It is a quiet Saturday morning. If you are the average American, the downturn in the economy has started you to think about how it will impact your career and the opportunities for your children as they enter the workforce. Articles about Enron and Tyco and Global Crossing and other corporate scandals abound and some of the most respected brand names internationally are talking about layoffs and bankruptcy.
Surfing the web
you read stories about entrepreneurship and wealth creation by individuals who
grabbed a piece of the "Great American Dream" of individual business
ownership. But you don't know where to start to look for your opportunity.
One-way may be to simply open up
your own independent business - but even here you don't know where to begin.
The simplest way may be to join a growing franchise or business opportunity
network. But you don't know which one is right for you. You are not even sure
of the differences between a biz-op and a franchise and you are not certain you
really need to care.
The investment
opportunities for business ownership that you find on the web today range from
the instantly recognizable fast food and brake and muffler franchises to
businesses which offer you the opportunity to place beverage vending machines
in offices. While on the surface, the messages from the various sites seem
similar; the legal and business relationships being offered are vastly
different.
Business
Opportunity
Business
opportunities are a highly regulated method of business expansion where a
company provides outsiders the opportunity, for a fee, to go into business.
Because of the historic high rate of fraudulent schemes the federal government
and many states have enacted regulations and disclosure requirements that
govern these types of relationships. Unfortunately, the rules regarding
business opportunities can vary between the federal government and the states
and even then they can vary from state to state.
Determining
whether an opportunity is a franchise or a business opportunity can be tricky
and even competent legal counsel will occasionally find it difficult. The
distinction is usually most noticeable in two key areas:
The franchisor
will generally insist on consistency from location to location and that
includes requiring the franchisee to operate their business under their brand
name. Business opportunities are frequently more entrepreneurial and less
structured.
While both may
provide training, the hallmark of franchising is in continual support to its
franchisees -something that most biz ops lack.
There are three
primary types of business opportunities.
Rack Jobber
The purchaser buys
a route enabling them to service the company's clients by restocking those
businesses with the company's products.
Distributorship
The purchaser buys
the rights to sell the company's product within a territory and the territory
may or may not be exclusive. Generally, the local business is not known by the
company's name nor does it use the company's logo in identifying the business.
License
The purchaser
obtains the right for access to proprietary data, marks or technology from
which products or services can then be offered to the public.
The major
advantage of a business opportunity over a franchise is that it offers a buyer
a greater degree of flexibility in conducting their business than does the
typical franchise - and usually at a lower cost of entrance and without the
need to make ongoing royalty payments. It can be a very good method for
home-based, part time or second income businesses.
Its most
significant drawback is that typically the business owner does not receive
significant management systems, training, ongoing support and marketing which
are typical of a franchise relationship. Franchising provides an infrastructure
and ongoing support that business opportunities generally don't.
Depending on the
business opportunity, there may be system-wide savings on the cost of products
and services sold to customers - a standard also with most well developed
franchise systems.
An expression
frequently used in franchising is that "You are in business for yourself
but not by yourself". In most biz ops your business is your own and
ongoing support is generally not something you can count on. However, depending
on your entrepreneurial nature and talents a biz op may be the perfect
opportunity for you to start your new business.
Franchising
Franchising finds
its roots before the Middle Ages. It first appeared commercially in the United
States before the Civil War, likely with Robert Fulton and his licensing of his
steamboats and emerged as a force to be reckoned with in the post World War II
1950's. It boomed in the 60's. It policed itself in the 70's and it matured in
the 80's and 90's. Franchising has become one of the most dominant forces in
the world economy today.
Franchising is
considerably more structured than business opportunities. However, just as with
business opportunities there are variations in the definitions used by the
Federal Trade Commission (FTC) and some states and there are even variations
among the states. The most common definition cited though is the one
promulgated by the FTC which makes the distinction between a simple license and
a license that has crossed the barrier and become a franchise.
- The licensee is given the
right to distribute goods and services that bear the licensor's trademark,
service mark, trade name, advertising or other commercial symbols;
- The licensor exercises
significant control over, or provides the licensee with significant
assistance and, the licensee's method of operations; and
- The licensee is required
to make a payment of $500.00 or more to the licensor or a person
affiliated with the franchisor at any time before or within six months
after the licensee commences business operations.
When these three
elements are in place, the license is generally considered a franchise and the
franchisor must abide by certain rules generally focused on how they offer
their opportunity to the public.
Franchising
describes the system of delivery, not the specific product or services
associated with the delivery as in a business opportunity.
The chief
differences between Business Opportunities and Franchising is in the degree of
the relationship:
Franchising: The
franchisee's business is identified by the franchisor's trademark and
consistency from location to location is usually important to the franchisor.
Business
Opportunities: generally are not identified by the franchisor's
trademark and the trademark if used is generally incidental to the products or
services being offered.
Franchising: Franchisees
generally receive training, marketing and other support on a continual and ongoing
basis from their franchisor.
Business
Opportunities: Other than some initial training, ongoing
training, marketing and other support is usually not provided and is incidental
to the relationship.
Franchising: The
franchisee offers products or services typically on an exclusive or
semi-exclusive basis and operates their business based upon standards of
performance and product line dictated by their franchisor.
Business
Opportunities: Business opportunities typically allow the
business owner to handle a variety of lines since consistency from location to
location is generally not part of the opportunity being offered.
Franchising: The cost of
entering into the franchise fee is typically significantly higher than the
minimum payment of $500. The payment is made for the right to enter into the
relationship and for the use the franchisor's system and trademark.
Business
Opportunities: Under a business opportunity the cost of
entrance usually relates to the purchase of identified products or services
that will be resold and any fee to join the system can be very modest.
Franchising: The
franchisee generally pays a continual royalty to the franchisor, which is often
based on the gross sales from the franchisee's business. The payment allows the
franchisee to continue in the relationship.
Business
Opportunities: If there are any continual payments, they are
usually for the identifiable products or services supplied by the company to
the business owner for resale.
There is a growing
perception today that franchising is a "sure fire" method of
expansion for business and is always a safe investment for franchisees. While
it is true that a properly designed franchise program can be an exceptional
method of expansion ñ that is not always the case. The same is true for local
franchises. Business comes with risk ñ and a well-structured and managed
franchise system can only reduce some of those risks. Franchising can never be
a guarantee of success.
Your decision to
purchase a franchise should be based upon two broad understandings:
1. An understanding of the
advantages and disadvantages of franchising in general.
2. An understanding of a
particular franchise and how to evaluate them.
Advantages of
Franchise Ownership
The benefits of
franchise ownership are only as strong as the franchise you select. Generally
speaking, the benefits can be classified in several broad areas:
Overall
Competitive Benefits
The public has
become accustom to a certain level of quality and consistency from brand name
franchised locations. Whether you believe a company's product is
superior or mediocre, the secret for their success is usually that it is
consistent. The consumer knows the level of quality they will receive in every
location they visit. This brand identification often provides the new
franchisee with an established customer base accustomed to shopping under the
company's brand and that makes it easier to compete with the well-established
independent operators and even against other well-established franchised
competitors.
Pre-Opening Benefits
Franchisors have made mistakes. Another
advantage of franchising is that they have survived their mistakes and can
guide their franchisees not to make the same mistakes. Upon joining an
established franchise system new franchisees generally receive comprehensive
initial training in the operating of the franchise system, its product,
services and methodologies. While the cost of entrance into a franchise system
includes a franchise fee - often cited as a disadvantage - the franchisee
benefits from a host of services including operations manuals, site selection,
store design, construction programs and reduced cost of equipment to name just
a few. Additionally, they have not only their franchisor as a seasoned partner
to ask questions to but the network of other franchisees within the system that
can be of assistance.
In essence, the major stumbling block for
pre-destined failure is removed by the franchisor - lack of preparedness. Most
independent businesses don't fail because their product or services were
inadequate. They fail because they did not anticipate problems. Chief among
these is working capital. Well-developed franchise programs ensure that before
they accept a new franchisee that they have adequate capital, even after
servicing their debt and taking into account seasonally adjusted cash flow.
Without this guidance many independent operators fail soon after opening.
Ongoing Benefits
In exchange for paying an ongoing royalty
and other payments, franchisees generally receive continual training programs
and other ongoing home office and field support and assistance.
Group purchasing power is a major benefit
of well-developed franchise systems. Frequently buying groups established by
the franchisor allow the franchisees to benefit from a lower cost of goods,
equipment, and supplies than that available to independent operators.
Leveraging off the contributions of the
entire franchise system, franchisors are able to create professionally designed
point of sale, advertising, grand opening programs and other marketing
materials that independents could never afford. Franchise programs can also
afford to continue to modernize the system through ongoing research and
development and the test marketing of new products and operating programs.
Franchising is a critical mass business
both with a market and system wide. The spending power of the individual
dollar, combined with their fellow franchisees within their market and the rest
of the system enable franchises not only to dominate local markets and
established independents but also to compete effectively against the
established large chains.
Disadvantages for Franchisees
One of the benefits most often cite for
becoming a franchisee may also be one of its major disadvantages. It is the
loss of independence that is necessary in any good franchise system. By
definition, franchisees are not entrepreneurs. If they were, they would never
buy a franchise. At best, franchisees are "entrepreneur lites". For
the truly entrepreneurial person, franchising is the wrong choice because the
structure of the system requires them to give up considerable independence in
the way they conduct their business.
This loss of independence, if taken to the
excess leads to a further disadvantage of franchising - over-dependence on the
system. Franchising succeeds best when franchisees are at risk and are
motivated by their financial and emotional risk to succeed. Where franchisees
rely totally on the system for their success their over-dependence can also
cause problems. The franchisee therefore must therefore balance the system's
restrictions with their personal ability to manage their own business.
Another strength that is also a weakness
is the expectations of the public when they shop at a branded location. The
principal reason for franchising's success is the public's perception of
quality and consistency throughout a franchise system. Therefore when the
public receives great service at one location the assumption is that the system
has great service in all its locations. This can be a major problem as well
because the reverse is also true. Poorly performing fellow franchisees will
damage your business even when they don't even share your market.
If the hamburger is bad in one location,
the public assumes it is bad throughout the system. If one location makes the
nightly news, all of the other locations under the brand are impacted by that
news ñ both the good and the bad. To protect its franchisees, great franchise
systems are usually the ones that impose the strongest controls necessary to
ensure that standards are met in each location.
Some prospective franchisees have
unrealistic expectations concerning the income they will earn from their
business. If unmet these unmet expectations can cause the franchisee financial
problems and make them regret the investment they made. While unmet expectations
are a weakness inherent in franchising, it is also a weakness of every business
whether franchised or independent. Realism is important in making investment
decisions. In franchising though, if the prospect conducts an independent and
thorough evaluation of the opportunity this risk can be significantly reduced.
Almost every restriction placed on a
franchisee by the franchisor takes away a bit of the franchisee's independence
and therefore can be considered a disadvantage. Some issues such as restrictions
on product and services offered, limitations on territory, the possibility of
termination for failure to follow the system, restrictions on independent
marketing and advertising are a double edge sword - depending on how you
perceive the relationship. However ask any franchisee whose investment has been
put at risk by another franchisee's poor performance if they benefited by the
franchisors ability to terminate the other franchisee. You will likely
understand the importance of selecting a franchise system that has the ability
and the track record of enforcing its standards.
Making Your Franchise or Business Opportunity Selection
Most any business can be offered as a
franchise or business opportunity and many appear the same on the surface. It
is important that you sort out the good from the bad before making your
decision.
The first step in franchise selection is a
personal audit. Make certain that the industry you select is one that meets
your personal needs. If you will be embarrassed to tell your friends that you
own a dry-cleaning business or have a janitorial service, even if they are
highly lucrative, then don't buy one. Personal happiness is important. There
are at least 85 different industries using franchising spanning any number of product
or service related areas. Personally examine your feelings toward each one to
begin to make an industry selection.
Once you have created a short list of
industries you are comfortable with, begin with an examination of the companies
within those industries. Make certain that the industry has legs and is not
just the next fad or worse, a fad that is already passed. Look not only at the
franchised competition in the industry but the established company owned chain
operations as well.
Finally, when you have selected the
industry for you, begin your examinations of the companies. The obvious choice
may be the well-established company with hundreds of franchisees but keep in
mind that many of the newer opportunities have entered the market with innovations
that may not be possible in older systems. Also, older established systems are
less flexible should you want to negotiate any terms while newer systems may be
willing to consider certain points as negotiable.
Here again though is a double-edged sword.
Franchising's strength is its consistency. Should the franchisor be willing to
negotiate with the prospective franchisee on significant issues, they are
likely to do so with others. Their reasons may be based upon their need to sell
you a franchise to meet next week's payroll or to ensure that their franchise
broker won't drop them as a client because they are not flexible enough for the
broker to earn their commission. Remember, brokers only make money when you
make a purchase. Even if these are not the reasons they are willing to
negotiate, another word for flexibility is inconsistency. And inconsistency is
not what you or the public wants from a branded operation like a franchise.
Most franchisor's today have web pages
with tons of information on their companies and their franchise opportunities.
Examine each one thoroughly and contact each franchisor you are interested in
for any additional information they may have available. Fancy graphics is not a
good reason to select a company. You need to understand the philosophy of the
company. Compare their services as well as their fees. Lower fees should be the
least important reason to select a company over another. How are the fees
structured? If franchise fees are high but royalty fees low can you surmise
that the franchisor is more interested in selling their franchises than having
continual revenue to provide you with services? If royalty fees are high, are
the services provided by the franchisor worth the extra percentages?
Your answers will come from two sources,
personal meetings with the franchisor at their headquarters and contact with
their franchisees.
Visit the headquarters of each franchisor
you are seriously interested in. Do not buy a franchise without visiting the
headquarters. Even large established franchisors have problems that can only be
determined from personal visits. Allow the franchisor the opportunity of
introducing you to the system, its services and key personnel. Make certain
that you meet with those individuals who you will be having a long-term
relationship with including the Operations, Training, Marketing and Field
Organization. Ask questions and do not accept superficial answers. What are the
continuing services provided and by whom? How long is the training program, who
conducts it, where is it conducted and what topics are covered? Does the
company have solid marketing? Do they own their trademarks? And - a hundred
other questions you may think of. Remember, the franchisor has been through
this process many times before, it is likely your first time. Come prepared
with your questions written down and ask them. Be satisfied with the answers
and do not be reluctant to probe for further information. Buying your franchise
is likely to be one of the most important business decisions you will ever
make. We have provided a workbook at the end of this article that can be used
as a guide.
Issues of serious interest should include
profitability and return on investment; proven product and service; operating
systems; training; marketing; expansion plans (is the franchisor more
interested in worldwide expansion or individual franchisee success); field
services; research and development; franchisee relations; franchise system
goals and ability to support the goals; and of course the financial health of
the franchisor. At the meeting with the franchisor you will receive, as
mandated by the franchise laws, a copy of the franchise disclosure documents.
If possible, try to obtain a copy in advance of your meeting so you can ask
your questions about the document in person.
Most franchisors do not send out their
disclosure documents before the meeting because they are costly to produce and
franchisors want to explain many of the items in the document in person. Failure
to receive a disclosure document in the mail is not a sign of franchisor
deceit. It is a recognized practice in the industry not to provide a UFOC
before you meet with a prospect. Some franchisors though will provide a copy of
their disclosure document electronically and there are even private companies
and some state agencies that will sell you a copy of the franchisor's UFOC.
The disclosure document will provide you
with a wealth of information that you should have reviewed by your accountant
as well as a qualified franchise attorney.
Many prospective franchisees unfortunately
rely upon their local lawyers for advice on franchising matters. Franchising is
a complicated and somewhat unique branch of the law and requires you to work
with lawyers that practice in this area. A good source for locating a qualified
franchise attorney is through this web site or through the International
Franchise Association at http://www.franchise.org or
your local bar association.
Today, in increasing frequency you may
find yourself working with a franchise broker or a company that represents that
they are your coach, even when their fees are paid by the franchisor. Since
brokers are paid by the franchisors to get you to buy one of their franchises,
they are the franchisor's agent and not your advisor. Care should be taken when
working with any brokerage therefore since they only make money when you buy a
franchise from one of their clients - and from no other franchise opportunity.
If you need an advisor, hire and pay for your own counsel. This is likely to be
the most important investment you will ever make ñ take care.
The UFOC contains a host of information
including the experience of the franchisor and its staff in the business being
franchised; the system's litigation and bankruptcy history; the cost of opening
a franchise as well as the initial and continual fees; an explanation of the
relationship and responsibilities of the franchisor and franchisee together
with financial information on the franchisor; the number of franchises opened,
closed and most importantly, a list of existing franchisees. Start with the A's
and proceed toward the Z's and call enough franchisees until you are satisfied
that you have adequate information to make an educated decision. Visit as many
of the franchisees as possible. This is a time consuming process, but after
all, it is only you and your family's financial life. If you can find a
franchisee willing to let you work in their location ñ most franchisors will
support that decision because it enables you to truly understand if you are
going to like becoming a franchisee.
The one piece of critical information that
you may expect to find in the disclosure document may not be there - an
earnings claim or any projection of franchisee profitability. For a host of
supportable reasons the majority of franchisors do not include this
information. It is therefore critical that you base your financial assumptions
on available information, information available from articles about the company
and discussions with franchisees. Ask the franchisees you speak with about
their financial performance and don't forget to check public filings for any
franchisor that is a public company.
Franchising or Business Opportunity - The
Choice
There is a difference between a franchise
and a business opportunity and each has its merits and its potential pitfalls.
Keep in mind that the salesman has been selling for a long time and is
experienced in their craft. Their job is to get you excited about the opportunity
and have you make a decision to buy from them sooner than later. It is likely
your first time making your own franchise decision.
Suppress your emotions and base your
decision on the facts and what will benefit you both personally and
financially. Seek out independent advice. Read articles and books on the
subject. There is a tremendous amount of information on the web that you can
easily access for free.
I should also
point out that Franchising for Dummies, a book I wrote with Dave Thomas the founder
of Wendy's is available in most bookstores and on line and may be a very
worthwhile tool for you to have. (Dave and I donated our proceeds to the Dave
Thomas Adoption Foundation so in addition to learning quite a bit about
franchising, you will be helping a wonderful organization do great things.)
Franchising for Dummies will provide you with an understanding of franchising
and give you a step by step approach to selecting the right franchise for you.
Good luck in
finding your own Great American Dream.
Michael Seid is
founder and managing director of MSA, one of the world's leading franchise
consulting firms www.msaworldwide.com. In addition to
being the co-author of Franchising for Dummies, Michael is a member of the
board of the International Franchise Association and is the first and only
professional service advisor ever elected to the IFA's board directly in the
association's history. He is a noted author and lecturer and is an advisor to
some of the nation's largest and many of its smallest franchise systems.
By: Michael H. Seid, founder and managing director of
MSA - Michael H. Seid & Associates
Reference: Franchising.com
