Tuesday, March 24, 2009

Steps to Acquiring a Franchise

Step 1: First, you must determine if you would function well as a franchisee.

Your job is to make an informed business decision about whether a franchisor’s business opportunity meets your needs and whether you can provide what the franchisor wants and needs in a franchisee.

You need to ask yourself basic questions:

1. What do you want from life at this time?
2. What are your wants, needs, and desires?
3. What are your goals, objectives, and dreams?
4. What are you looking for in a business?
5. Have you decided to leave what you are now doing–not just the job, but the profession?
6. Have you made a decision to become a part of another organization? Remember that in franchising you joined someone else’s business. You are going to be using their marketing system to generate customers and their operating system to satisfy them.
7. Do you have the kind of personality that can accept running the business according to someone else’s plan without feeling that it compromises your individuality?
8. Do you have an interest in doing this kind of work for the length of the agreement?
9. Have you ever worked for one company for five or ten years?
10. Do you have related skills, knowledge, abilities, and work related experiences similar to the ones required for running the franchise you are considering?
11. Do you have the financial resources to open and operate the business successfully?
12. Can the business support your lifestyle needs?
13. Which of the franchises you are reviewing meets your financial needs short and long term?

Step 2: You then have to choose the right franchise among the 3000 plus franchise selections available. Most franchisor's today have web pages with tons of information on their companies and their franchise opportunities. Evaluate the legal documents from a business perspective. Determine whether the franchisor has territory policies that might make franchisees less competitive in a highly competitive environment. Many prospective franchisees erroneously believe that having a large territory is best for them. It could, in fact, be the worst thing for them. For example, if you have too few franchisees in a market and competitors have more units than you have, it could leave you at a disadvantage in terms of dominating the market for your product or service in your area.

Look for a franchisor who can communicate a strategy not just for market presence but for dominating markets; look for a franchisor interested in establishing a competitive edge and increasing market share. If a franchisor cannot talk about these issues, it is entirely possible the franchisor is using franchising as a way to generate franchise fees and royalty revenue rather than to establish a competitive position in the marketplace.

Evaluate the marketing/advertising fee. Many franchisors and prospective franchisees erroneously believe that a low marketing fee is a good thing. In fact, the marketing fee should be related to the amount of money each franchisee needs to contribute to support an advertising campaign that will generate enough new and repeat
business for each of them. A 1% advertising fee may look good now, but when you need 5% from everyone to be competitive, it might not be possible to convince all franchisees to participate.

Evaluate the effectiveness of the Franchise Advisory Council. Does the franchisor incorporate the franchisees’ input in the decisions that affect the future direction of the system? Does the franchisor involve franchisees’ input in decisions?

Be sure you can answer the question “How will I make money in this business?” There should be a very simple answer to this question. It will not violate earnings claims restrictions for the franchisor to answer it because you are not asking “How much money will I make?” You simply want to know how money is made in the business. Spend as much time as possible speaking to existing franchisees. Ask them if they would do it again. How long did it take them to recoup their investment? How much money are they making? Does the operating system work? Are they provided with good marketing programs? Do the franchisees get along well with each other and with the franchisor? What are the major problems with the business? Do they use all of the operating system? Is the franchisor’s ongoing support adequate and helpful? The answers to these questions will help you make your decision.

Step 3: After you narrow down your franchise choices, you must then thoroughly investigate each opportunity.

After your preliminary research, you’re going to contact the franchise systems you’re interested in. You will receive an information package from each company. By the way, this is a good way for you to begin to evaluate the franchise. You might want to think over whether or not you want to pursue this particular opportunity if it takes a month or more to receive the information or if you can’t even get to this point because all you do is leave voice mail messages for the franchise development department.

Generally, a franchise information package will contain a letter, a brochure describing the business and a qualifying questionnaire. The questionnaire usually asks for the following information:

o Assets

o Liabilities

o Net Worth

o Sources of Income

o Educational History

o Previous Employment

o Credit References

o Personal References

o Motivation for Buying a Franchise

The franchisor should have a business plan for the system that covers at least the length of the agreement you are being asked to commit to. Ask for the plan for the market where you are going to locate the operation. Ask for their analysis of the competition. Ask how many units are being planned for your area and why that many. Why not more, why not less? Ask how much is going to be spent on marketing in your area.

Ask to look at the operations manuals or at least to see an outline of them. This is important because the operations manuals are your guideline to a successful operation. You need to feel comfortable that they are complete and clear and meet your abilities, needs, and goals. Ask to receive a full explanation of the initial and subsequent training programs. Ask how people are trained. Is it classroom or hands-on practice? Are there case studies and discussions or is it straight lecture?

Ask for a full explanation of the pre-opening assistance offered by the franchisor. Understand any help franchisors give for site selection and lease negotiation. Be clear about what ongoing support the franchisor provides to the franchisees.

Step 4: Once you have made a choice you must analyze and understand the franchise agreement and, if possible, negotiate points of disagreement with the franchisor. The disclosure document will provide you with a wealth of information that you should have reviewed by your accountant as well as a qualified franchise attorney.

Many prospective franchisees unfortunately rely upon their local lawyers for advice on franchising matters. Franchising is a complicated and somewhat unique branch of the law and requires you to work with lawyers that practice in this area. A good source for locating a qualified franchise attorney is through the International.

Step 5: Finally, you will have to put together a financial package to fund your franchise investment.

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