What to Know About Franchising when in Job Transition

Double-digit unemployment, the highest in the U.S. since 1983, has led many people to consider buying a franchise. Being your own boss, getting off the corporate merry-go-round, and envisioning a better lifestyle sure sounds enticing. If you are one of those, however, the first thing you need to do is to heed this important piece of advice—should you ever become a franchisee, please don't ever think or say, "Will franchise for food."

Not saying don't buy a food franchise, but rather, don't rely on getting into franchising as a means of creating a quick cash flow to feed your family and yourself. Consider these due diligence factors before you get ready to sign on the bottom line:

• Check with a few other operators to get their cash flow feedback and experience
• If you are purchasing an existing business, confirm your inventory obligations
• If someone else will run the enterprise day-to-day, how well will they manage
• Fully understand what your franchisor fees and other obligations will be
• Consider engaging a business advisor if you have no experience in business
• Develop and understand a break-even analysis with your financial expert

Secondly, you need to keep a long-term perspective about owning a franchise. Realize that often, it is only after several years of persistence and tight management controls, that the real monetary rewards are achieved. In fact, remember that, in most cases, minimum franchise agreements last five years. Do you have sufficient back-up funds and patience to make it through the long haul?

The third key element to consider is somewhat more of a psychological hurdle: understand that being a franchise owner can be as tedious as your most recent job if you let it be. Getting up at four o'clock in the morning to make the donuts may offer lucrative rewards, but not everyone has the personality and temperament to do so. Rather, you need to sharpen your business and human resources skills so that your operation becomes a well-oiled machine over time instead of a chore.

So, how do you determine this factor? Your best choice is to enlist the aid of a franchise consultant who can advise you about the best fitting opportunity to match your attributes.

Our franchise consultants can assist you through your job transition.

What Makes for a Good Franchise Location?

Some locations may look as though they were a perfect spot for a franchise to operate in, but further investigation may prove otherwise. Others may look as though they were the last place one would want to be located, but again looks can be deceiving.
So how do you know which location or site will make a good franchise location. Consider the following when making your decision:

• Area of town
  An area of town that is already well-populated by other businesses, or is considered part of the business district can be a good choice. You do want to make sure that over-saturation is not a concern.
  
  Speaking of the area, consider whether it has a reputation of being a "good" part of town. Even if it doesn't fit the "normal" definition of "good" part of time, if safety of the public and protection of franchise property is provided to best extent possible, it still might be a site to consider.
  Don't be hasty about giving up on a site if it isn't in "best" location. Often, some city, county, or even state officials offer incentives or provide benefits for franchisees willing to locate in less-known or less-desirable areas.
  
  You will have to check with the franchisor if you are considering such an area. Some franchisors are reluctant to locate in "less-desirable" areas, even if assurances of safety and protection are offered.
  
  
• Access to Major Thoroughfares
  This includes interstate and state highways and well-traveled county roads. Drive down a city's "Main Street", too. It may prove to be an excellent location.
  It may be more expensive to lease or rent real estate in these areas, but most likely in the long run it will be well worth it.
  
  
• Location of and Distance Between Competitors
  Check out your competitors' locations. Too many in one area can mean constantly having to "scrap" and fight for business. However, being the only one for miles around may not be all that favorable, either, especially if all or part of the county in which your franchise will be located is in a rural area.
  If it takes too long or requires too much gas to reach your location, you can't count on very frequent return business. You may have a few regulars who make it a weekly or monthly outing, but you will have to consider if this is enough to sustain the franchise.
  
  
• Overall Appearance
  Just because the area looks suitable does not mean it will be a good location. If it doesn't look appealing, you still may find it harder to attract customers, even if the area is considered "safe."

A FranFinders expert franchise consultant and assist you with finding a franchise location.

How to Understand a Franchise Agreement

Can you understand your Franchise Agreement?

Unless you are or were associated with the legal profession in the past, the answer to the first question is probably a resounding, "No!" That's why you had an attorney to look it over and explain it to you.

Now, however, for some reason, you are perusing the document again, and you're not sure you remember everything you and the attorney discussed. You know that it was clear enough the first time he explained it that you felt comfortable signing the agreement, but now you're needing to look at some portions of it again.

So, now you're faced with the second question. But, surprisingly, the answer to that one can be a confident, "Yes!" because we're going to take each part of a standard franchise agreement and break it down.

There will be differences in every franchise agreement, so some things covered in this article may not be in your agreement, and we may not cover some things that do appear in your agreement. For those situations, you will need to contact your franchise attorney again.

Franchise agreements may be divided into Chapters and Articles, or they may use other terms to express changes in subject matter. For purposes of this article, we are going to refer to subject topics as Chapters and Articles.

The title page will most likely be the first chapter. The top portion will consist of identifying information on the franchisor and franchisee, and possibly the territory in which the franchise operates. From there, the body of the title page will define the type of business and will re-state the business name.

The rest of the paragraphs will most likely spell out different items that concern both the franchisor and franchisee. These can include such things as recognition of the advantages of the franchise, the importance of maintaining the franchise's reputation, and other things.

Article numbers will delineate different topics that fall under the subject matter addressed by Chapter 1. If necessary, subsections will be used (example: Article 1.01, Article 1.02, etc.).

Article topics may include License and System, with subheadings such as License Grant, Location and Territory, or similar titles. Each section will deal with matters pertinent to the section's title.

For instance, the License Grant section will explain whether or not the license to operate the franchise is exclusive or non-exclusive, and will state for how long the License Grant is applicable. From there, this and other sections may pertain to matters involving location and territory, as well as other information.

One section, in Article 1 or another article, will define the meaning of the term "licensed business" and will explain again the type of service provided by the business. Subsequent sections, which may immediately follow the one which introduces the subject matter pertaining to "licensed business" will outline the franchisor's rights and privileges in regards to that particular topic, as well as the responsibilities of the franchisee.

An article in the franchise agreement, along with its relevant subsections, will address the franchise fee(s) and advertising. The amount of the initial fee, royalty fees, national marketing fee, and any other applicable fees, and when each fee is to be paid, is included, as well as information on how or whether those fees will be used for advertising expenditures.

A section in the franchise fee article, or another article itself may be included explaining when, where, and how a grand opening will be held for the new franchise.
At least one article and its subsections will deal with business records and reports, which ones are necessary, penalties for failure to make such reports, and audit and inspection rights of the franchisor.

Articles covering training, trade secrets and/or confidentiality issues, the franchisee's pre-opening obligations (these may also deal with real estate issues) and other issues pertaining to the operation of the franchise may have also been included.

Use the article titles and subsection headings to find the one that you think fits your particular situation, and isolate that section by either copying the page(s) and highlighting the material or printing off that section only, if the document is in pdf or a similar format. Then, take time to read it carefully, making notes as you do so.

If you are still unsure of your position or responsibility as a franchisee, or still have questions, or if your situation was not covered in this article, then by all means consult with a franchise attorney. You may have to pay a consultation fee, but it is better to spend a little now than run the risk of having to spend a lot later.

Ask a FranFinders franchise consultant to recommend a franchise attorney to assist you.

Tips on Evaluating a Franchise Earnings Claim

The first thing you should know about franchise earnings claims is that they must meet certain specific requirements. These include, but are not limited to:

They must be in writing
A description of what the claim is based on, as well as any assumptions that were made must be present
Information on the number of units whose figures actually equal or exceed the earnings claim amount, and the percentage in which they do, must be provided
Supporting documentation and information must be available for inspection, and an offer to produce and show the same must be extended
Earnings claims should contain language that is considered cautionary.

Now that you know what an earnings claim should look like, you can go about finding one. Start with the franchisor's Franchise Disclosure Document (FDD). One of the articles, items, sections, chapters, or whatever the subject divisions are called will allow the franchisor to give information on potential earnings.

A franchisor is not required to disclose this information. If he chooses to do so, he is required by the Federal Trade Commission (FTC) to do so in writing, and to make sure the information is as accurate as possible.

Just because a franchisor does not include this information does not necessarily mean there is a problem. Rather, the company may be too new or there may be such a small number of franchises that the earnings claim would not be a true indicator of such figures. Once the franchises have been operating for a while, or business has grown, such figures would most likely be more accurate.

It also takes time and not a little bit of money to compile and make such a report. And, sometimes, after a franchisor has expended the time and money, the report may present information in such a manner that the franchisee may form a less-positive, and possibly erroneous, opinion of the company.

You can still get an idea of what a franchisee's earnings claim would say if there was one, by looking at the section of the FDD that tells you who is currently a franchisee and who has been a franchisee. This information includes a way to contact these people.

If you do contact current and former franchisees, keep the conversation limited to averages and ranges as they pertain to figures. Take a little time to get to know the franchisee first, by discussing general topics, then move on to financial matters.

Talk to several franchisees, not just one or two. In this way, you will have a more complete picture of the operation.

Now, look at the information you've obtained. Find the franchisees who operate in similar situations such as yours will be, add up how long they've been in business, subtract expenses, take two painkillers for the headache you probably have by now, and look at the total. This should be a reasonable expectation of your possible earnings as a franchisee.

Remember that this figure is not going to be completely accurate. Other factors will need to be considered, and will figure into the overall total. You should have enough information, however, that you can make an informed decision as to whether or not this is a good investment for you.

One of our franchise consultants can assist you with your evaluation efforts.