FINANCIAL SECURITY THROUGH FRANCHISE OWNERSHIP

by Jim Deitz, The Franchise Doctor

"THE SECRET OF SUCCESS IN LIFE IS TO BE READY FOR OPPORTUNITY WHEN IT COMES" ...Benjamin Disraeli

Congratulations!! You've taken an important step toward making your life more successful when you requested details on franchise ownership. Evaluating the pros and cons of owning your own business is an exciting beginning--bringing thoughts of a new dawn for your financial independence and career satisfaction. I hope this presentation will be an important step toward helping you choose the right venture.

Thanks for taking the time to review this information on Franchising as a vehicle for gaining wealth and independence. As the president of Andover Franchising, Inc, a consulting and franchise sales company in Atlanta, I help companies expand through franchising. My company assists in designing the franchise structure, the documentation, training manuals and we often conclude by selling franchises for companies that offer something unique to their licensees. Additionally, we broker existing franchised businesses when the owner seeks to change his or her career path.

As an aid to those considering franchise opportunities, we've produced a seminar that is offered at several Universities. This booklet is an outgrowth of that material. I think this information should help you evaluate your interest in franchising from the comfort of your home. Many report an improved understanding of franchising arose from their reading and they were able to proceed toward their goals more confidently.

During my career, I've witnessed many intelligent businessmen with great business concepts fail in their ventures. Often a small "piece of the puzzle" was all that was lacking. At the same time, I've seen those with lesser skills and experience succeed in earning above-average incomes at the helm of a franchised business. In the following pages, I'll explore with you the advantages and disadvantages of franchising and I think you'll agree that first-time entrepreneurs should buy a franchise.

"The key to happiness is having dreams... The key to success is making dreams come true."

What is a Franchise?

As we begin, let's establish a definition of a "Franchise." The International Franchise Association suggests that when one party (usually a corporation) allows another (again, often a corporation) to use its name, logo, and system of business to generate sales and profits, a franchise arises. One of the earliest franchisors was the Singer Sewing Machine Company, which set up dealers shortly after the Civil War to sell and repair its revolutionary machines throughout the country. Shortly after the turn of the century, Coca-Cola licensed others to manufacture and distribute its wonderful elixir. Ford Motor Company later set up dealers to sell and service its products. Of course, McDonald's is an example of how an entrepreneur (Ray Kroc) could take an idea and quickly spread it coast to coast (and eventually around the world) without starting out with millions of dollars in capital. Many companies turn to franchising as a system for expansion because they recognize that they can expand rapidly with a minimum amount of capital and enlist top-notch partners if the company is willing to share the profits. The company that sells licenses to its system is called the franchisor, while those who open their own units are called franchisees.

"Call on others for support and advice. When we combine forces, we multiply our chances of success."

What Must I Invest?

Today you can become a franchisee for as little as $500 or easily invest millions to open a major restaurant or hotel franchise for one of the major marques. Franchisors provide initial training in their system of doing business and start-up assistance upon receipt of your initial licensing fee. This usually ranges from $10 to $25,000. Many observers of the business scene agree that being allowed to use a successful company's business plan is worth $100,000 or more. Because the franchisors wish to keep their initial fees low, additional revenue is generated by charging monthly royalties---usually a percentage of sales. These typically vary from 4% to 10% depending on the industry and the involvement of the franchisor. Many companies spend huge sums on national and regional advertising and collect an additional 2 or 3% of revenues from their franchisees to support this program. The franchisee also invests additional funds in equipment, leasehold improvements, inventory, supplies, and staffing to begin the business.

While many budding entrepreneurs resist the licensing fees and royalties as unnecessary expenses, statistics show that franchisees fail less often than independents. The strength of a franchise is its "road map" that explains the true job description of the owner, the costs of getting started, the training in every detail that must be addressed for the company to succeed and the discounts available when purchasing equipment and inventory. A franchisor doesn't want a failure on its hands and typically rejects those who aren't deemed sufficiently capitalized or qualified to run a profitable unit.

While the size of your investment may be frightening, you should remember:

"Opportunity always involves some risk.

You can't steal second base and keep your foot on first."

Let's proceed with our analysis of how you can gain FINANCIAL SECURITY THROUGH FRANCHISE OWNERSHIP.


The Benefits are Many...

1. Earn what you're worth Thousands of franchise owners report they were handicapped in their corporate careers by company policies and supervisors that put a cap on their earnings. When you own your own company, your efforts are rewarded and your personal income shows it!!

2. Build an equity Financial strength comes to those who succeed in running a business. A recent survey indicated approximately 75% of all millionaires in the U.S. own their own business. If great wealth is one of your goals, entrepreneurship is the answer.

3. Satisfaction of achievement Many business owners report that seeing their actions turned into reality without stagnating for months in committee meetings (as often happens in big companies) is a major reward of owning their business.

4. Gain tax bonus (perks) The Internal Revenue Service tax code rewards small business owners. While company employees buy most things in after-tax dollars, many entrepreneurs can write off expenses for major purchases such as automobiles, insurance, and travel, as well as paying their spouses and children for doing part-time work.

5. Choose your own job description When you're the owner, you can delegate certain aspects of the business to others and create a job description that suits your personality, skills and interests. Naturally, the industry you choose and the size of your operation will affect your flexibility in this area.

6. Control your future Business owners live the scripture "You reap what you sow." You can budget your work schedule against family needs and recreation--if you're willing to share some profits with additional employees.

7. Never transferred, laid off or fired Major companies are notorious for relocating their employees and downsizing their staffs at the most inopportune times! When you run your company, you'll decide when and where to operate.

8. Why a franchise?? There are many reasons why franchising is the best venue for the majority of first-time business owners. Most revolve around the increased probability that the business will succeed and provide profits to the owner in a shorter time frame than an independent business. This allows the owner to address her/his personal goals both financially and personally. See the graph on this page.

9. Lower costs than an existing businessWhen buying an existing company, you will usually pay the seller 2.5 to 3.5 times its earnings. Starting a franchise is almost always less expensive.

10. Less risk than an independent start-upNapoleon Hill, in his classic book "Think & Grow Rich" suggests that one spend 3 to 5 years as an apprentice in an industry before considering owning a venture in that field. Buying a franchise eliminates this need and puts you on the road to success quickly.

11. Gain advice on site selection, unit design, operations, capitalization and marketing A good franchisor provides instruction and support on ALL aspects of running a business in its industry. It's as though you are hired and trained to open a branch for a major national company--Except that you OWN the "branch".

12. Receive a proven, profitable system for doing business When you've had a chance to talk to other franchisees, you'll recognize how important it is to have a system to follow for your venture. This plan is easily worth $100,000 or more. Luckily, franchisors typically charge 12 to 25,000 dollars for an initial fee (similar to a down payment) and then accept a percentage of sales as an ongoing royalty for the use of their name and business system. These are good investments in return for the improved probability of success; the quicker sales growth curve; the research and development of future products and services offered by the franchisor; and the business plan.

 

13. Benefit from quality research & developmentMost small business owners are just too busy making money to research the future trends in the industry and develop new products or services to meet the needs of their customers. A franchisor will always be searching for ways to make its network more successful.

14. Gain access to trained support personnel Your royalties and advertising fees provide regular improvements in the franchisor's systems and these are provided to you for implementation in your venture.

Does Franchising Make A Difference??
Many first time entrepreneurs feel that the added
expense of franchise licensing fees and royalties
will cut into their profits and make the business
less attractive than if they were independent.
The chart above attempts to show the impact
a good franchise has on sales and profits.
Sales grow more rapidly because of a proven
marketing plan, advertising programs that work,
and help in choosing the right site for the venture.
The franchisor's training keeps the neophyte from
going down many "dark alleys" that consume cash,
time and energy. In addition, you gain name recog-
nition and discounts on equipment, inventory and
supplies---all adding to your bottom line. If you
don't have at lease five years' experience managing
a business like that which you plan to open, a quality franchisor will be worth its weight in gold!
15. Quicker start-up than independentsA proven plan outpaces an independent's hit & miss operation almost every time. Looking at just independents that succeed--you'll find that franchises grow quicker, reach break-even sooner and succeed more regularly than others in the same industry as depicted in the chart on the left.











Well, you can tell I'm sold on franchising, but what about those who own a franchise??...

A recent Gallup poll of 994 franchise owners: produced the following snapshot of the field:

94% considered their franchises successful. (How many employees would say their companies were succeeding?)

75% said they'd "do it all again". (Most employees seem dissatisfied with their work, pay and prospects for advancement.)

6% reported unhappiness with their franchisor (No industry is perfect, but the media's reporting of unfairness seems overrated.)

The average pre-tax income was $124,290. (Well above average salaries for any industry I've found!!)

These poll results arise from one fact---Franchising Works!!

Total Gross Sales through Franchised businesses exceed $800 BILLION! That's 35% of all U.S. retail sales & services!!

There are over 8 Million workers employed in 100 franchised industries.

A NEW FRANCHISE OPENS EVERY 8 MINUTES OF EACH BUSINESS DAY

A total of over 20,000 new franchises opened in '93. In addition, studies prove that franchises survive! Government studies show that 77% of independent businesses close their doors within 5 years of opening.

Only 8% of franchises close in the same time period. That's only 10% the failure rate of independents!!

YOU, INC

Whatever venture you choose, and however you name it... As president, you call the shots... Your success or failure will depend, in large part, upon how well you follow the franchisor's plan.

Finding the right franchise for you is a critical task. I suggest you look for the proper ingredients that will flourish under your guidance. If you have questions, ask the franchisor what traits their most successful franchisees possess. You may want to take a personality skills assessment test to focus on your strengths. Some of the personal traits that are most critical to your future: self-confidence, being a self-starter; possessing the ability to delegate and being persistent.

Don't plan a lifetime---just 5 to 7 years. If this is your first venture, look for an attractive niche that can provide the earnings you desire for the next few years. During that period of time, you will be learning and applying the skills needed to be successful in your own venture. Later, you may be attracted by another industry and you can hire others to run your franchise or sell it at a nice profit!

BUILDING VALUE IN YOUR FRANCHISE

Each year your business builds equity. As sales and earnings grow, so does the net worth. There are always others wishing they owned their own business and could draw regular paychecks. Cashing in occurs when you decide to sell. Franchises typically sell for 2.5 to 3.5 times "discretionary income." This is computed by reviewing your profit & loss statement and adding pretax profits, owner's salary, perks, depreciation, and amortization. In essence, you're determining how much money the owner has at his/her disposal to spend each year after paying all mandatory expenses. As a buyer, you should compare this to your current annual salary (before taxes) to gauge the lifestyle you'd enjoy if you owned the company. By your third or fourth year, your business will probably be worth 3 to 5 times what you have invested in it, if it is a service business, somewhat less if inventory, equipment and leasehold improvements are significant.


CHOOSING YOUR FRANCHISE

There are Four main ingredients found in each business...

1. The product or service that is delivered to its customers.

2. The location that the business occupies.

3. The amount of capital that was invested or borrowed by the venture.

4. The management team that runs the company--You!


A QUALITY FRANCHISE PROVIDES HELP IN ALL FOUR ARENAS

1. The franchisor has proven the need for the product or service. The existing units are already addressing that need. The franchisor has developed a specific business plan showing how to market to its customer base, how to price, sell and deliver the product or service too! There will be training on hiring and training employees to help run the company; guidance on pay schedules and benefits; and details (often computer software) to help manage your money.

2. The franchisor helps with professional site selection. This is critical for site-specific businesses as is the demographic survey that confirms that your territory contains enough target customers.

3. The franchisor provides budgets that work & cost-control systems. You will know when you begin, if you have enough money to get started. Buying power will keep costs down and following the prepared plan will help you reach profitability in short order.

4. The home office's training and on-going assistance keeps you on track, working the system that increases your probability of success.

Always remember your franchisor has helped many others succeed in this industry. You've paid them for their expertise and advice---now Follow It!!

METHODS OF FINANCING A FRANCHISE PURCHASE...

Personal savings is your best bet, since there is no debt to be repaid.

Other sources include borrowing on your home, stocks, credit cards, etc. These will increase your costs, since you'll owe interest, but they offer a quick response and are commonly used to finance ventures.

Loans or investments from family & friends is another option. If they believe in you, they may be willing to help you improve yourself financially. I'd suggest you draw up loan documents and treat these parties as you would your banker.

Banks, & the SBA are sources of millions of dollars annually. Usually the toughest to borrow from, these sources are the last resort. Most will loan a minimum of $50,000 and demand full collateralization. If one spouse is keeping their job, that will help. A new "Low Doc" program is just being introduced by the SBA in the Spring of 1995. Check with your banker for details.

Strengthen your personal financial house Now is an excellent time to begin preparing for your step into entrepreneurship. Before leaving your current job:

1. Refinance your residence

2. Trade cars, boats, etc.

3. Increase your credit card limits

4. Get liquid!!

Bankers and finance companies are very difficult to deal with when you've just opened a new business. Before you quit your job, take the steps listed above and forget to mention your plans for owning a business. Bankers (who are conservative anyway) always expect the worse, and like to see a 3 to 5 year work history before they loan money to small business owners.

MAKING A CHOICE

Choosing the right franchise can be a confusing process.

First, you must believe in the product or service that the franchise network delivers. Is the niche stable, expanding, long-term, saturated??

Next you must verify the industry's future. What do the trade papers predict?

Check your aptitude for the job. If you don't enjoy math, an accounting franchise isn't for you, etc. Often outside sources can help here. A personality and aptitude test (similar to those used by major corporations) will help you discover your hidden talents.

Determine the earnings capability. Most franchisors can't provide earnings projections, but you must make an effort to determine your future return.

Confirm the potential earnings and the franchisor's integrity with existing franchisees. Each franchisor will give you a list of its network members. You should call them to get their confirmation of your projections. If a franchisor (or business opportunity seller) will not give you a list of its franchisees, you should heed the red flashing lights and end discussions.

LOOKING FOR GOLD

Creating pro-forma income statements is not a complicated process... A - B = C

A First you project Gross Sales for the year. B Then you estimate all Expenses for the same period

A minus B equals Cash Flow $$. This is the pool of funds you'll have to pay yourself, repay debt and invest in growing your venture.

The worksheet on the next page will help you develop your Income Statements. First project gross sales. What is the average sale? How many units will you sell per hour, per week, per year? Multiply the two for Annual Gross Sales.

Determine cost of Goods Sold. What is your cost for the materials sold? Often this can be determined by an industry average. Gross Profit is the difference between Sales and Cost of Goods Sold.

Next you must subtract each expense category: Employees' Payroll & Taxes; Rent; Utilities; Advertising; Insurance; Royalties; Supplies; Accounting & Legal Fees; Repairs & Maintenance; Equipment Replacement Fund; and any Miscellaneous Expenses. Note, this is before your salary and any perks you give yourself, such as a company car, etc.

The balance is Net Cash Flow. Again, this should be compared to your gross salary on your current job.

THE FRANCHISE BUYING PROCESS

Research the industry, review the franchisor's brochures and evaluate your interest in participating in the industry. Determine what will be your personal job description. Are you sure you're suited to that type of work, 40, 50 or 60 hours per week?

Submit an application, or Qualification Sheet. Most franchisors want to understand your interests better before they advance much further. While this doesn't bind either party, it will prove your desire to be evaluated for franchise ownership.

Review disclosure documents. The government asks each franchisor to prepare these documents (usually 50+ pages) so that you can get a complete understanding of the offering.

Develop questions for the franchisor. The marketing representative will be happy to share additional information with you to help you reach the right decision.

Call or visit existing franchisees. These owners were on the same path you're now walking a year or two ago. Most will be very helpful in discussing the viability of their industry and the franchisor. See the list of questions in the next section. Note that they start with generalities and become more specific after you develop rapport.

Meet the franchisor. Most feel best with a face to face meeting with the decision makers of the franchisor. Evaluate their sincerity. You're not going to marry them--but it is mighty close. Ask them pointed questions about franchisees that failed. Could you join that group? Does the management team respect all the members of the network--or just the superstars?

Choose a potential site. You may want to explore sites that seem suitable for your venture, understanding that most franchisors will have the right to OK or disapprove your choice before a lease is signed. If site is critical to your success, be sure to obtain demographic studies and compare these with outstanding existing franchisees.

Execute the franchise agreement. Two weeks must elapse between the date you receive your disclosure documents and signing the Franchise License. Don't let anyone rush you--but begin making critical decisions in a timely manner--a critical skill for an entrepreneur.

Attend training. The franchisor's school will be your next step in joining the network. Go rested, with an open mind. Absorb and make the commitment to follow their plan--You paid for it, now, use it!

Grand opening When you return home, you'll be set to equip your operation, hire and train your staff and open for business. At this point your future is growing brighter because the person with the most to gain--you--is finally in charge of your success!!


Here are some additional thoughts added as reference topics to help you be prepared in evaluating different franchising organizations.

Advisors. Talking with others as you decide which franchise is right for you is of great value. Recognize that many friends and family members will discourage you from moving toward your goals. They may sincerely believe they are protecting you from the chance of failure. Sometimes they're afraid you'll outshine them!! Your best advisors are those who have taken a small business risk and achieved the success you desire.

Franchisees are one of the best groups since they've got the "insider's view" you need. Be sure to listen for warning signals. If many are willing to sell, especially for low prices, there may be problems afoot.

Accountants Can help you with the financial aspects of the business. The one you choose must be a small business specialist, with franchisees for clients. Remember most accountants are very conservative and they may not understand your strong desire to take control of your financial future.

Attorneys can provide advice on the contracts you'll sign. Again they should have experience dealing with franchisors to understand your needs. Many "generalists" will try to negotiate a better deal for their client by rewriting the contract. This will not be possible. At least, it will slow your purchase, at worst, it will alienate the franchisor to the point they will not allow you to join.

You must understand that the contract is written very one-sided in the franchisor's favor. It contains many prohibitions and stiff penalties to remedy your breach. You should realize that the strength in franchising is that each unit produces the same products or services. If you're the kind who loves to experiment, reinvent the wheel, and "push the envelope," maybe franchising is not for you. You must recognize that standardization is critical.

To your benefit, if your neighboring franchisee decides to modify the list of products or services, you can ask the franchisor to enforce his contract to protect the value you're building in your unit.


Franchisee Questions

To help you approach franchisees in the network you're hoping to join, we've prepared several "starter" questions.

How long have you owned your unit? What did you do before? What activities consume your normal day?

Do sales & profits compare favorably with your expectations?

Do you earn more now than on your last job?

How effective is the franchisor's training? Start-up assistance? On-going help? Would you consider selling? For how much?

What would you change about the franchisor if you had the power?

Are you planning to open more units? If not, why? Are others?

What recommendations can you give me as I try to decide if this franchise is right for me?

I'm projecting first year sales at $XX. Am I high, low, OK?

I'm projecting Cost of Goods at XX%. Is that High, Low, OK? Employee Payroll is estimated at XX%, etc. Repeat for any major expenses you feel you need to verify. Then repeat with second year sales projections, etc.

Would you buy your franchise again, if you had it to do over??


The Uniform Franchise Offering Circular

The franchise disclosure document is usually a thick, 50+ page document that seems imposing. It contains a great amount of information about the company allowing you to become familiar with the details of your future relationship. This document answers many questions. Who is the Franchisor? Lists the principals of the company and their business background as well as the history of the venture. What is the Offering? Exactly what is being offered? This section describes the length of the agreement, territory, responsibilities, opportunities, etc. How Much Will it Cost? Initial fees, royalties, advertising fees, start-up costs for equipment, and working capital are covered. What Does the Company Promise? Will they train? Develop training materials, ad programs, generate accounts??? What do you promise? Most franchisors will restrict your activities to prevent you from using their system without paying royalties, during and after the agreement ends. Financial History of the Franchisor. Is the company stable? Will they be in business for the long-term? List of Existing Franchisees These are the franchisees you'll want to call to verify that this is a venture you'd like to pursue. A Copy of the License Agreement This is the actual contract that will govern your relationship over the next 5, 10 or 20 years. Read it & understand. Overall, the documentation seems restrictive and somewhat negative. There are more "you can't's" than "you cans". The penalties for violating the agreement are harsh but don't be put off by the legal aspects of the contract. It is written to give the franchisor the power to keep a "wild" franchisee from ruining the good reputation of the entire network. That franchisee will be terminated if they operate a renegade operation. Unless you plan to break the rules, this is only good for you. Your net worth will rise as the value of your franchise goes up. If the company gets a black eye, it will adversely affect you, too. Understand the extent of your restricted or exclusive territory and verify that it makes sense to you and your advisors. Also be sure you compare your favorite franchisor with others in the same industry. Are you getting the most you can hope for at the least cost?? What are the comparative advantages??


"The Secret of Success in Life is to Be Ready for Opportunity When it Comes..."

Certainly a point you should focus on as you advance toward entrepreneurship. Being "ready" gives you the confidence to make the decision to proceed when the right venture is uncovered. Thousands lack the self-confidence necessary to make these critical changes. Be sure you don't get trapped by "inertia of rest"--unwilling to take the risks necessary to succeed...

"Don't wait for your ship to come in... Swim out to it!"

An unknown speaker once said, "Some men dream of great accomplishments while others stay awake and do them!!" I hope you'll stay focused on the task of finding the right business venture for you and your family. If you're willing to invest some money in yourself, work hard in the early years, and follow a franchisor's proven plan, you should reap the rewards of satisfaction and the financial security that you desire. Remember,

"Winning Starts with Beginning."


This report is Copyright ©1995, 1998, 1999 by Andover Franchising, Inc., Atlanta It may be copied and distributed freely in hard copy or by electronic means only if not abridged in any form.

THANK YOU FOR YOUR INTEREST. I wish you well in your search for a profitable franchise and all your future business ventures. Andover Franchising sell franchises from a variety of franchisors, with investments starting at $25,000. We also develop specific assessments of franchise offerings, and we provide financial projections. For companies considering expanding through franchising, we conduct feasibility studies, help develop documents and training manuals. If I can be of further help, please call me at Andover Franchising (770) 587-2538.

My entire 30 year work history has been closely involved in entrepreneurship. In the late '60's, I wrote credit reports on small and medium-sized companies for Dun & Bradstreet in New York City and Atlanta. Then for several years I was a loan officer issuing commercial, SBA and personal loans for a bank in Birmingham. During the latter part of the '70's I owned several small businesses in Birmingham before selling to others. In '81 I joined a national franchised business brokerage office helping small businesses change ownership. After a short time, I was named Regional Manager for the franchisor and traveled the Southeast training agents in 50 independently owned franchises. In 1987 I co-founded The Andover Group, a franchisor in Atlanta that now oversees 5 local business brokerage offices, one of them my company, Southern Venture Services. I'm a member of the Southeast Franchise Forum, Georgia Association of Business Brokers, and the International Association of Business Brokers.

I hope my business experience can play a small part in your future entrepreneurial successes.

If you have not reviewed the additional ideas on our internet home page, please review The Franchise Doctor's Site.


The Franchise Doctor
is a service of
Andover Franchising, Inc.
Franchise Specialists for the Southeast
1010 Huntcliff Trace, Suite 1350
Atlanta, Georgia 30350

(770) 587-2538 or, outside of Georgia, 800 220-8256

E-Mail: JimDeitz@franchisedoc.com