise business.Selling or Transferring Your Franchise: How much control does the franchisor exert over selling or transferring your individual franchise business? Doe the franchisor have approval/veto rights over prospective buyers? What percentage of the sale is the franchisor entitled to, and when must it be paid? Basically, this aspect of the contract dictates how, when and under what conditions you can sell the business. It is always wise to have a good exit plan before investing in anything, so know what your rights and obligations are in regard to selling the franchise business.
 
Termination of the Agreement: Under what conditions can the franchisor or the franchisee legally terminate the agreement before its expiration date? Know your legal and financial rights in this area in case the franchisor does not meet the Agreement stipulations, and what financial consequences you’ll face if you fail to live up to your obligations.
 
Death and Other Contingencies: It sounds morbid, but one must plan for unexpected circumstances and the possibility of catastrophic events. If you should die, is your spouse or any other family members entitled to take over the business? If the business is held jointly by yourself and your spouse, are there stipulations about how divorce affects franchise ownership? What are you obligations to rebuild if business is disrupted by a natural catastrophe, and how does this affect any mandatory fees that are normally due?
 
Expansion Options: Does the Agreement include any possibilities for you expanding the business and/or purchasing other franchises so that you own multiple units instead of just one? Though it may seem unthinkable during this stressful phase of obtaining your first franchise, once you’ve got one successful business up and running, you might want to grow beyond a single unit. Find out if that is possible and what it will cost so you don’t run into any surprises if you want to expand.

Territory: Is your franchise an exclusive territory or does the franchisor reserve the right to open other locations nearby? How is your territory determined? Is it by population numbers? Is it drawn up by geographical map, and if so, how detailed is that map?


Some Negotiation Tips

As noted earlier, some franchisors have rigid Franchise Agreements that all their franchisees must sign and adhere to. However, some franchisors may be more flexible about negotiating the terms in the Agreement. But, be careful, since franchises are all about proven systems and consistency, a franchisor that seems too eager to bend the rules may be a sign that further investigation is needed.
 
Items that typically offer room for haggling include:
  • Franchise Agreements and negotiation tips.Territory rules about exclusivity, future expansion or changes in size
  • Grand opening support and resources provided to you
  • The training provided to you and possibly your staff
  • Rules about transferring the franchise to other franchisees
  • Fee schedules and payments
  • “Default cure” which governs how much time you have to correct a problem that keeps your franchise from operating properly before you are in default of the contract and your status as a franchisee owner jeopardized
  • The start-up date when you are expected to launch the business
  • How the price will be calculated for the franchisor to buy your business once you’ve reached the termination date
  • Your liability limits regarding franchise performance
 
Your lawyer and your accountant are the most familiar with your individual situation, so seek their advice about which Franchise Agreement terms you should attempt to alter to make more favorable for you.


19Apr 2019

Start your own business franchise.

 

To succeed as franchise owner, you must be able to follow the rules, and conduct the business according to the book, in this case, the Operations Manual. If you find it hard to follow someone else’s rules, then running a franchise probably will not suit you. You must be happy following an established system, without constantly trying to improve or change it; and be able to promote your franchise with pride, even though you did not invent the business yourself.

 

Knowing yourself sounds like obvious advice, but it entails examining important issues about your business objectives, talents and strengths, finances, family commitments, and even your personal habits, like sleeping pattern and clothing preferences. By knowing yourself, what it is you want to achieve, and the most practical way for you to do it, you’ll eliminate wasting time on researching franchise choices not suited to your temperament and abilities.

 

Consider these questions to honestly evaluate yourself:

 

Your Goals:
Where do you want to be in five years? In ten years?
Do you want to make a full-time commitment, or start out slower?
How important is money vs. job satisfaction?
Are you motivated by personal challenge?

Your Talents, Abilities and Temperament:
What activities (such as sports, technology, decorating, etc.) do you like to do?
Are you better at physical or mental tasks?
Are you good at interacting with people or organizing things?
Are you an outgoing “people person” or more introverted?
Do you have patience for a the long-term process, or are you eager for fast results?
Do you prefer to wear business attire, a uniform, or casual dress?
Do you want to be outside and on the go, or work inside each work day?
Can you accept the discipline of a franchise system?

Demands on Yourself and Family:
What about your physical endurance – can you work long hours on your feet or do you prefer more sedentary work?
What is your preferred work schedule – fixed hours or flexible? Do you want to have your weekends free? Are you a morning or night person?
Is your family supportive of this venture? How will it impact their lives? What are your child care commitments?
Do you want clear separation of your business interests from your home and personal life?
What about leisure time – could you handle sometimes missing social gatherings or school events? Not taking as many vacations (at least for a time)?

 

 

Financial franchise information.

Your Financial Situation:
Do you have the resources to buy a franchise and survive the initial start-up phase until the business turns a profit?
Can you cope with unexpected losses or setbacks?
What is your risk tolerance? How much of your assets are you willing to put on the line?
What is your credit history and can you raise financial backing?

 

 

Recognizing your true abilities, natural preferences, and real limitations is the first step to success in any type of business. By having some clear direction as to your goals, personal commitments, and lifestyle choices, you’ll have a better idea of the most realistic way to achieve your ambitions.

20Mar 2019
Finding the Right Franchise Location-1
 
What they say about real estate also applies to franchises: location, location, location! If your business is not in a place that will draw customers, your business cannot succeed.
 
Find a franchise location.Many franchisors provide guidance with location selection and lease negotiations. This help can be a big boost to finding an optimal site at the right cost. The more help you get from the franchisor in selecting a site and negotiating a lease, the better your chances at success.
 
Inaddition, most franchisors, even if they don’t provide that support, will still reserve the right to approve the location you choose so at least you’ll know you’re on the right track. 
 
In choosing a location, think about who your customers will be and where you will most likely find them. In a mall? Near college campuses? Town centers? Or possibly in off-street specialized venues like airports and other transportation terminals, sports stadiums or convention centers.
 
There are several key factors to consider when choosing a location:
  • Accessibility: Is it easy to find and get to? Is there convenient parking?
  • Traffic: Is there a continual flow of pedestrians nearby? Are the streets laid out for easy automobile access to the site? Is it convenient to public transportation?
  • Visibility: Can the site be easily seen and from how far away?
  • Community: Is this an up-and-coming neighborhood, or one that is regressing?
  • Local Competition: How many other similar businesses are in the neighborhood?
  • Size and Layout: Does it meet the operational requirements of your business? This is where franchisor approval of the site can be most helpful.
  • Condition and Construction: How much remodeling or building will be required, and what will it cost?
 
Other essential criteria for finding the right location are the demographics – not only do you need a concentration of customers, but a pool of prospective employees too.
 
Study what activities typically generate traffic in the area – sporting events, movies theaters, retail shops etc. – and how often, the times of day, and the seasons of the year people frequent the area.  
 
You must also verify if your territory is exclusive in terms of mapping or population density, which will be stated in the FDD and Franchise Agreement. It is important that “encroachment” on your territory be carefully defined in the Agreement. For instance, the franchisor might agree to not open another store within a fixed radius, but may offer branded products in a nearby supermarket. Know you rights regarding exclusivity and what constitutes encroachment on your territory.
 

18Feb 2019

To run a successful franchise, franchisees need to operate from a location that is affordable, spacious enough and in many cases in an area where a large number of people go every day.

Good franchises will provide detailed selection criteria with information covering subjects such as the population of the surrounding area and the age and gender makeup if necessary, how many people visit an a town or city centre or shopping area and the amount of parking available.

With franchises that do not require face-to-face sales in a building, such as accountancy, internet and merchandising franchises, and also home maintenance and services franchises, an office or warehouse is often the best place to work from.

However, others need to sell products to customers either mainly or solely face-to-face, therefore they need to assess the places in their region where are lot of people visit or go past.

Large shopping centers or malls are certainly a place where there is a high amount of foot traffic and can present franchisees with an excellent location. It is likely though those extra charges such as area maintenance, association dues and advertising will have to be paid.

Other options are city or town centre shopping areas or neighborhood shopping complexes in suburb areas which usually contain a supermarket and a few other large retailers.

These can vary in quality and the number of people who visit them so it is important to do extensive market research and obtain, if possible, figures detailing the number of people who shop in these areas.

Wherever the retail location, franchisees need to bear in mind where the retail spaces available are in relation to competitors and what its neighboring stores are as most of them may attract and different target audience to what the franchisee is looking to get.

Once a possible location has been found, most franchisers will want to approve it and as well as how many people could potentially visit it and its cost, the franchiser will take into account the size of the building.

This is because there needs to be enough room for all the equipment and other stock, with ideally room left over if the business is successful and needs more staff and equipment.

The one potential obstacle left if the franchiser approves the building is the lease negotiation, which should involve a real estate broker.

Along with the franchiser and broker, franchisees need to ensure the rent and other costs such as real estate taxes and landlord insurance are reasonable.

In addition, franchisees need to ask if there is any financial aid available from the landlord in the form of free rent allowances and tenant improvement allowances.

19Jan 2019

Franchise Financing – The First Steps-1

Most prospective franchisees must borrow money in order to purchase and start up a franchise operation.But today’s lending environment is tough. With so many lenders affected by the mortgage default debacle now dragging down the US economy, lenders are tightening up on loan approvals.


In order to get a lender to consider a request for a loan, there are two things you must have:  a good credit rating, and a sound business plan. Without these in hand, it is impossible to obtain financing.


Franchise Financing – The First Steps-1First, start with your credit rating. The Fair and Accurate Credit Transactions Act (FACTA), entitles all consumers to receive one free credit report each year. You can obtain your free report from the Annual Credit Report government approved web site.


There are options there for receiving the report online or through the mail. Basically, there are three main Consumer Reporting Agencies (CRAs): Experian, TransUnion, and Equifax, and links to these can be found at the annual credit report site.


If your credit is good then great! If however, you think the credit report is wrong, you do have options to correct it. The FCRA stipulates that both the consumer and reporting agency are responsible for correcting inaccurate or missing information. You must notify the CRA in writing about the information that is inaccurate. The CRA must investigate this information and report back to the consumer. If the information is found to be inaccurate, it must be corrected and other CRAs supplied with the correct information. You are also allowed to inform any potential lender that there is a dispute regarding your credit report. If you require more information you can visit the Federal Trade Commission website which provides relevant information relating to credit reports and FAQ.


If it all sounds like too much paperwork, don’t despair. Though there are legitimate credit improvement services there that handle the dispute. Check out your local phone book or the web. Your best bet is to work with your own lawyer if you need help disputing your credit report.

Once you’ve established a good credit report and this can be simple to do, the next step is writing a business plan. Without a business plan, there is little hope of obtaining any financing.


Much of the information you need to create your business plan – such as operational processes, start-up costs and fees, products and services, marketing strategies and more — should be found in the Universal Franchise Offering Circular/ Franchise Disclosure Document (UFOC/ FDD) supplied by the franchisor company. Some franchisors even supply a business plan template for you to use.


Creating a business plan does require some detailed research and good writing, but it does not have to be an insurmountable difficulty. Most business plans follow a uniform format, and you can find samples of these in books and at web sites. There is a wealth of resources available for you to view at The Business Plan Center including samples plans, plus links to business consultants, business plan software, books and much more.


Basically, all business plans start with an executive summary which describes the franchise, the products and services offered, the target market, the competition, your competitive advantage, and projected revenues and return on investment. Since this is your initial pitch, it should be persuasive as well as concise, probably limited to one page in length.


The core of your business plan then must cover some specific details:
 

  • A business Mission Statement
     
  • business structure of the franchisor company regarding management, history, debt, earnings etc.Franchise Financing – The First Steps-2
     
  • Industry analysis of the sector, be it pizza restaurants or window installation that describes the market share, competition, future growth, and trends in the industry.
     
  • Operational systems for the business, this information can be found in the UFOC/ FDD.
     
  • The marketing plan for your business. Again, the UFOC/ FDD should provide information on what the franchisor provides for marketing support, plus you’ll want to add some of your own original strategies to differentiate your business.
     
  • Business management plan for your company, how are you going to run it on a daily basis? Include your own management experience; and the management structure you intend to put in place.
     
  • Financial information to show how you intend to finance start-up costs (this can include your pursuit of a loan). You need to supply projected earnings forecasts and cost analyses, with a target date to break even on your investment.
     
  • An appendix of additional documents, such as your tax returns, media coverage of the franchise, and any other materials that will support your proposition to buy and profitably operate a franchise.

     

The franchisor you are working with will probably review your plan before you present it, and can give you good advice on how to improve it. It is imperative though that your own lawyer and accountant review the plan too. You can get more information about writing a business plan here at Franchise Direct’s Guide to Buying a Franchise.


With a good credit report and sound business plan in hand, you will be ready to approach lenders and apply for a loan.
 

20Nov 2018
Franchise Funding, Fees and Financial Expectations-1
 
There are a number of start-up and ongoing costs associated with setting up and running a franchise, including:
 
  • The initial franchise fee – this is what you pay the franchisor to use its business sytems and trademarks.
  • Opening fees – these include fees such as training-related expenses, business permits, etc.
  • Capital investment – securing a location and/or equipment in accordance with the franchise package specifications, which could entail hiring contractors for construction and remodeling. You may have to buy start-up inventory. There will be other, not-so-obvious costs too, such as insurance, property taxes, accountant and legal bills, and even zoning fees. 
  • Working capital – the money you’ll need to survive the initial start-up phase, including training, until business revenues begin to grow. You may have to pay employees before the business makes any money.
  • Continuing fees – in the form of royalties, management service fees, advertising and marketing.
 
Investing in  a franchise opportunity.The FDD should includes charts and information about estimated start-up and ongoing costs for your individual franchise. But, how will you pay for all this?  Some franchisors offer a financing package, but most likely it will on the franchisee to fund the franchise.  For many franchisees, this means seeking loans from financial institutions. To secure a financing, prospective franchisees need to present a credible business plan.
 
Although creating a business plan sounds complicated, it doesn’t have to be. Most business plans follow a fairly uniform format, which you can find online or in business books. And after you’ve pulled together all the raw information you need, you can hire a professional writer to polish the content for final presentation. Some franchisors provide help with business plans too, though there are legal liabilities associated with franchisors making any projected earnings claims for inclusion in the business plan.
 
Much of the information needed, such as the company’s management structure, market demographics, day-to-day operational procedures, a marketing plan, start-up and ongoing costs, will be supplied to you by the franchisor in the FDD.  View this page for detailed information on how to create a business plan for your franchise.
21Sep 2018

Today’s 50+ population is reluctant to be “put out to pasture.”  Instead, many people in their 50s and beyond are pursuing their dreams of owning a business when they leave the traditional workforce. And there is no reason that older people driven by the entrepreneurial spirit cannot achieve their dream.

 

Colonel Harland Sanders is an outstanding example. He was in his mid-60s when he devoted himself to expanding the Kentucky Fried Chicken franchise. Ten years later, KFC was a popular fast food restaurant with more than 600 locations throughout the U.S. and Canada.

 

Consider these statistics gathered from a study by the American Association of Retired People (AARP):

  • The percentage rate of self-employed people rises with age.
  • Those who are middle-aged and older make up a large share of all self-employed people, with those over 50 accounting for 40 percent of the self-employed.
  • Approximately one in three of older self-employed individuals made the transition from employee to business owner after the age of 50.
  • People older than 55 are the fastest growing group of self-employed workers.

 

Franchise ownership is considered by many to be an excellent option for retirees for self-employment.  In 2007, CNN Money compiled a list of the best paying retirement jobs, and ranked franchise ownership in the top 20 based on market demand, scheduling flexibility and other preferences expressed by this age group.

 

And franchising has only increased its imprint within this age group.  Statistics show that over 25 percent of franchise owners are over 55.  In fact, between 2007 and 2013 the percentage of people 55 and over who are franchise owners rose from 20 percent to 28 percent—a 40 percent increase, according to Franchise Business Review.

 

For retirees, the advantages of buying a franchise are many:

  • A franchise is a proven commodity with proven systems in place – it’s easier than starting a new business from scratch.
  • Operational support
  • Training provided
  • Advertising and marketing support
  • Brand name recognition

 

Franchise companies are recognizing that older, experienced workers retiring from regular jobs are good candidates for franchise ownership. They have confidence from the wisdom gained over the years in the workforce. They know how to plan ahead and reliably carry through to reach goals. And their experience has refined and sharpened their interpersonal skills.

 

But before rushing into franchise ownership, retirees must carefully consider just what it is they want do in this next phase of their lives. Quality of life should be the first priority, so that factors such as time commitment and physical endurance must be carefully weighed. The financial aspect is another major influence – as one approaches retirement age, it is unwise to “bet the farm” on any one investment. Retirees are better off looking for franchises with lower up-front costs and minimal ongoing overhead.

22Aug 2018

 

As a franchisee, you want to feel secure that your territory and market are protected, and yield the expected returns. The only way to put protections in place regarding your territorial rights is before you sign the Franchise Agreement. Some franchisors do not offer exclusivity rights, and you should know and understand that before making any commitment.


Those franchise agreements that do stipulate exclusive territory rights (which is more typical), often neglect to detail contingencies for ‘what if” situations. And there are several scenarios that can happen that technically don’t violate the contract’s territory clause, but which can severely impinge on your sales and profits.

 

What do you need to look for regarding franchise territory rights in the Franchise Agreement?

1. First of all, verify whether it is an “exclusive” territory and exactly what that means. For instance, does the exclusivity apply to a geographic area, with specific designated borders, such as a county or square mile limit?


Sometimes territories are allocated by demographics based on population numbers, so your territory may be mapped according to a minimum number of households. But neighborhoods change, and so can the population. In the case of a population increase, that could entitle the franchisor to open a competing franchise very close to your “exclusive” territory. Find out what the franchisor will do to protect your customer base.

 

Some franchisors offer “right of first refusal” which gives the existing franchisee the option to take over the new territory before it is offered to anyone else.

 

2.  Another infringement situation might arise through mergers or acquisitions – if your franchisor company is bought by another or acquires a competitor’s brand with franchises in your territory. Newly acquired franchises could be allowed to operate under your franchise brand, and that will siphon off your customers.


Again, your need to have contingency clauses in the Agreement to protect your territory rights in the case of an acquisition or merger. Know how you will be compensated. Sometimes the existing franchisee receives fees from the new competitor. The franchisor may agree to closing newly acquired competitors, or might make a provision to sell the competing location to the existing franchisee at a fair market price.

 

Here are some basic questions to ask, and details to examine regarding territory rights:
  • How is the territory defined and is it exclusive? For instance, is the territory marked by specific geographical borders or perhaps within the confines of one mall?
  • Are you allowed to choose the territory and select the location within that territory? Does the franchisor retain any right to force relocation of your franchise at a later date? If so, under what conditions can this happen?
  • If the territory is exclusive, are you prohibited from soliciting and accepting business from customers outside your designated territory? These situations might arrive for home or delivery types of services.
  • Exclusive territory rights sometimes have minimum sales and fee quotes imposed on the franchisee. Be sure you understand any such requirements because failure to meet those minimum numbers can jeopardize exclusivity rights.
  • Are “first refusal rights” given to the franchisee in case of encroachment through territory change, acquisitions or other circumstances?
  • Find out about the possibility of future re-negotiation regarding the territory. If you contract is for five or ten years, will the territory by susceptible to change at the franchisor’s discretion?
  • Find out what plans the franchisor might have for the areas adjacent to your territory.
  • Get the facts about any past territory disputes between the franchisor and franchisees. Your lawyer should be able to ferret out this information.

 

There is of course homework you should do before getting down to these details. Your due diligence should uncover market potential and expected sales within a territory to confirm that the territory is large enough to meet your financial expectations.


And since prospective franchisees should always talk to those already operating the business, be sure to get their opinions about territory allotments, and the franchisor’s commitment regarding exclusivity rights.


And last, but not least, be sure it’s in writing! Your territory rights and protections must be spelled out in the Franchise Agreement, which your lawyer should thoroughly examine and explain. Prevention is key — reversing a wrong is always more difficult than keeping it from happening in the first place.


Know how your territory is defined, what protections are in place, and how you will be compensated if your rights are breached.

23Jun 2018

Franchises vs. Business Opportunities-1

 

Business opportunities (biz opps) and franchises are two ways to start a business without having to start from scratch, offering prospective business owners a proven system to operate with. While they are similar, and have many overlapping features, they have distinct differences that should be acknowledged before an entrepreneur signs on the dotted line to proceed with either.

 

Business Opportunities
biz_people.jpgA business opportunity is defined as the sale or lease of any product, service, equipment, etc. that will enable the purchaser to begin a business.

 

Business opportunities cover a broad spectrum of careers, and include the following:

  • Turnkey Operations: A business model where a product or service is ready to be sold or provided immediately after the purchase without additional input by the purchaser.
  • Distributorships: An independent agent has the right to sell and market another company’s products to dealers, but cannot use that company’s name as part of their own.
  • Dealers: Similar to distributorships, except the sales are to consumers and retailers.
  • Network/Multi-level Marketing: An agent sells products directly to consumers and recruits others into the program as well. Usually, a commission is paid to the agent on their own sales and the sales of the agents they have recruited into the program.
  • Trademark/Product Licenses: A company grants a licensee the right to use the seller’s trade name along with their methods, products, equipment and/or technology.
  • Rack Jobbers: A company sells their products through store racks that an agent services. The company maintains the racks, and the agent is in control of the inventory and how to display the merchandise. Periodically, the agent will notify the company of what was sold, and the company will send a commission check.
  • Vending Machine Routes: Similar to rack jobbers, except the agent (vendor, in this case) must pay for the machine and the product. The agent also has to service the machines him- or herself.
  • Work from Home Opportunities: A company contracts an agent to do work remotely, most often by computer. Examples include taking surveys from home, selling merchandise on eBay, data entry work, affiliate marketing, and many more.

 

With the purchase of a business opportunity, the buyer owns the business outright and can customize all aspects of the business to their tastes. When a potential business owner contacts a person (or entity) selling a business opportunity, they are contracting with that licenser for a business system including training, equipment or a service method that the licenser has been through the growing pains with and has made profitable. Traditionally, once the purchase is finalized, and training – if applicable – is completed, the relationship is over.

 

Franchises
A franchise is defined as the right or license granted by a company (franchisor) to an individual or group (franchisee) to market its products or services in a specific territory.

 

Three common types of franchises are:

  • Business Format: Probably the most popular form of franchising. The franchisor licenses their brand to a franchisee for use with a predetermined way of conducting business.
  • Product: The franchisor grants the franchisee permission to sell/distribute a product using their logo, trademark and trade name.
  • Manufacturing: The franchisor permits the franchisee to manufacture their products (i.e. food) and sell them using their trademark and name.

Business women shaking hands

 

When the purchase of a franchise is made, the purchaser is required to comply with strict guidelines and rules regarding the operation of the business unlike in a business opportunity. These guidelines are in place to protect others within the system and maintain brand consistency. And unlike most business opportunities, costs paid to the franchisor don’t end with the initial sale. Royalty payments are collected for as long as the franchisee owns their franchise. In exchange for these payments, the franchisee will receive continued support, such as marketing assistance.

 

In acquiring a franchise, the potential franchisee goes through what is traditionally a much more extensive vetting process to complete the deal. In addition to an interview, a potential franchisee will first have to complete an application that details his or her background and work experience to assess how he or she would fit into the franchise’s system, and provides detailed financial information to find out if he or she can sustain the business until it is profitable if necessary. Then, assuming the potential franchisee is deemed a suitable candidate, the franchisor will present a franchise contract that should be gone over with legal counsel before it is agreed to.

 

The franchisor also makes several disclosures upfront. Franchisors are required by the Federal Trade Commission (FTC) to present potential franchisees with a Franchise Disclosure Document (FDD) at least 14 days before a contract is signed. A FDD is a document that outlines the history of the business, all the franchisees in a franchise’s system, turnover rates, terminations, fees, rules, restrictions, and numerous other items pertaining to that particular franchise.

 

Risks of Both
Just because franchises currently have more federal regulation than other business opportunities doesn’t mean that they are without risk. There are several risks to owing a franchise as well. For instance, in the event of a dispute, current laws provide little support or protection to a franchisee from the FTC. There can also be hidden expenses for equipment or materials needed to run the business that aren’t specified or made clear in the FDD that mount up in addition to the largely steep franchise fees, which are non-refundable.

 

Because business opportunities aren’t as closely regulated as franchises, the entrepreneur must personally take precautions to avoid scams. To combat the risks of scams, the FTC has taken steps to aggressively crackdown on businesses that have provided false claims in recent years. They are also working to educate those looking into these business opportunities with a website with tips on spotting a potential fraud, and ways to contact them if you believe you’ve been misled by a company offering bogus business opportunities.

 

Comparison Chart
The following chart further explores the main differences between the two entities.

  Business Opportunity Franchise
Costs Typically less expensive than a franchise, with few requiring royalty payments. Higher upfront costs with required royalty payments to the franchisor. Most often, potential franchisees need to gain financing assistance to pay the upfront costs, which can be quite steep.
Structure Less structured operations allowing for owners to implement the systems that work best for them along with easier customization of the business. Very structured with little to no leeway in deviations allowed from the established business model. This includes items such as daily procedures and quality standards.
Ongoing Support Usually there is little contact between the seller and purchaser of the business opportunity after the business is set up. Any support is usually informal and not based upon a contract. Franchisors typically provide training, marketing support and other items to franchisees as a part of their agreement.
Legal Regulation Varies from state to state. Usually the licensee must provide some sort of disclosure to the purchaser. Franchisors must provide a FDD to the franchisee at least 14 days before any agreement is signed/finalized.

Risk - Cost - Effort

Picking the Right One for You
To sum it up, all franchises are business opportunities, but not all business opportunities are franchises. Figuring out what kind of entrepreneur you are and what you’re looking for is important for deciding which kind of business you should pursue. Both are good for potential business owners that don’t have a unique product or service to bring to the marketplace, but still want to run a business day-to-day. The big differentiator is how much support you want. If you’re simply looking for a jumpstart and desire more flexibility, a business opportunity is probably the route for you. If you’re looking for consistent support, and can handle restriction in the procedures of your business, maybe a franchise is the path for you.

 

Wrap-up
Regardless of whichever one you decide to pursue, here are some tips to help you along the way:

  • Contact the state attorney general’s office for background information on the business
  • Find and contact current and former owners who have been through the process with the business you are seeking to start
  • Recruit experts – lawyer, accountant, realtor (for zoning considerations) – to help ease the burden
  • Read through all documents thoroughly before signing anything

 

No business venture is immune to failure without a sound business plan and a lot of hard work. For these reasons, do extensive research, ask a lot of questions, particularly when it comes to net earnings, temper your expectations, and work hard at making your business a success.