Is Franchising for You?

It seems that a new McDonald's or Dunkin' Donuts is opening up on every street corner. Fast food franchises are not the only ones becoming ubiquitous - Great Clips (hair salon franchise), Jani-King (commercial cleaning services) and the eponymous Novus Windshield Repair are also among the nation's top 20 fastest growing franchises. As of 1995, there were over 540,000 franchises in the United States, generating over $758 billion in total sales. So why are all these franchisees dishing up donuts, cutting hair and fixing windshields?

Franchising is basically the commercial expression of that old saying, "Why reinvent the wheel?" Instead of risking one's money and time on an untested idea, a person can start his/her own business with the support and resources of a large and established organization. The franchisee can sell goods or services supplied by the franchisor or goods or services that meet the franchisor's quality standards. The franchisor supplies the business expertise, in the form of marketing plans, management guidance, financing assistance, site location and training.

Women Franchisees. So why is the percentage of women franchise owners actually declining? While women are starting businesses nationally at twice the rate of men, studies show that this is not the case in franchising (See Chart 1). In the same vein, while minorities are increasing the percentage of business ownership today at record pace, they are actually losing ground when it comes to franchise ownership (See Chart 2).

Do you have a franchise personality? As with any business, a prospective entrepreneur should first assess her reasons for going into business. A future franchisee should be able to say a resounding yes to the following questions about her personal characteristics and conditions:

  • Are you bored of your 9-5 daily work routine and being someone's employee?
  • Do you have leadership qualities and do you like to make your own decisions?
  • Can you see yourself listening to managerial suggestions, and sometimes, directives from a franchisor?
  • Are you willing to work 12-16 hours a day, six days a week and probably Sundays and holidays?
  • Are you prepared to invest and possibly lose your savings?
  • Is your family supportive of your decision to become a franchisee?

Ideally, a future franchisee should have at least some experience in working in a business and/or in a managerial or supervisory capacity. A manager with experience hiring and firing people will not have to face human resources issues for the first time in a franchise context. A person who has taken a business course or two will be more familiar with financial management. However, typical working experience at a company is not a prerequisite to franchising success. A person who's managed or worked at a small coffee shop may be well prepared to purchase a fast-food franchise.

After you are certain that your reasons for buying a franchise are realistic, and that you have the financial and emotional ability to do so, you should be doing your research about the industry. A prospective franchisee should meet with an attorney, an accountant and current franchisees. There are several excellent franchise associations that assist franchisees. For women who need assistance in obtaining contacts and inside knowledge about the franchise industry, contact Women In Franchising, 53 West Jackson Boulevard, Suite 205, Chicago, Il 60604 Tel: 312/431-1467; Fax: 312/431-1469. The following resources are suggested:

  • Franchise Opportunities Handbook (published by the U.S. Department of Commerce)
  • The International Franchise Association, 13350 New York Avenue, NW Suite 900, Washington, D.C. 2005-4709 (they publish Franchise Opportunities Guide)
  • The Franchise Annual (published by Info Press, 728 Center Street, P.O.B.550, Lewiston, New York 14092, (716) 754-4669
  • Entrepreneur magazine's annual Franchise issue
  • The prospectus and disclosure statement offered by the franchisor, with special attention to the section, "Risk Factors"
  • In some states (including New York), the section of the prospectus that lists the names and addresses of franchisees who have dropped out of the system within the last year (call them)
  • Better Business Bureau
  • Your local chamber of commerce
  • U.S. Small Business Administration
  • Federal Trade Commission

Do your homework and find out about the Franchisor! Before you decide to enter into a relationship with the franchisor, you should be aware of their legal responsibilities to you:

  • Fourteen states, including New York, have franchise disclosure or registration laws that require the franchisor to prepare documents for submission to state authorities.
  • You are entitled to a disclosure document, including financial statements, before you make a purchase, no matter what state you are located in.
  • You should be given a copy of the Uniform Franchise Offering Circular (UFCO) at least ten days before you make a purchase. The UFCO will contain estimates of all initial start-up costs.
  • The franchisor must provide one week of training for you and your manager in one of the parent stores, an operational manual, guidelines on audits and assignment procedures and ongoing support and assistance

What may differentiate a superior franchisor may be the additional obligations they take on, those not required by the law. The better franchisor may provide a marketing plan, promotional materials and area site selection assistance. You may be able to obtain insurance coverage, including fire, inventory, burglary and workmen's compensation from the franchisor. Some franchisors, such as Southland Corporation's 7-Eleven, offer a "test-drive" period of 180 days in some states. A 7-Eleven franchisee may terminate the franchise relationship during the first 6 months of operation and receive a refund of the franchise fee and her investment. The franchisor, on the other hand, does not have a termination option with respect to its commitment to the franchisee.

Prospective franchisees located in New York State who think they've been misled or defrauded by a franchisor should forward a complaint to the Franchising Section of the New York State Attorney General's Office, Investor Protection and Securities Bureau, 120 Broadway, New York, New York 10271.

Where should the franchise be located? Unconventional site locations are currently a national trend. That means, instead of Burger King near the town square or on a fast food strip, there might be a Mail Boxes Etc. in the Jacob Javits Center, a California Burrito in Madison Square Garden or Mad Science (an early science education franchise) inside of a public school. In the case of Blimpie, it means that Delta airline passengers are eating Blimpie sandwiches instead of your typical tray of airplane food. Thinking creatively about location could make the difference between a successful franchise and an empty store.

Watch our for those legal issues! Your attorney should be raising the following common sticking points in the franchise contract:

  • Hold harmless clause may require that you release the franchisor from specific acts or violations of state laws.
  • An integration clause may prevent you from successfully suing for any deceptions preceding the signing of the contract
  • Choice of venue or choice of law provisions are especially important if the franchisor headquarters are in a state different from yours. These clauses may require you to settle all disputed claims in your franchisor's state of residence, thereby forc ing you to settle your claim under laws favorable to the franchisor.
  • Extra criteria required by the franchisor approving an assignment of your ownership rights. If you want to eventually sell your franchise, these criteria may prove to be too onerous to most of your prospective buyers.

What about financing? You could be on the hook for less than $50,000 for a temp agency franchise or over half a million for a fast-food franchise. In addition to the conventional sources of financing, such as savings, family, insurance loans, commercial bank loans and government sources, you might consider the franchisors that offer direct financing. There are many different types of financing programs among franchisors. Subway will finance equipment, 7-Eleven will finance the franchise fee and inventory, and Papa John's Pizza will finance start-up costs. Borrowing directly from a franchisor eliminates one step from the typical borrowing process, i.e. convincing the lender that the franchisor is worth the risk.

Consider buying an existing franchise! The most important element of this decision is why the franchisee wants to sell. Your due diligence is just as important for this type of transaction as it is for a new sale. Additionally, you should be confirming that the franchisor will consent to such a transfer, and not exercise a right of first refusal it may have pursuant to the original franchise agreement. Remember that it might be tough to meet those extra criteria contained in the original franchisee's franchise agreement that kick in when the original franchisee is assigning ownership rights.

Franchising can be a lucrative way to own and run a business. As with any business project, due diligence and hard work are essential for a successful venture. Perhaps more so in the case of a franchise purchase, it is imperative to know the seller, i.e., the franchisor. Unlike other business sales, the purchaser is not simply buying a business to run by herself after the closing. The buyer is also entering into a permanent business relationship through the ongoing sale of the franchised goods and services.

Chart 1

Women's Status in Franchising

  Total Female Female/Male Male Other
1987 Survey of 137 Franchising Companies
Outlets 100% 10.9% 20.0% 60.6% 8.5%
  18,868 2,056 3,773 11,434 1,605
1990 Survey of 260 Franchising Companies
Outlets 100% 11.12% 23.95% 60.21% 4.72%
  34,407 3,826 8,242 20,715 1,624
1994 Survey of 242 Franchising Companies
Outlets 100% 9.72% 20.43% 60.81% 9.04%
  42,552 4,134 8,695 25,875 3,848

Source: 1987, 1990 and 1994 Surveys conducted by Women in Franchising, Inc.

Chart 2

Minorities' Status in Franchising

  Total Black Hispanic Native Amer. Asian/PI
1992 Survey of 392 Franchising Companies
Outlets 100% 3.47% 2.32% 0.13% 5.88%
  60,342 2,095 1,400 80 3,548
1993 Survey of 371 Franchising Companies
Outlets 100% 2.56% 2.16% 0.15% 5.40%
  61,343 1,572 1,323 95 3,313

Source: 1993 MBDA Franchise Profiles Survey conducted by Women in Franchising, Inc.







 



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