How To Make The Game Winning Shot In Franchising (Part 1)
By Pam Price, CFE
The final minute in a basketball game can be the most exhilarating or the most excruciating and most definitely the longest minute of your life whether you are a player or a fan. Inevitably it often ends with the buzzer shot or back-to-back three-pointers. Although these shots are great crowd pleasers, most games are won and lost by players executing the fundamentals and plays they have learned from their coach and practiced time and time again.
Owning and operating a franchise business can be both lucrative and rewarding, if, like in basketball, the fundamentals are followed and you have a good coach with a proven playbook. Successful executives, entrepreneurs, athletes and entertainers often desire to diversify their holdings and establish an on-going income stream for now and the future. Likewise, entrepreneurs wish to leverage Brand value by franchising their successful concepts as a means of channeling their growth.
Source: IHS Global Insight Third Quarter Franchise Forecast for 2013
According to the International Franchise Association (IFA) study for the 2013 Franchise Business Economic Outlook, there were over 746,000 franchise establishments in the United States in 2012, accounting for 8.1 million jobs. With the vast number of franchise concepts currently in existence, the size of the individual businesses varies greatly. A given franchise system can be comprised of a single franchise unit or it can consist of thousands, with Quick Service Restaurants representing the top industry with 37%, Table / Full Service Restaurants following with 13% and Business Services a close third at 11%.
Franchising is intended to provide a repeatable, consistent model for the growth and operation of a business, while leveraging the franchisee’s capital to fund expansion. As a business concern, the concept of franchising has proven its merit as a viable way to own a successful business. According to the Small Business Administration (SBA), roughly 30% of non-franchise businesses fail within the first year, but that number falls to 5% when discussing franchises.
So, what are some of the advantages and disadvantages to becoming a franchisee? To the Advantage, you have an established product or service, you receive technical and managerial assistance, quality control standards are in place, you have brand awareness and marketing which usually equates to accelerated growth of your business.
Some of the Disadvantages are that you have restrictions on how you can operate your business, the performance of other franchisees or the franchisor can affect your business, the contract can be terminated and monthly or quarterly royalty and advertising fees are taken from gross sales.
Before entering into any franchise agreement, it is important to choose the brand that’s right for you. You could choose a brand because of the region you live or play in, you could choose a brand which has a cause or purpose that you are passionate about, maybe you know other franchisees or friends that have been successful with franchising that brand or maybe it is purely based on unit economics. Whatever the reason, choose the brand that you feel you could dedicate your time, resources and passion to. Whether you are a passive investor with an operating partner or you plan to be actively involved in the day-to-day operations, know your brand!
An important step in making an informed decision about purchasing a franchise is to know the responsibilities the franchisor is legally obligated to fulfill. And while buying a franchise means obtaining a complete system of doing business, there is no guarantee for success. According to Steve Strauss, attorney and author of the “The Small Business Bible”, the top five reasons that franchisees fail is bad systems, bad locations, inadequate advertising and marketing, too much competition and inadequate start-up capital. Learn as much as you can about the franchise and the franchisor’s obligations, systems and support before entering a purchase agreement, or even before meeting with the franchisor or their representative to discuss the possibility of purchasing a franchise. It is also wise to work with a proven real estate professional, who knows their specific market, to find the right locations taking into account trade areas, traffic patterns, household counts within a given radius and competitive data.
Fourteen states have franchise disclosures or registration laws that require the franchisor to prepare documents for submission to state authorities. The Federal Trade Commission (FTC) requires in all states that a disclosure document, as well as financial statements, be given to franchisees before purchasing the franchise. This document is called the FDD or Federal Disclosure Document. Legally, it must be furnished to a prospective franchisee upon first meeting or within either two weeks or 10 business days, prior to the signing of any documents, depending on the state. Make sure you or your council understand what’s contained in the FDD, which includes a non-specific copy of the Franchise Agreement, as that will become your binding contract with the franchisor.
So, now that we’ve chosen the team that we think can take us to the Playoffs, we’ve read the playbook and feel confident about the potential of our team and it’s leadership and we’ve signed our contract, all that’s left to do is to listen to the coach, follow the play book and stay dedicated and focused on the end result, which for a franchisee, is growing a successful business and making money!
In the next edition, we’ll take your through the steps from the signing of the Franchise Agreement to the opening of your first location!