Basics about Franchising, Is It Right For You & Choosing the Right Franchise to Invest In

A lot goes into deciding which franchise business is the right one to invest in.  One large ‘if’ is if a Franchise business is even the right type of business to start or invest in for you.  A lot foes into the decision, and here are some items for you to consider when deciding which, if any, franchise business is the right one for you.

The video below contains a brief discussion of franchise businesses, and has some practical stories from actual franchisee business owners.

Here is a recap of the discussion about franchise businesses from the embedded video above.

Definitions:

Franchisor:  The Owner of the Franchise System that administers & manages the overall brand.

Franchisee:  The business owner who chooses to own and operate one or more units under the purview of the Franchisor.

Franchise Unit:  One single franchise license associated with one physical location or territory. For example if you open two franchise sandwich stores, it would be two franchise units.

Franchise Fee:

• The franchise fee is the amount paid to the Franchisor for the rights to be a member of the franchise system.

• Is the Franchise Fee reasonable for the industry?  How does it compare to competitors in the same industry?

• How long is the intial Franchise Term for?  How much is the renewal fee?  Is it equivalent to paying a brand new franchise fee, or is it simply a nominal amount?

Royalties:

• On Going fees paid to the Franchisor by the Franchisee.  It is usually a percentage of the gross sales, such as 6% of monthly gross sales.  It can be collected, weekly or perhaps monthly by the Franchisor.

• Things you want to investigate is are there minimum royalties due, how are they collected, and how do they compare to the competitors.

• Occasionally it is possible to negotiate a brief moratorium on Royalties, especially during the start up phase.  This is helpful in getting a business off the ground, by freeing up working capital for marketing purposes.

Ad Funds aka Brand Funds:

• In addition to the Royalties, most franchisors have a fee for marketing and promotional purposes.  Again, usually it is a percentage of the Gross Sales.

• Check to see how much local marketing is being done in your area to determine if you are getting value for the money you will be contributing.

• Take Advantage of the current market conditions, which have lease rates far below the rates of 2007. Assignment Clause:

• Pay attention to the Assignment & Personal Guaranty Clause:  Both of these can be sticking points when you want to sell, so read up on them in your lease to understand the challenges facing you.

• Clear up Maintenance Responsibilities between you and the landlord

Leasing: Site Selection & Cost of Occupancy:

• Selecting a location to operate your franchise unit from can be a challenging process, so it is good to check if you will be receiving assistance from the Franchisor with this.

• HOWEVER, keep in mind, that you, and you alone, will be responsible for the lease obligations, so make sure to be very involved in the process, if not, outright leading the process.

• Make sure the rent is going to really be feasible to your business.  Always negotiate good terms.  And this goes beyond the rate.  There are many, many other points in a lease to negotiate.   Read the following page titled Lease Negotiation Services to see a collection of articles about the various aspects of commercial leases to consider and negotiate.

Inventory and FF&E (Furniture Fixtures & Equipment):

• Is some intial inventory included with the Franchise Fee?  How much initial inventory will be needed, so you can properly budget for it beforehand.

• Same thing goes for the FF&E (Furniture, Fixtures & Equipment) that you will need to open for business.  Is some equipment included with the Franchise Fee.  Know how much you’ll need to spend so you can budget for it. Check pricing of Equipment especially if you are buying from Franchisor approved Vendors. Is the Franchisor making a profit on the equipment sales?

• WATCH out for terrible equipment lease terms, in case you are either required to lease finance equipment, or have to lease finance equipment out of necessity. Carefully review the terms of the lease to make sure you are not getting ripped off in fees, interest or payoff payments. Equipment financing is a murky field that is vulnerable to rip offs.

Vendor Relationships:

• Are there exclusive vendor relationships with the franchisor?

• If there are exclusive relationships, this can be a good thing as there may be favorable pricing that has been negotiated to reduce costs to the franchisees.

• But, find out if the vendors give purchasing rebates, and find out if the Franchisor is keeping them for themselves, or passing on those rebates to the Franchisees.

On Going Franchisor Support & The Franchisor’s growth strategy:

• Check with existing franchisees to see how much support they are getting from the Franchisor with operational issues.

• Is the Franchisor on a quick growth strategy? If so, they may be spreading resources to adding new franchisees at the expense of on going support for the existing franchisees.

• Who owns the Franchise Brand? The founder, or has it been sold off to Franchising professionals? Both have their upsides and downsides.

Territory Protection:

• How close to your location will the Franchisor ask you or another franchisee to open another location?

• You want to make sure the franchise agreement specifies criteria that will offer protection to your unit location. You don’t want to be forced to open another unit too close to your current location that will cannibalize sales from each other. Worse yet, you wan Space

Area Developer Agreements:

• Are you planning on opening multiple units? If so, an Area Developer Agreement is something to consider. It is a franchise agreement that calls for specific number of locations to be opened in a specified territory and timeline.

• An important distinction is the type of Area Developer Agreement is who will be responsible for opening the units. Some Area Developer Agreements call for the the Area Developer Franchisee to open and operate all of the stores. While other allow for the Area Developer to recruit other franchisees to open and operate the stores.

For More information on how Just Elementary, Inc, Business Brokers can help you with lease negotiation, site selection & reviewing prospective franchises to invest in contact our Client Care Manager Sonia Chhabra at  (888) 926-9193 or email cs@justelementary.com