Buyer beware

More and more buyers are seeking franchises from relatively unknown franchisors with little-known brand names and service marks. At the same time, an increasing number of people, particularly those who have not been in business before, are also interested in purchasing small businesses from independent business owners operating in a geographically limited neighborhood area. This scenario usually takes the form of older sellers who purportedly wish to dispose of their business as they reach retirement age. Since spending your savings on a business is one of the most important decisions of your life, if not the most important decision, always heed the classic advice, "Buyer beware."

In the late 1950s and 1960s, all kind of charlatans jumped on the bandwagon and franchised nearly everything imaginable, on a global scale. A buyer didn't always know what he or she was getting into. Typical of our society, help eventually came from legislative enactments that swung the pendulum the other way, at least as far as paperwork is concerned. As a result, franchising today is a much more exacting and time-consuming process because of required procedures and restrictions. But all this activity has resulted in more protection for the franchise buyer.

Why buy a franchise?

With so many options available and all the potential pitfalls possible in buying a business or franchise, you may be wondering why you should invest your time and money in a franchise opportunity. To help you get an idea of some of the advantages you would enjoy as a franchisee, review the list below. As a franchisee, you will enjoy:

• Group advertising power
• Owning your own business and making day-to-day decisions yourself, guided by the franchisor's experience
• The ability to sell products and services to markets that cannot be serviced by company-owned outlets because of higher operational costs and lower motivation of employees in company-owned outlets
• The benefit of identification of service marks, trademarks, proprietary information, patents and designs
• Systematic training from experts
• A lower risk of failure and/or loss of investments that if you were to start your own business from scratch
• Being a part of an uniform operation, which means all franchises will share the same interior and exterior physical appearance, the same product, and the same service and product quality
• Assistance in financial and accounting matters from the franchisor, as well as ongoing support
• The enhancement of your management abilities and benefitting from an opportunity you could not have in most employment situations

In addition, you may wonder how to ensure that you make the best decision possible. Investing in your own business takes guts and the willingness to make important decisions. As a result, you will need to carefully research the statistics regarding new business start-ups versus the purchase of an existing business from a non-franchisor. Once you have done this, compare these statistics with research on franchised endeavors. What you find may be useful in helping you make a sound business decision and helping you understand why franchising may be more beneficial for you. Here are some helpful facts of franchising:

• The US Department of Commerce, in an early edition of Franchising in the Economy, cited statistics showing that franchising had increased phenomenally over the years and it was a significant part of the present US marketing system. Franchising offers tremendous opportunities to individuals and companies seeking wider distribution of their products and services. The US Department of Commerce also pointed out that retail sales from franchise establishments accounted for over one-third of all US retail sales.
• John Naisbitt, in the Naisbitt Group's The Future of Franchising: Looking 25 Years Ahead to the Year 2010 (1989), predicted that more than one-half of all retail sales would be made through franchise sales by the year 2010.
• Government research over the years has indicated that the success rate for franchise-owned endeavors is significantly better than the rate for non-franchise-owned small businesses.

In short, the good news is that franchising is a growing part of the national economy and presents a better chance for success to the new franchisee. The bad news is that not every franchise is a surefire way to multiply your savings and provide you with an enjoyable occupation.

The legal definition of franchising

The legal definition of a franchise differs among the several states that have passed franchise registration statutes and the Federal Trade Commission (FTC). California was the first state to pass a franchising law, and its definition is similar to the definition of franchise used by the other states that have franchise registration statutes. The California definition, taken from California Business and Professions Code, Section 2001, defines "franchise" as follows:

Franchise means a contract or agreement, express or implied, whether oral or written, between two or more persons by which:

• A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor.
• The operation of the franchisee's business pursuant to that plan or system as substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliates; and
• The franchisee is required to pay, directly or indirectly, a franchise fee.

The cited business definition mentioned previously meets the elements of the legal definition; however, the attitudes of the franchisor and franchisee in looking upon the franchise as the "marketing arm" or the "independent company owned office substitute" of the franchisor set the franchising concept in the proper business perspective.

Thus, a potential franchisee should not purchase a franchise from any franchisor that he or she would not consider for a top employment position and a franchisor should not sell a franchise to any person he or she would not consider a top choice for a lifetime manager of a company-owned office. By the same token, a franchisor should give you the same care and support as he or she would give to his or her top managers of the company-owned outlets.

Business owner's definition of franchising

The business owner's definition is the most important definition to both the franchisor and franchisee, because if the franchise entity doesn't succeed, any legal statutory requirements are a moot point. The business owner's definition of franchising is as follows:

Franchising is a method of market expansion utilized by a successful business entity wanting to expand its distribution of services or products through retail entitities owned by independent operators using the trademarks or service marks, marketing techniques, and controls of the expanding business entity in return for the payment of fees and royalties from the retail outlet.

Essentially, the franchise is a substitute for the franchisor's company-owned office in the retail distribution of the franchisor's services or products. The success or failure of one party to this unique relationship generally determines the success or failure of the other party. If the franchisor and franchisee keep this business relationship definition in mind, the self-centered attitudes that appear to arise under the legal definition can be avoided.

McDonald's - The King of Franchise

McDonald's has often been referred to as the king of the businss format franchise. It all started when Ray Kroc, a milkshake machine salesman, discovered a successful drive-in restaurant in San Bernardino, California, run by the McDonald brothers. Kroc bought the rights from these two brothers to sell their method of running a restaurant as a franchise. Today McDonald's systemization has developed into an idiot-proof system for every aspect of running a fast food business - from specifying how many seconds french fries should be cooked to scripting exactly what employees should say when they greet customers. McDonald's training programs teaches every franchise manager how to implement its systems so that each restaurant will be run the same way 100% of the time. If the franchisee doesn't adhere to McDonald's high standards, McDonald's has the contractual power to terminate the franchisee.

Problems faced by Franchisors

Isaac Singer faced two problems when he wanted to get his sewing machines to market in the 1850s: training and money. His customers needed to be taught how to use the machines before they would buy them. He also needed a great deal of money to build his manufacturing facilities. Rather than hire a huge staff of trainers and raise all the capital himself, Singer decided to sell the rights to local businesspeople, whom he trained to teach customers how to use the product. In exchange for the right to sell the product, the businesspeople paid Singer license fees, which Singer used to help fund his manufacturing costs. The language, format, and contractual franchise agreementss Singer used are very similar to those still being used today.

Franchising: The early years

Historians credit two different groups of people for the early stages of franchising. Some historians believe the pope is responsible for the first francising system when, centuries ago, he was in charge of tax collection. Certain people were selected to serve as tax collectors and were given a geographical area over which they would collect the money. The collectors kept a sizeable portion of the money they collected and then gave the rest to the pope.

Other historians believe that franchising began in the Middle Ages, when local sovereigns or lords granted rights to local businessmen to hold markets or fairs, operate the local ferry, or hunt on sovereign's land. Kings offered franchises for most commercial activities, ranging from building roads to brewing ale. Basically the king gave some businessman the right to a monopoly for a particular type of commercial activity. Regulators developed regarding these franchises, which are still part of European Common Law today. The actual term franchise comes from an old French word meaning privilege or freedom. I find it very interesting today that for many who have pursued the franchising dream, the word freedom has been the ultimate objective.

The concept of franchising as it is known today dates back to the 1840s in Germany, when major ale brewers gave the exclusive rights to sell their products to certain taverns. But the true guru of modern franchising is Isaac Singer, who in 1858 built the market for Singer sewing machines using franchising agreements similar to those found today.

Singer's method of franchising, the product distribution method, was picked up by many manufacturers, including Coca Cola, which expanded its product throughout the US by shifting the burden of manufacturing, storing, and distributing its soda to local businesspeople through the process of selling them bottling rights. Car manufacturers found they could shift their distribution and selling costs to local businessmen who wanted to run car dealerships. Oil companies saw the light, too, and shifted their distribution and retail costs to local businessmen who ran convenience stores, gas stations, and car-repair shops.

After World War II, when millions of US servicemen & women returned from the war needing jobs, the concept of business format franchising took hold. Many of these veterans decided they wanted to run their own businesses, but didn't necessarily have the knowledge or capital to develop a business concept from scratch. In addition to the need for jobs, there was also a dramatic need for the rapid expansion of service industries, such as hotels, motels, and fast-food restaurants.

These two forces drove the creation of the type of franchising that dominates the sector today - business format franchising. Companies that developed an ideal business model for running one of these types of service businesses sold their business model to local businesspeople who wanted to run that business in their their own area.

Definitions

• Franchise - A right granted to a business by a company to use the company's name and sell or rent its products and service is called a franchise.
• License - A license grants permission to engage in a particular business activity.
• Product distribution franchise - The right to use a brand name and distribute a product is a Product distribution franchise.
• Business format franchise - The right to use a brand name and distribute a product plus the systems needed to operate the local business is a Business format franchise.
• Franchisor - The company that sells the right to offer its product or service to a businessperson is the franchisor.
• Franchisee - The businessperson who buys the right to sell the product or services of another company is the Franchisee.
  

Learning about franchising

Franchising works. According to a 2004 survey done by the consulting arm of PricewaterhouseCoopers for the International Franchise Association Educational Foundation, more than 9.7 million people in the US work in the world of franchising. Franchising is found in almost every industry, from the most visible - the fast food industry - to hotels & motels, educational services, home repair and remodeling, health & wellness services, and business support services. According to the IFA, some industry analysts indicate that sales through franchises businesses have grown faster than the gross domestic product. And over 50 percent of retail sales are made at franchised shops.

So if franchising is such a powerful economic engine, then what's driving it, and how can you get involved?

At its most basic level, franchising is a business relationship. In fact, in my opinion, franchising is the most relationally intense business concept that exists. This relationship links a company that wants to distribute a product or service and an entrepreneur who wants to run his or her own business. In both types of franchises, the company that sells the rights to distribute a product or use a business format is called the franchisor. The businessperson who buys those rights is called the franchisee.

The company that owns the product or service grants a limited license to the person who wants to sell or distribute that product or service. There are two types of franchises that exist today: product distribution and business format. Product distribution franchises involve an agreement between the manufacturer and entrepreneur granting the rights to sell the manufacturer's product, but do not operate under the name of the manufacturer.

The more common type of franchise today is called business format franchising: the company offering the franchise provides not only the product or service, but also licenses the entrepreneur, who wants to start the business, an entire system for running that business.

Buying a franchise

Are you currently working for someone but longing to be your own boss by owning your own business? Are you retired and looking for a way to get back into a new line of work? Are you a recent college graduate wanting to get into your own business? When looking for new business opportunities, buying a franchise or existing business may be the way for you to go. But how do you select your own business? As a new business purchaser, you must first select your own business? As a new business purchaser, you must first select a particular field of business you like and then decide whether or not that endeavor is suitable to your past experience and talents. Once you have done so, you can pursue a more established course of action.

When starting a business, you have three options. First, you can start your business from scratch, using your own name, knowledge, and background. Second, you can buy an existing business, to own the business outright and operate it without any controls from a third party. Third, you can purchase a form of license to sell a product or service utilizing the name, good will, marketing techniques, and operating procedures from a franchisor.

Once you have given adequate consideration to the advantages & disadvantages of buying outright or franchising and have carefully weighed your conclusions along these lines with your conslusions about other forms of business, you can then decide how best to invest your savings and fulfill your dream of being your own boss. According to statistics provided by the US Department of Commerce, the chances of success in a franchise operation are generally recognized as much greater than those of operating a business from scratch or even purchasing an existing business. You must also realize, however, that the autonomy in operating a franchise is not necessarily less than in operating a business you start or a business you purchase.

In addition, any prospective business owner should remember that the risk of failure exists in purchasing any business, be it a franchise or a local business venture. One important item to keep in mind in any business purchase is the ground rules set forth in the purchase agreement. These ground rules are often a determining factor in the success or failure of any purchased entity. It is not so much that the purchase agreement must contain legal loopholes or escape clauses that allow a buyer to regain his or her compensation if the business should fail - which is often not the case when a franchise is purchased - but the terms must be workable for both parties. To be workable and successful, the terms should include that the initial and ongoing fees and obligations provide a reasonable profit to the franchisor or seller and are also affordable to the buyer.

Interested in Franchiee

Executive says to the Conman above, "We're interested in taking out a franchise."

How franchising is better

Franchising is a terrific way to turn a company into a regional, national, or international sensation. But you will need a solid concept, adept management, and the financial resources to be profitable. By franchising:

• People will pay you for your proven business model so that they, too, can run a profitable operation.
• People will pay you royalties based on their sales.
• Your concept can grow regionally, nationally, or even internationally.
• You are creating a viable exit strategy for when you are ready to retire.
• You are following a model that has worked for more than 50 years, for the most part, successfully.

Franchise companies added nearly 30,000 new establishments to the US economy in 2006, according to the International Franchise Association.

Franchisee success stories

The 50 years of the history of franchisig is filled with the following success stories:

• Ray Kroc got his start as a mixer salesman whose California clients, brothers Dick and Mac McDonald, ran a popular hamburger restaurant, McDonald's. Mr Kroc purchased the restaurant and transformed it into today's giant operation through franchising.
• Fred DeLuca, the Subway Restaurant founder, launched his business as a 17 year old when a family friend wrote him a $1,000 check so that he could open a sandwich shop in Connecticut. After opening 32 other Subways in the state, the company grew nationally and internationally by franchising.
• Tom Carvel, the famous ice cream maker, launched his business with a $15 investment, selling ice cream from a truck. Later, as a refrigeration consultant and concessionaire, the taught shopkeepers how to create his ice cream for a flat fee and a percentage of the sales - in other words, through franchising.
• William Rosenberg created Dunkin' Donuts from a small 'roach coach' in the Boston area.
• David Sandler, founder of the Sandler Sales Institute, sold his sales training program to Fortune 500 corporations as well as small and medium sized companies.
• Gary and Diane Heavin, founders of Curves for Women, grea a small chain of women's only 30 minute fitness centers in Waco, Texas, to an international chain of more than 6,000 such fitness centers.
  

Cartoon: Best kept secret

... and we kick off our new 'Best Kept Secret' hamburger franchise with a 3 month, 30-city media blitz.

Becoming a franchisee

Establishing an independent business may seem like a lot of work. It does hold a great amount of risk. If you don't have an unique product in mind and you want to build upon the proven success, reputation, and customer base of an established product or sevice, then franchising is your answer. Unlike in independent businesses, decisions are made for you by experienced industry professionals. Your name, trademark, and product like are known, trusted, and recognizable from day one.

If you decide to go this route, you still have a large and vastly important decision to make - which franchise is right for you? Which franchise will keep you interested, will make proper use of your skills and knowledge, and will bring you profit in the end? You have a number of options as you begin to gather the information that will enable you to choose exactly the right franchise.

You may have considered visiting a franchise broker. Brokers have low fees and can match you to a franchise based on your education, skills, and psychological attributes. However, you should know that brokers match you based upon a small list of available franchises. Brokers are paid by franchisers to market their businesses. That means that brokers will not suggest all possible options, but only those businesses with which they are in partnership. In order to find the perfect franchise, narrowing your options by visiting a broker is probably not your best bet.

We suggest gathering your own information to make the most informed choice. Don't worry! A number of resources exist that can help you. The most important thing to remember at the information-gathering stage is to remain organized. Keep organized and detailed records of names, databases, and Websites. Be sure you record which information goes with which franchise or industry. Such detailed analysis will prove invaluable when the time comes to make your final selection.

Begin your information gathering by making a list of questions. When beginning a new enterprise, everyone has concerns and needs as well as more general questions. Write these questions down, and do not stop gathering information until you have a satisfactory answer to everyone. Try to find the overlap in your questions and answers. How do the questions and answers interact? Such observations can provide you with even deeper insight.

What kinds of questions should you be asking? In addition to any personal needs or expectation, you should consider company and product longevity, competition, and modernization. For example, you should research the company's past financial records and its relationship with other companies. You should also research where the market and technology are heading and assess the company's products and services in that light. Has the company stayed up to date with current trends? Are there any upcoming introductions of new products or services that might threaten the company's own products and services? If so, how would the company be likely to respond? Is the company expanding? Is it focused? What kinds of services and support does it offer its franchisees? Finally, if your franchise would require employees other than yourself, is the labor attractive? Would you be able to offer competitive pay rates?

The answer to your questions can be found on the Internet, in franchise and business directories, in books and magazines, and at trade shows.

• Internet: Much useful information can be found online. As with all Internet research, be careful of your sources. You should especially be sure to check the individual Web sites of the companies you are considering taking a franchise with.
• Directories: A number of franchise directories are available to assist you. Directories are the best place to begin the information gathering process.
• Franchise Opportunities Guide (www.Franchise.org): Published bi-yearly by the International Franchise Association (IFA), this guide contains essential information such as the names and contact information of franchisers, suppliers, and legal consultants specializing in the franchise industry. It also includes franchise statistics and articles of interest to the franchisee. You can order the guide through the IFA at (800) 543-1038 or via the IFA Web site for $17.
• Franchise Update Publications (www.Franchise-Update.com): This organization publishes a number of guides, including Executive's Guide to Franchise Opportunities; Food Service Guide to Franchise Opportunities; Guide to Multiple-Unit Franchise Opportunities; and Franchise Update Magazine. These are essential publications. For information about ordering them, go to the Web site or call (800) 289-4232.
• Bond's Franchise Guide (www.WorldFranchising.com): This guide covers both the US & Canada and includes contact information for more than 1000 franchisers. It costs $29.95 and can be purchased at (800) 841-0873 or via the Web site. World Franchising also publishes a number of helpful books.
• Franchise Annual (www.InfoNews.com): This guide also publishes franchiser contact information, along with brief business descriptions and fees. The guide is available online and can be purchased for $44.95 by calling (716) 754-4669 or via the Info News Web site.
  

Franchisor warning franchisee

The franchisor is warning a franchisee in the above cartoon, "Bottom Line? If sales don't improve, I will shut you down." Really, Bob loved working with kids.

Choosing the right franchise

You're interested in buying a franchise, but how do you know which franchise is right for you? Which franchise will suit your individual knowledge, skills, goals and preferred level of involvement? By choosing the right franchise, your chances of success increase substantially - most failed franchises result from a buyer not doing sufficient research to find the franchise that suits him best.

Franchises are not independent businesses

The first thing any franchisee must realize is that a franchise is not an independent business. Franchising is not for you if you are the type of person who needs exacting control over your business. Do not forget: when you purchase a franchise, you are simply providing the capital to enable another person's dream, idea or product enter the marketplace. Why? Because it has already proven its worth - it works.

Most independent businesses fail within 3 years of their launch. A large amount of capital, time, energy, and personal sacrifice is needed to make an independent business succeed. Don't let this deter you, though, if you have a big, new idea for a product or service that you are sure consumers cannot live without - perhaps establishing an independent business is the way to go.

There are many resources available to help you decide whether your business idea is worth pursuing.

Check out the Service Corps of Retired Executives (SCORE) (www.score.org). The Corps partners with hte US Small Business Administration (SBA) (www.sbaonline.sba.gov) and offers the advice and counseling of retired business executives to those thinking about starting an independent business. SCORE can help with financial planning, creating and following a business plan, and other issues that are critical to starting a business.

The Small Business Development Center (SBDC) (www.sbaonline.sba.gov/sbdc/) is another organization affiliated with the SBA. The SBDC has 63 of its own centers across the nation, as well as more than 1100 offices within local schools, colleges, and chambers of commerce. Your local SBDC can provide you with technical & management assistance for your independent business.

Before establishing an independent business, you should do extensive market research on your idea. Is it appealing to consumers? Will it have a market? Have SCORE and an SBDC review your findings and point out any weaknesses. Also, be sure that your idea is economically feasible. Will your costs (rent, inventory, taxes, fees, payroll, insurance, legal fees) be covered by your revenue? Is your product pricing fair? Do you have a supportive & reliable bank? Once again, use SCORE and an SBDC to be sure your financial calculations make sense.

Franchise out life

Yes, I know the Meaning of Life, but I've decided to franchise it!

The Educated Franchisee by Rick Bisio

The Educated Franchisee is a How-To book by Rick Bisio & Mike Kohler for choosing a winning franchise for your business. The book starts with a chapter on fear and Frank Carney, co-founder Pizza Hut & current franchisee Papa John's Pizza says about it, "Fear is a good motivator. So is wealth. This book shows they can work together to help you find success as an entrepreneur in franchising." He also says, "Having both owned businesses & helped others become business owners, I can tell you that building a successful business can be one of the most satisfying acts of your life. This book is designed to help make sure you find the very best business for you."

After more than 20 years as a business communication executive with Cox Communications, Mike Kohler was introduced to franchising through his work with Rick Bisio. Kohler has successfully owned both franchise & master franchise businesses. His experiences in franchise exploration contribute an end-user dimension to this book's concepts.

Kohler has taught business management & English composition. He earned his Bachelor's degree in Communications (Journalism) and a Master's degree in Business Administration, both from the University of Nebraska-Omaha.

Cartoon: Lemonade franchising

See how a lemonade seller starts franchising for his 50 cents lemonade to a customer saying, "Here's your lemonade and here's some descriptive literature about my franchising opportunities."

Results of the franchisee motivation survey report

The recently conducted Franchisee Motivation Survey led to the results that the most credible source of information for evaluating the franchises is talking with the present franchisees. Though, it doesn't come as a surprise as people don't blindly trust franchisors and do a background check by talking with the present franchisees. Some other sources are:

• Company sources (Internet)
• Meeting personally with company representatives
• Reading company material
• Researching company website
• Visiting their booth at a trade show
• Listening to company presentation to a group
• Visiting franchise location
• Talking to a franchise broker
  

Refund counters

Marks & Spencer refund counters: 'No quibble refunds' and 'Quibble refunds'

The Franchise Handbook: A Complete Guide to All Aspects of Buying Selling or Investing in a Franchise

The Franchise Handbook: A Complete Guide to All Aspects of Buying Selling or Investing in a Franchise is a book by Robert Hayes which is considered to be a great resource for both prospective franchisees & franchisers and explains in details what the franchise system entails and the precise benefits it offers to both parties. You will learn franchising advantages and disadvantages, how to develop or purchase a winning concept, how to choose a business franchise that fits your personal style and financial goals, how to develop forecasts and budgets and how to estimate startup costs. The book also covers managing daily operations, attracting and keeping customers, hiring employees and training staff, securing financing, legal agreements, offerings, markets, real estate, cost control, marketing, international franchising, as well as federal and state franchise regulations. Ed Teixeira, President FranchiseKnowHow, says, "This book describes the important components of acquiring and operating a franchise.. an ideal tool for prospective franchisees."