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.”

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.

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.

What are the Laws of the FDD (Franchise Disclosure Document)?

•What is the FDD?

Franchise Disclosure Document (FDD) is a format for disclosing franchisor information to prospective franchisees. The purpose of the FDD is to protect the public by providing information about the franchise company.

Currently, franchise investment laws exist in 15 states. Those states are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. All of these states make it a requirement that franchisors compile and provide a Uniform Franchise Offering Circular (UFOC).

This is a very important document, as it gives information concerning the financial status of the franchise, both current and within the past fiscal year. Further, it gives information on who is now and who has operated a franchise within the past fiscal year, and whether they are still doing so.

Thirteen of the fifteen states requiring UFOCs also consider the sale of a franchise to be considered just as if a security had been sold. They will not allow the franchise to be sold until a state agency designated for such a purpose has registered and made available as a public record a UFOC.

Two states of the fifteen, however, do not require that UFOC be filed. The information on what is and is required by the states mandating UFOCs can be found on the Federal Trade Commission’s website.

Besides UFOC requirements, the state laws in the 15 listed states provide franchisees, both current and prospective, with certain legal rights. One of these is the right to file a private lawsuit if it is discovered that a franchise or franchisor is violating the disclosure laws of that particular state.

•What are the laws of the FDD?

The laws vary by state. You will have to consult a franchise attorney or your state office that is responsible for overseeing franchises to determine what they are for your particular state.

•Just how do they affect me?

You must be in compliance with these laws in order to legally operate your franchise. Failure to do so can result in civil and legal sanctions. Civil sanctions can include the franchiser exercising his right or privilege to terminate the franchise agreement, civil fines or penalties if you are found to be in violation of any of the franchise agreement terms, and other civil sanctions as may be found or deemed appropriate. Legal sanctions can include fines, penalties, and possible criminal action if you are found to have broken any laws. These can include state ethics and financial disclosure laws.

•Am I in compliance?

If you have any doubt at all as to whether or not you are, immediately consult your franchise attorney. If you are found to be in non-compliance, take the necessary steps to correct the infractions as soon as possible.

Do not try to shift blame or to deny it, especially if the evidence is apparent. By accepting and admitting that you are in the wrong, you are showing good faith that you will attempt to rectify the situation.

What’s the Best Way to Research a Franchise Competitor?

Everyone who owns or operates a franchise business wants to know how the competition is doing. You as a franchise owner can find out in a number of ways. Depending on the route you want to take, you can either have the research done by a professional franchise research company or can do it or have it done on your own.

This article includes information on professional franchise research companies as well as some ideas for “checking out the competition” that you might wish to employ.

•Use a Franchise Research company

Enter “research a franchise” into your search engine, and choose one that can get the information you are looking for. They may have access to information that you don’t, including financial and other business records. In addition, they can advise you on how best to use the information they gathered in order to improve your franchise’s business, if need be, or stay on top if your franchise is currently outperforming the competition.

•Use “Mystery Shopper” tactics

Have someone who is not associated or whose association with you is unknown to the competition visit the competitor’s locations. Make sure, however, they use legal, ethical methods of obtaining pricing and other information, and that you use that information in the same legal, ethical manner.

•Do your own “physical” research.

It may not tell you much about the competition’s official financial or operating status, but you may be surprised at what you can learn.

Drive by, or have someone do it for you, at different times each day. At opening time, go by a few minutes before opening and see if people are waiting to get in. then go back an hour later, and see if customer traffic has increased at all.

At closing time, go by at different time increments prior to and just after closing time. Check to see if business has already ceased operation or selling as early as 30 minutes before closing and 15 minutes before closing. Then go back right at closing time, and see if the lights are still on, and/or if customers are still present. Then, go back 10 to 15 minutes after closing, and see if they actually have to let customers out after allowing them to complete their transaction.

Keep a check to see if their “closing time” appears to be getting earlier and earlier. This can be a sign of either not enough business or the owner/proprietor not caring about serving late customers. Either way, it may give your franchise an advantage.

Go to where people congregate, or have someone who is not associated or whose association with you is unknown to the competition go to such a place, and be prepared to stay a while. You or your representative are listening to see if any comments, favorable or otherwise, are being made about the competition.

If it’s possible to do so without drawing suspicion, the “listener” might steer the conversation in that direction.

Again, use the information obtained in this manner legally and ethically. It does you no good to find out the competition’s status if it means you broke the law or acted in an unethical manner once you got the information.

What are Normal Start-Up Costs for a Franchise?

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.

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.