What is considered normal start-up costs for one franchise business may not be so for another. Many factors can be involved, but generally most franchises will have at least some of the ones mentioned in this article. Dollar figures may be vastly different, also, which is why no actual amounts have been quoted.
•Front-end Franchise Fees
These include how much the investment into the franchise itself costs as well as business licenses and permits and other expenses that must be met before the franchise can even begin operation.
•Ongoing Royalty Fees
Ongoing royalty fees are what you pay when you first “buy into” a franchise. As the name implies, this is a continual expense. As long as the business continues, the franchisee will have to pay for rights to brand or trade names, products, logos, and anything else that is considered as belonging to the franchisor.
•Real Estate
This is the literal property that the building sits on, and where it is located will affect how much it costs. It may be cheaper to build, lease, or rent cheaper part of town, but the franchisee will have to consider if choosing that location will affect business. Also, some franchisers do look at crime rates in certain areas. If the figures are not favorable, franchisers may not allow a franchise to be opened in a high-crime area unless there is a powerful incentive, such as neighborhood restoration or re-gentrification efforts being made, or assurances from local authorities or governments that precautions will be taken to ensure the safety of employees and protection of property.
•Inventory and Equipment
If the franchisee has a choice as to where purchases can be made, as long as it meets franchiser approval or protocol, these costs may be less. If, however, the franchisee is obligated to buy from certain suppliers, the costs may be more. How much inventory the franchisee is expected to keep on hand may also need to be considered. The franchisor may feel that at first a larger amount will be needed in order to meet demand and avoid delays or loss of sales.
•Legal costs
If the franchisee is responsible for hiring a franchise attorney, that may be necessary at the beginning, so that he will be available to advise in legal matters and examine legal documents. Even if the franchisee can use the franchiser’s attorney, the franchisee may have to pay a fee to the attorney or the franchiser for the legal work performed.
•Planning costs
If a business plan is required, the franchisee will have to decide whether to write his own business plan or get someone to do it. The business plan is usually one of the first documents submitted; therefore, any expense incurred will be considered start-up cost.
•Advertising/Marketing Budget
The franchiser may help with this, or the franchisee may be expected to create, pay for, and disseminate all advertising. The franchiser may require that some pre-opening advertising and marketing be done; therefore, this will be considered as part of the start-up cost.
•Cash Flow Analysis
This is often considered documentation that must be submitted before any sale is made. The franchisee will have to determine if he can figure this out himself or will need to hire an accountant to do it. He may have to hire his own accountant; however, he may be able to use the franchiser’s accountant. If this is possible, the franchisee may still be expected to compensate him for his time.
Wednesday, July 14, 2010
Wednesday, July 7, 2010
How Does One Value an Existing Franchise Business?
How do you really know the value of an existing franchise business? Some visible factors, such as volume of business, number of locations in a particular or region, and other things may be easy to see, while others may not be as apparent.
You can ask yourself these and other questions you may have as you attempt to value an existing franchise.
Is it apparent that the franchise’s revenue base is satisfactory, or do simple things such as the franchise’s overall physical appearance, inventory (both amount and appearance) give the impression, whether true or not, that there may be trouble?
If visible or apparent clues give you reason for concern, you may want to check the latest Franchise Disclosure Document (FDD) or other records which are available for inspection.
How is it making its money?
Is the franchise buying low and selling high, or buying high and selling low? Either of these can be a good indicator of the franchise’s value.
Support from the master franchise, if there is one, is another good sign. Ask yourself if the support is being given to ensure success or to keep the franchise operating so as to avoid compromising the overall franchise profits.
If the franchise already has a good reputation, ask yourself if efforts are being made to ensure that is likely to continue. A lackadaisal attitude towards maintaining a franchise branch’s reputation may be a sign of trouble.
Is the franchise able to keep current customers and attract new ones?
Continued growth is always a good sign, which stagnant or diminishing growth is not.
If you have access to the figures, look at the franchise’s marginal costs, and ask yourself these questions:
Are they low enough to ensure success or are they still high?
Consider how long the franchise as well as any newer branches has been in operation in this situation. Newer locations often take a while to show a decrease in marginal costs.
Is there a chance the marginal costs can change?
An increase if they are already satisfactorily low can be a sign of financial problems, while further decreases without a loss of quality or customer satisfaction can be a good sign.
How hard is it to “get into” this particular franchise market?
If it is too easy, and almost anyone can “get in”, overall profits can be diminished. Additionally, the risk of “market saturation” can occur, which can have an effect on the franchise’s value.
If it is too hard to “get into” the franchise, the possibility that the franchise has the “market cornered” may exist. Ask yourself what are the chances that this will continue. Also consider the possibility that making it difficult for others to invest is actually doing more harm than good, as it is causing a lack of “new blood” to be “infused” into the franchise.
You can ask yourself these and other questions you may have as you attempt to value an existing franchise.
Is it apparent that the franchise’s revenue base is satisfactory, or do simple things such as the franchise’s overall physical appearance, inventory (both amount and appearance) give the impression, whether true or not, that there may be trouble?
If visible or apparent clues give you reason for concern, you may want to check the latest Franchise Disclosure Document (FDD) or other records which are available for inspection.
How is it making its money?
Is the franchise buying low and selling high, or buying high and selling low? Either of these can be a good indicator of the franchise’s value.
Support from the master franchise, if there is one, is another good sign. Ask yourself if the support is being given to ensure success or to keep the franchise operating so as to avoid compromising the overall franchise profits.
If the franchise already has a good reputation, ask yourself if efforts are being made to ensure that is likely to continue. A lackadaisal attitude towards maintaining a franchise branch’s reputation may be a sign of trouble.
Is the franchise able to keep current customers and attract new ones?
Continued growth is always a good sign, which stagnant or diminishing growth is not.
If you have access to the figures, look at the franchise’s marginal costs, and ask yourself these questions:
Are they low enough to ensure success or are they still high?
Consider how long the franchise as well as any newer branches has been in operation in this situation. Newer locations often take a while to show a decrease in marginal costs.
Is there a chance the marginal costs can change?
An increase if they are already satisfactorily low can be a sign of financial problems, while further decreases without a loss of quality or customer satisfaction can be a good sign.
How hard is it to “get into” this particular franchise market?
If it is too easy, and almost anyone can “get in”, overall profits can be diminished. Additionally, the risk of “market saturation” can occur, which can have an effect on the franchise’s value.
If it is too hard to “get into” the franchise, the possibility that the franchise has the “market cornered” may exist. Ask yourself what are the chances that this will continue. Also consider the possibility that making it difficult for others to invest is actually doing more harm than good, as it is causing a lack of “new blood” to be “infused” into the franchise.
Wednesday, June 30, 2010
What is Your Risk Tolerance Level for Starting a Franchise Business?
There are risks involved in every investment, and this holds true for starting a franchise business. And, just as each investment and franchise will have its own particular risks, so will the owner have his level of tolerance for dealing with such risks.
How much risk tolerance level you have may make the difference in whether or not your franchise succeeds and you see a return on your investment. So, ask yourself the questions below, and others you may think of, to determine just where your risk tolerance level is.
How much of a risk are you willing to take?
If you are willing to invest in a franchise that is newer or may not have as proven a “track record” as a more-established one in which success is apparent, your risk tolerance level may, of necessity, have to be raised a bit. If you don’t think that’s possible, or don’t want to add that particular risk to those which already exist, you might want to consider a “tried and true” franchise investment.
What guidelines will you use to decide if a risk is too big or not?
What does the FDD that you obtained when you first started considering investing in a franchise look like? Did you trust the contents at first glance, or did you find yourself questioning some of the entries? This can make a big difference in determining your risk tolerance level.
Remember, “Gut instinct” may sometimes be as reliable as the most complete, accurate financial report. And, that instinct may be telling you to check your risk tolerance level to see if you need to take another look at things.
How do things look right now?
Is it apparent that the company is successful or is there indication that it is struggling? Consider, of course, the current economic climate overall, but also consider if waiting will possibly lower the risks, thus not affecting your risk tolerance level.
What will you do if you find that a risk was bigger than you thought?
Will you “cut your losses” or stick it out a little longer? Again, consider the current economic climate as well as any other situations that may have caused changes to occur.
Decide on guidelines that you will use to make your decision. In this way, you will have a concrete idea of the signs you are looking for. From there, you will be more able to make an informed decision.
What signs or signals will you accept as proof that you’ve reached the end of your tolerance?
If the problems with the franchise are all you can think about, you have probably reached or are close to reaching your risk tolerance level, especially if the situation has had ample opportunity to change for the better, and there is still no sign of that happening.
Further, if you are beginning to have financial difficulties that could cause long-term problems, this might be a sign that your risk tolerance level is pretty close to being reached.
How much risk tolerance level you have may make the difference in whether or not your franchise succeeds and you see a return on your investment. So, ask yourself the questions below, and others you may think of, to determine just where your risk tolerance level is.
How much of a risk are you willing to take?
If you are willing to invest in a franchise that is newer or may not have as proven a “track record” as a more-established one in which success is apparent, your risk tolerance level may, of necessity, have to be raised a bit. If you don’t think that’s possible, or don’t want to add that particular risk to those which already exist, you might want to consider a “tried and true” franchise investment.
What guidelines will you use to decide if a risk is too big or not?
What does the FDD that you obtained when you first started considering investing in a franchise look like? Did you trust the contents at first glance, or did you find yourself questioning some of the entries? This can make a big difference in determining your risk tolerance level.
Remember, “Gut instinct” may sometimes be as reliable as the most complete, accurate financial report. And, that instinct may be telling you to check your risk tolerance level to see if you need to take another look at things.
How do things look right now?
Is it apparent that the company is successful or is there indication that it is struggling? Consider, of course, the current economic climate overall, but also consider if waiting will possibly lower the risks, thus not affecting your risk tolerance level.
What will you do if you find that a risk was bigger than you thought?
Will you “cut your losses” or stick it out a little longer? Again, consider the current economic climate as well as any other situations that may have caused changes to occur.
Decide on guidelines that you will use to make your decision. In this way, you will have a concrete idea of the signs you are looking for. From there, you will be more able to make an informed decision.
What signs or signals will you accept as proof that you’ve reached the end of your tolerance?
If the problems with the franchise are all you can think about, you have probably reached or are close to reaching your risk tolerance level, especially if the situation has had ample opportunity to change for the better, and there is still no sign of that happening.
Further, if you are beginning to have financial difficulties that could cause long-term problems, this might be a sign that your risk tolerance level is pretty close to being reached.
Wednesday, June 23, 2010
How to Choose a Franchise Accountant
A franchise accountant is an important member of your franchise team. In fact, a franchise accountant should be one of the first members of the team, even before the franchise agreement is entered into.
By obtaining the services of a good franchise accountant from the very beginning, you will already be ahead of the game. The franchise accountant can read the Franchise Disclosure Document (FDD) which gives detailed information on the franchiser, especially in terms of financial matters, and other documents that are pertinent to a franchise agreement. The franchise accountant can also obtain profit and loss figures, tell you whether or not any fees you are being charged are unreasonable, and provide other financial advice.
Once you have entered into the franchise agreement and begun operations, the accountant should remain a team member. He can assist or completely assume the responsibility of preparing monthly reports, handling payroll, preparing tax reports, and other accounting duties.
So, how do you know which franchise accountant to choose? You can start by asking some questions such as the ones below. If you think of others, by all means ask them, too.
•Is the accountant familiar with financial issues as they pertain to a franchise?
•Does the accountant have a background or experience in franchise accounting?
•Is the franchise accountant a Certified Professional Accountant?
•Does he charge a flat rate for certain accounting duties and hourly fees for others? For example, does he charge one fee for preparing the payroll and another for preparing tax returns and reports? Are both flat rates and the hourly fees reasonable? (Remember, it’s OK to “fee shop”, but make sure you get all the services you need.)
You might also want to consider the feasibility of hiring a franchise accountant to work solely for you. If you must use an accounting firm because of budget constraints, however, try to have a particular accountant assigned to your franchise so that you will always be dealing with the same person. This will provide an extra measure of security for your business and financial records.
Also, even if you have a family member, relative, or close friend who is an accountant, think about whether or not you want that person to have access to your financial information. Even the most trustworthy person can occasionally let something slip; however, you have better control over how far the information gets if the franchise accountant is unrelated or not a personal friend.
By obtaining the services of a good franchise accountant from the very beginning, you will already be ahead of the game. The franchise accountant can read the Franchise Disclosure Document (FDD) which gives detailed information on the franchiser, especially in terms of financial matters, and other documents that are pertinent to a franchise agreement. The franchise accountant can also obtain profit and loss figures, tell you whether or not any fees you are being charged are unreasonable, and provide other financial advice.
Once you have entered into the franchise agreement and begun operations, the accountant should remain a team member. He can assist or completely assume the responsibility of preparing monthly reports, handling payroll, preparing tax reports, and other accounting duties.
So, how do you know which franchise accountant to choose? You can start by asking some questions such as the ones below. If you think of others, by all means ask them, too.
•Is the accountant familiar with financial issues as they pertain to a franchise?
•Does the accountant have a background or experience in franchise accounting?
•Is the franchise accountant a Certified Professional Accountant?
•Does he charge a flat rate for certain accounting duties and hourly fees for others? For example, does he charge one fee for preparing the payroll and another for preparing tax returns and reports? Are both flat rates and the hourly fees reasonable? (Remember, it’s OK to “fee shop”, but make sure you get all the services you need.)
You might also want to consider the feasibility of hiring a franchise accountant to work solely for you. If you must use an accounting firm because of budget constraints, however, try to have a particular accountant assigned to your franchise so that you will always be dealing with the same person. This will provide an extra measure of security for your business and financial records.
Also, even if you have a family member, relative, or close friend who is an accountant, think about whether or not you want that person to have access to your financial information. Even the most trustworthy person can occasionally let something slip; however, you have better control over how far the information gets if the franchise accountant is unrelated or not a personal friend.
Wednesday, June 16, 2010
How to Write a Simple Franchise Business Plan
Your first question may be: “Why do I even need a franchise business plan?” You may especially be thinking this if you are planning on investing in a highly-recognizable franchise with proven success.
One reason may be that your creditor or financial backer may require one. If they do, then you need to know how to write one that is effective and complete.
And, even if no one else does you still need a plan. You need to know what exactly what you are hoping to accomplish by investing in a franchise, the goals you want to reach, what is involved in investing and operating a franchise, and other things. Your franchise business can be quite simple. As long as you include the following information, along with anything else you might feel is necessary, you should have a comprehensive, well-rounded plan.
Start with a brief introduction, which may include the name and location of the business, your name and contact information, and other information you may feel is pertinent.
Next, provide a complete explanation of the franchise. Include a detailed description, including what products or services are offered. Also provide information on the size of the market you are attempting to reach, and what, if any, competition there may be.
Also take this opportunity to “toot your own horn” a little. Explain how you came to the decision to purchase this particular franchise, or why you feel you should make this investment if you haven’t already. Explain what problems you think you may face during the “start-up” phase, and how you intend to solve them.
You may wonder if this is necessary. If someone else is seeing this plan, then it is. If this plan is strictly for you, you may still enjoy looking at it and remembering how it all got started.
Now, list your employees who will or do hold management positions, and tell why they were chosen. Even if it’s just you right now, go ahead and put that down.
It’s time to explain your marketing and advertising strategy. Tell how you are going or plan to make your business work.“Show the money”. Again, do this even if you are the only one who will be seeing the plan. Make conservative estimates on how much you want or expect the business to make, as well as how much money will be spent on the business.
In this section, you want to state how the franchise was or will be funded, as well as a list of start-up costs. In this way, you will be prepared should unexpected expenses occur.
One reason may be that your creditor or financial backer may require one. If they do, then you need to know how to write one that is effective and complete.
And, even if no one else does you still need a plan. You need to know what exactly what you are hoping to accomplish by investing in a franchise, the goals you want to reach, what is involved in investing and operating a franchise, and other things. Your franchise business can be quite simple. As long as you include the following information, along with anything else you might feel is necessary, you should have a comprehensive, well-rounded plan.
Start with a brief introduction, which may include the name and location of the business, your name and contact information, and other information you may feel is pertinent.
Next, provide a complete explanation of the franchise. Include a detailed description, including what products or services are offered. Also provide information on the size of the market you are attempting to reach, and what, if any, competition there may be.
Also take this opportunity to “toot your own horn” a little. Explain how you came to the decision to purchase this particular franchise, or why you feel you should make this investment if you haven’t already. Explain what problems you think you may face during the “start-up” phase, and how you intend to solve them.
You may wonder if this is necessary. If someone else is seeing this plan, then it is. If this plan is strictly for you, you may still enjoy looking at it and remembering how it all got started.
Now, list your employees who will or do hold management positions, and tell why they were chosen. Even if it’s just you right now, go ahead and put that down.
It’s time to explain your marketing and advertising strategy. Tell how you are going or plan to make your business work.“Show the money”. Again, do this even if you are the only one who will be seeing the plan. Make conservative estimates on how much you want or expect the business to make, as well as how much money will be spent on the business.
In this section, you want to state how the franchise was or will be funded, as well as a list of start-up costs. In this way, you will be prepared should unexpected expenses occur.
Wednesday, June 9, 2010
What Is the Difference Between a Franchise Opportunity and a Business Opportunity
When you invest in a franchise opportunity you pay or have paid for the right to sell a particular franchise’s products or offer that particular franchise’s services. For this, you get permission to use a particular brand name. And, the more recognizable a brand name is, the more likely consumer response will be.
You also get a “jump start” on starting your business or operation because a lot of the “up front” work has been or will be done for you. The equipment you need to get started will either be supplied to you or you will be told where (and possibly from whom) to purchase it, possibly at a reduced cost. Further, you will be given any training you may need.Additionally, you are not alone. You can always ask the franchisor for assistance, as well as other franchisees. This can be particularly helpful if you are a beginning franchise business owner.
You also have some regulations and legal guidelines in place for your benefit. Among these is the Franchise Disclosure Docmument (FDD). This is a document that a franchiser is required to show you before you ever sign anything or hand over the franchise fee.
It gives information on such things as franchise fees, estimates of expenses, and the franchise’s history. The most important thing it provides, however, is the names of those people who currently operate franchises and who did so in the past fiscal year but have since ceased to do so.
However, with a franchise opportunity, while you are in some ways your own boss, in other ways you are not. You must adhere to the policies and regulations expected of everyone who operates a franchise. Further, a portion of your profits also goes back to the franchiser This includes “royalty” fees for being allowed to use the brand name.
On the other hand, that is one of the main differences between a franchise opportunity and a business opportunity. Once you buy a business opportunity, it is yours. The person who sold it to you is no longer connected with it in any way. Because of this, you have a lot of leeway in how you run your business. This includes choosing your hours, determining which products you do or don’t want to carry, and other things.
Unlike a franchise opportunity, however, you don’t have a support system, such as a franchise owner does. You’re basically on your own, unless you know another business opportunity investor who can help you, provide advice, or mentor you.You may also have to create your own client or customer base, especially if there was no previous one in place when you invested in the business opportunity. And, of course, your income depends on how well your business does.
You also get a “jump start” on starting your business or operation because a lot of the “up front” work has been or will be done for you. The equipment you need to get started will either be supplied to you or you will be told where (and possibly from whom) to purchase it, possibly at a reduced cost. Further, you will be given any training you may need.Additionally, you are not alone. You can always ask the franchisor for assistance, as well as other franchisees. This can be particularly helpful if you are a beginning franchise business owner.
You also have some regulations and legal guidelines in place for your benefit. Among these is the Franchise Disclosure Docmument (FDD). This is a document that a franchiser is required to show you before you ever sign anything or hand over the franchise fee.
It gives information on such things as franchise fees, estimates of expenses, and the franchise’s history. The most important thing it provides, however, is the names of those people who currently operate franchises and who did so in the past fiscal year but have since ceased to do so.
However, with a franchise opportunity, while you are in some ways your own boss, in other ways you are not. You must adhere to the policies and regulations expected of everyone who operates a franchise. Further, a portion of your profits also goes back to the franchiser This includes “royalty” fees for being allowed to use the brand name.
On the other hand, that is one of the main differences between a franchise opportunity and a business opportunity. Once you buy a business opportunity, it is yours. The person who sold it to you is no longer connected with it in any way. Because of this, you have a lot of leeway in how you run your business. This includes choosing your hours, determining which products you do or don’t want to carry, and other things.
Unlike a franchise opportunity, however, you don’t have a support system, such as a franchise owner does. You’re basically on your own, unless you know another business opportunity investor who can help you, provide advice, or mentor you.You may also have to create your own client or customer base, especially if there was no previous one in place when you invested in the business opportunity. And, of course, your income depends on how well your business does.
Wednesday, June 2, 2010
What Is Franchise Co-Branding?
Franchise co-branding is when two companies operate in conjunction with one another. Usually, both share the same building or piece of property, and both company’s brands or products are displayed.An example of this is when a deli sandwich shop opens up in a truck stop, or a fast-food restaurant operates inside a major retail store. Another example is a motel which either shares building space with a restaurant or has a restaurant located either on or immediately adjacent to the premises.
Franchise co-branding is becoming very popular. Franchisers and franchisees are seeing co-branding as a way to increase the profit margins of both entities. Their thinking is “Anything that will get people through the door and into the store”.When co-branding works right, that is exactly what happens. And, one way that franchises that participate in or are considering participating in co-branding can ensure success is by capitalizing on the strength of each business.Consider this: an eatery that offers particular food choices, such as soups, salads, and sandwiches may consider co-branding with a bakery or ice-cream shop. The soup/salad/sandwich business will attract the lunch and dinner crowd (and breakfast crowd as well if it sells breakfast items). The “sweet shop” will draw in those looking for a between-meal snack or treat or those who want dessert after their lunch or dinner.
If both businesses make the effort to offer items that can be consumed no matter what the season, they stand to further increase their profits. There will be no “lull” simply because of the fact that it isn’t the “right season” for something.If they can reach an equitable agreement, and if it is in keeping with the master franchises’ policies, it may not be necessary for both businesses to operate each and every time one is open. For instance, if the “sweet shop” franchisee wants to be open for business on the weekend or during a holiday, but the other franchisee does not, that is entirely possible. Or, both may agree (again while considering and following master franchiser policies) to close at certain times.
Sometimes, however, franchise co-branding does not work for the better of either franchise. Lack of adequate space for the comfortable operation of both businesses, employee problems, and other difficulties may actually hinder the success of co-branding. Further, if one of the franchises causes the other to lose favor with consumers, both businesses can suffer as a result.Careful attention to detail, close adherence to franchise policies, and open communication between all parties involved can prevent such problems.
Franchise co-branding is becoming very popular. Franchisers and franchisees are seeing co-branding as a way to increase the profit margins of both entities. Their thinking is “Anything that will get people through the door and into the store”.When co-branding works right, that is exactly what happens. And, one way that franchises that participate in or are considering participating in co-branding can ensure success is by capitalizing on the strength of each business.Consider this: an eatery that offers particular food choices, such as soups, salads, and sandwiches may consider co-branding with a bakery or ice-cream shop. The soup/salad/sandwich business will attract the lunch and dinner crowd (and breakfast crowd as well if it sells breakfast items). The “sweet shop” will draw in those looking for a between-meal snack or treat or those who want dessert after their lunch or dinner.
If both businesses make the effort to offer items that can be consumed no matter what the season, they stand to further increase their profits. There will be no “lull” simply because of the fact that it isn’t the “right season” for something.If they can reach an equitable agreement, and if it is in keeping with the master franchises’ policies, it may not be necessary for both businesses to operate each and every time one is open. For instance, if the “sweet shop” franchisee wants to be open for business on the weekend or during a holiday, but the other franchisee does not, that is entirely possible. Or, both may agree (again while considering and following master franchiser policies) to close at certain times.
Sometimes, however, franchise co-branding does not work for the better of either franchise. Lack of adequate space for the comfortable operation of both businesses, employee problems, and other difficulties may actually hinder the success of co-branding. Further, if one of the franchises causes the other to lose favor with consumers, both businesses can suffer as a result.Careful attention to detail, close adherence to franchise policies, and open communication between all parties involved can prevent such problems.
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