Deciding on a Franchise Product or Service to Sell

It’s a big decision deciding what you want to sell, what business or franchise product or service speaks to you and will also make you money when you decide on what type of franchise to buy or business to own.

Private Or Public Directions On A SignpostHave you ever thought about why stores in your neighborhood sell what they sell? For example, a Postal Connections in Islandia, New York, is an agent for U-Haul and a store in Redmond, Oregon, sells greeting cards and locally made gifts and crafts.

How did they and how do other local stores decide what they want to sell and what would also work in their markets? Here are 15 points to consider when making this decision:

  • Do you like the product you’re considering selling to the point that you would buy it yourself?
  • Would you champion it to a friend or family member?
  • Does it look like the product or service has staying power…will it still be moving over the next five to ten years?
  • Can the product be advertised and sold for a reasonable COGS (Cost of Goods Sold)?
  • Can you make money selling it?
  • Is there a demand for the product in your local area?
  • What problem does the product resolve for your customers… how does it improve their life?
  • Who will you be selling it to…what are the demographics?
  • Do you like the customers who will be using this product or service?
  • How will the product or service by promoted and sold?
  • Does the need exist for the product?
  • What is the guarantee, service process or replacement procedure?
  • Name three ways the product is superior to its competition in the area.
  • Is the product priced lower and/or of better quality than similar products?
  • How is the product or service manufactured or produced?

To sell a product or service, everything has to be right: price, timing, demand, supply and especially your contentment in selling it.

Five Paths to Franchise Financing

businessman pressing button virtual screensYou’ve found the ideal business in the thriving world of franchising and are ready to live the dream of business ownership where you are supported by the strength of a national franchisor.

As you ponder how to pay for it, there are several sources of funding that you may want to look into:

  • Home Equity: If you own enough of your home and feel confident about your business decision, you can take a second mortgage or set up a line of credit with your lender. You will not need a business plan for this type of financing so this method can often be the simplest route to business ownership.
  • Small Business Administration Financing: SBA backed loans can be a great source of funding especially for those who may not quality for traditional financing sources.
  • Traditional: This is where you go to a bank and get the money. You will need a pretty good credit rating, a solid business plan and some on-hand liquid capital. However, the rates can be very competitive if you meet all of the criteria and your franchisor might even help with your business plan.
  • IRA Money: You can roll your IRA money into a business loan. The advantage is that no penalties are associated with this conversion and you will not need a business plan or good credit because it’s your money.
  • Franchisor Programs: Some franchisors offer in-house financing or have established partnerships with lending companies. Because the lending company has confidence in the concept, it can be easier to get a loan.

You can also borrow money from family and friends. If you have built up good credit, you might even be able to get a loan online or quality for an unsecured business credit line.

The point is that there are several alternatives to franchise financing. Find the one that works best for you.

The importance of Pre-qualification to a Franchise Investment

Postal Connections

Similar to buying a home, it is vital that a perspective franchise buyer has realistic expectations, preparation and know cash flow capabilities to make a franchise investment.  For years, mortgage companies have pre-qualified borrowers to establish a price range for the home they would lend to.  The benefits are many, including a pre-qualification provides tremendous buying power and the right guidance on lending ratios—debt to income level, for example. This knowledge gives the buyer confidence for making purchase decisions.

Investing in a franchise is very similar.  The amount financed to own a franchise is an important consideration—debt service is a fixed cost that must be paid every month. Realistic business expectations, solid revenue and cost estimates, are critical to purchasing a franchise opportunity. The Franchise Disclosure Document [FDD], a FTC filing, is where you’ll find this. With this Document and your current financial records are what’s needed to easily achieve a funding pre-qualification.

Once a franchisor knows you have the financial capabilities, the more eager they will be to advise you in many areas such as site selection, space lease payment levels, potential sales territory and marketing plans even before you join their network. At Postal Connections we are able to guide people to funding sources and offer advice to make qualifying easier.

Here are some simple tips:

  • Be able to prove your financial status (Borrowing from your rich uncle, unless documented is not a serious financial status)
  • Be prepared to have funds available buy the franchise, run the franchise for several months and pay your bills at home.
  • Work with the Franchisor to understand financial requirements from signing an agreement (most franchises require payment of a fee), installation cost for the business, marketing cost from Grand Opening to reaching break even.
  •  Use borrowing or leasing to an advantage. Borrowing can get you into business now and interest rates are at historic lows. Leasing does not impact your credit scores and if “closed-end” you own everything after the last payment.
  • Have enough money to advertise. A start-ups always need funds to build awareness and advertise incentives to try your business.
  • Understand how to use leverage and avoid over-extending. This aspect is very important and your chosen Franchise should be willing to give you straightforward and specific advice.

We’ll help you determine the best match for financing and cash management.  Franchising is an active investment that requires ongoing work and capital.  But the rewards are tremendous, as long as you finance properly based on thoughtful business expectations and a realistic plan for paying back the borrowed money.

Alan George, Postal Connections Franchise Development

The FTC and Franchising

Consider these powerful facts about franchising:

  • There are about 825,000 U.S. franchise business
  • 40.9 percent of all retail businesses are franchises
  • Franchising contributes 8.2 million direct jobs and 18 million indirect
  • Franchising adds $2.1 trillion to annual U.S. Gross National Product [GDP]

That’s the way it stands now but it was a long road getting there. Some of the most popular and well known franchises were created spanning many decades:

  • Howard Johnson 1925
  • Kentucky Fried Chicken 1930
  • Baskin Robbins 1948
  • Dunkin Donuts 1950
  • Burger King 1954
  • McDonald’s 1955

However, the success of these franchisors and others spawned some unfunded and poorly managed franchise ventures in the 1960s and 1970s. Some even bordered on fraud where money was taken from those eager to own businesses but a franchise was not delivered as promised.

FF pic IFA

The FTC and IFA

The federal government stepped in in the form of the Federal Trade Commission (FTC). Many regulations were added to bring full disclosure of what potential franchisees might be getting themselves into.

In addition, the International Franchise Association (IFA) was founded in 1978. It’s a reputable industry group where franchisor members use the IFA icon to show compliance with best practices and full disclosure. (In 1978, membership was only for Franchisors, today individual franchisees can join.)

Full Disclosure Documents

Also, the FTC created the Uniform Franchise Offering Circular (UFOC). This was updated in 2007 and is now called the Franchise Disclosure Document (FDD).

Along with the FDD, the business contract (Franchise Agreement) must also be included. Every franchise is governed by these two documents. In fact, if it’s not in the Franchise Agreement, it’s not an obligation.

 What’s in the Documents?

  • A legal description of the business & the term
  • Franchisee & franchisor obligations
  • All fees & payments
  • Detailed Lists of what is included with the fees
  • Statement of average unit sales (Item 19, optional)
  • Rights to transfer, expand & renew the franchise
  • Territorial rights
  • Signatures to the contract
  • Current & former franchisees list
  • Audited statement for the franchisor
  • And more…

Obviously, for potential franchisees these are must read documents. They are designed to make sure that everything is above board and the franchisee is getting good value at a fair price and that it’s something that can be verified.

A Veteran Discovers the American Dream in Franchising

What do you do if you’re a veteran who is reentering the workforce? You might get a traditional job. However, after serving in the military and coming out with a set of impressive skills like humility, a service mentality, discipline and most importantly, the ability to see any situation all the way through, you might consider owning a business. These skills and others acquired in military service makes you a perfect candidate for entrepreneurship.

FM Marc RichardMarc Richard- Franchisee of the Year

That’s what happened with Marc Richard. He bought a Postal Connections franchise in Vero Beach, FL in 2010 and proceeded to thrive in the franchise environment. So much so, that in 2011, he was named Franchisee of the Year.

He also will be a forum presenter at the Military Officers Association of America Career Fair held the week of May, 12th, 2014. He transitioned from graduating from West Point to serving as a US Army infantry captain to joining the workforce to becoming an entrepreneur which is the topic of his speech at the Career Fair. Marc is uniquely qualified to speak about his experiences which may help other veterans seeking a path after their honorable service to our country.

Veterans in Business for Themselves

One of the paths for veterans is business ownership. According to the Small Business Association and US Census Bureau stats. many veterans are doing just that. Consider these statistics from a survey conducted by the Census Bureau:

  • In 2007 (the latest year figures are available for), there were 2.45 million businesses with majority ownership by veterans, representing 9% of all US firms.
  • 8.3 percent of the respondents had service related disabilities.
  • California, Texas, Florida, New York and Georgia had the largest number of veteran-owned businesses.
  • 75.1 percent were 55 years and older and tended to be better educated than other business owners.
  • Finance, insurance, transportation, construction and scientific and technical services were among the industries that veterans were involved in.
  • The largest capital source (reported by 61.7% of the respondents) was personal or family savings followed by business loans (9.8%) from commercial financial institutions.

Often, veterans who go into business for themselves, especially in franchising, can take advantage of favorable offerings to ease the transition. For example, currently, Postal Connections is offering 50% off the franchise fee for veterans.

In addition, the turnkey nature along with the built in support system (In Business for Yourself but not by Yourself) features of a franchise can make it a very attractive option for veterans seeking their hard earned slice of the American Dream.

The Power of Franchising in America- By the Numbers

FM number-of-franchise-businesses CensusThe importance of the American Franchise system cannot be overemphasized. Since the 1840s, when German brewers granted rights to taverns to craft their beer, the system made its way across the pond to gradually become the major force in American business that it is today.


Franchise Facts

  • There are 825,000 U.S. franchise businesses
  • 40.9 percent  of all retail businesses are franchises
  • Franchising generated 8.2 million direct franchise jobs and 18 million indirect
  • The business model contributes $2.1 trillion to the U.S. Gross National Product [GDP] annually

Franchise Ownership

Isaac Singer, who improved the sewing machine in the mid-1800s, is considered one of the first, if not the first, American franchisor. Now, the business models attract every type of individual seeking his/her slice of the enticing American Dream of business ownership. In franchising’s case, this is a tried and true business formula.

Current franchise ownership stats are:

  • 20.5 percent  are owned by women
  • 24.4 percent  are jointly owned by women
  • Since 2011, more than 5,000 US veterans and their spouses have started franchises
  • Minority ownership increased by 6.2% from 2002 – 2007
  • 20.5 percent of franchises are minority owned. (Minorities make up 14.2% ownership of non-franchise businesses.)

Franchise Progress

There is a reason that franchising remains so popular among such a diverse segment of entrepreneurs. The formula is successful. Because, let’s face it, it’s tough to make a go of a business. With a franchise, however, you are in business for yourself but not by yourself. And that’s what creates the dynamics in these statistics.

  • Fewer than 5% of total franchises close each year
  • Nearly 97% of new franchises are still in business after 5 years (study done by Arthur Anderson/now Accenture on a sample of 400)
  • 62.2 percent of all new businesses close after 6 years (U.S. Small Business Administration)

When considering a business opportunity, make sure you look at the power of a franchise. If you join one, you will be part of one of America’s great economic engines.

(graph from

Financing Your Franchise Dream from an Unexpected Source

Did you know that you could finance your business from your 401K or IRA without incurring a tax penalty? When we say finance, we mean all costs associated with your business from living expenses until you get profitable to franchise fees.

Economy Affects 50+ Age Group

Our economy has changed dramatically in the past eight years. One result has been that many employees over 50 years old have lost their jobs and are having difficulty finding replacement employment. Often, they have valuable work experience and retirement savings to use toward another venture because they are not ready to retire. Many would like to create a career bridge to retirement while building an asset that can later contribute to their finances when that occurs.

FM 401k-Button Fran Net blog

401k/ IRA Financing Advantages

In our experience with franchise candidates 50 years old and more, we see retirement fund franchise financing becoming an important resource for getting into business. The benefits over borrowing from banks or other financing sources are many:

  • You pay the principle and interest on the loan back to your retirement fund. Of course, your 401K or IRA takes the risk. But that risk is often the same one that you would take by borrowing since most lenders require a personal guarantee to pay off your loan.
  • Funding via your retirement account does not impact your credit report or score.
  • It is often faster to get the funds via 401K/IRA rather than by typical lending processes.
  • There are several credible firms available to assist you in setting up funding via your 401K or IRA. These companies have experience in setting up a government accepted C-Corporation inside your retirement account so there is no tax impact and it passes legal requirements as a non-personally directed investment.
  • Often the investment of the C-Corporation is only one of several funds within your retirement account.

Tax Deductions

Your C-Corp will cost money to set up and there will be a monthly management fee to the company you select to handle this transaction. The usual cost of this is $4,000 to $5,000 for set up and under $100 per month in management fees. All of these cost are expenses that are tax deductions for your C-Corp.

Choosing a company to assist with setting up your 401K or IRA as a funding source should be chosen by performing due diligence just like in every aspect of your business buying exploration process.

Two sources that will come up when searching for 401k business funding are Guidant and Fran Funding. Spend time discussing their services with them so you can judge how exactly they will support your business.

 (Pic from Fran blog)

Locking into the Franchise Formula

One of the main differentiators between buying an independent business and purchasing a franchise is the franchise formula. But what is a franchise formula? It is a proven model for marketing and operating a business from lawn care to garage door installations to educational systems to cupcake shops to a fast food restaurant.

Independent businesses also have a formula, but their model is about that specific operation and how the current owner works the business. It is not a proven formula beyond its current state because there is no proof of it working in another locale or under a different owner.

Asset Value

When you own a franchise business over many years you are continuing to pour value into your business and the franchise as a whole. As a result, the ability to sell if/when the time comes appears to be much greater. This is due to the fact that the franchise business is working in other locations among other owners.

What you’re really doing when you buy a franchise is investing in its formula. The impact of that can be seen in the business support you receive. (Remember, when you buy an independent business, the owner usually leaves after a short period of time and you’re on your own.)

Franchise support is typically extended to:

  • Marketing to target customers or protected territories
  • Operations support that starts with a complete description (manuals) of how the business works
  • Training, ongoing support and business concept updates
  • Financial sourcing and planning in support of the business’ progress
  • Site selection if the business is location specific
  • Brand identity

FM franchise direct

Due Diligence

Of course, not all franchises are created equal. And it is the individual’s duty to perform due diligence and confirm that the franchisor is meeting the basic expectations of the franchise formula. This is done by reviewing the franchisor’s claims, investigating current franchisee performance and carefully studying the Franchise Disclosure Document [FDD].

The final step in validating the franchise formula is having a personal meeting with the franchisor. This is where you get to probe about the business philosophy and the company operational practices. See if they’re realistic and most importantly, if they fit your expectations and personality.

(Image from Franchise Direct)

What Does a Franchise Cost and What is the Money For?

FM logo 3As one who offers franchise opportunities, typically the first question asked by interested people is how much does it cost to become a franchisee and what does this include? To answer this question it needs to be understood that a franchise is a system—usually including proprietary methods, training, a brand name and support from experts—for operating a proven business concept.

With franchising, no matter what your initial buy-in is, you should be able to make money. The franchise cost of entry and how fast you reach an ROI, greatly depends on what franchise you choose, what you can afford and the ongoing cost for operating the business. But where the initial investment money goes is similar for most franchises.

Below are the main initial costs:

Franchise Fee- This is what must be paid to become part of the franchise system. It is for the tried and true business concept, the expertise of the franchisor and the chance to become part of a money-making opportunity. This fee can run from a few thousand dollars to more than $100,000 for greater opportunities of revenue and for the higher end, well known franchises. It usually includes the rights to use proprietary materials and systems as well as the cost of training, initial marketing packages, software and website access.

The franchise fee also can be based on the size of the territory (population) that you will service and how much support will be provided by the franchisor. For example, the iSold It franchisor offers both an at-home and a brick and mortar location franchise system. The franchise fees are different due to territories defined and training.

Build Out and/or Business Set-Up Expenses- These are expenses needed to make any modifications to the physical space to conform to the franchise standards. They include equipment, software (if needed), branding décor, sales materials, supplies, freight to deliver items, training, and other expenses the franchisor might incur to set-up your business.

For example, if you are opening a retail business, it would be flooring, cabinets, counters, sales inventory, equipment, signage, etc. It also includes construction costs, fees for any local licenses and materials needed to bring the store up to standard.

For a home based business it typically includes equipment needed to market and sell things, products, business supplies, and branding materials (whether online or printed). Typically, the franchisor is heavily involved in assisting you in this important process.

Liquidity or Operating Reserve- It will take some time before the franchise turns a profit so franchisors usually require new franchises to have cash-on-hand to take them through that period. This could be needed for as little as six months to over a year. It is the money needed to keep the business going until you pass a breakeven point. This is the financial number, often called fixed cost of the business, that you need to “keep the doors open” whether or not one sale is made.

Once you become a franchisee, your franchisor should spend time with you determining exactly what your breakeven point is. He should also help you plan several years out about how much sales revenue will come to you as wages or profit distribution.

These categories of cost, called Total Initial Investment, are the amount you should expect to invest in the new franchise. Every franchisor is required by the Federal Trade Commission to accurately report the Total Initial Investment to people considering purchase of the franchise in their Franchise Disclosure Document [FDD] and in any advertising stating the initial cost.

Example: Postal Connections Initial Investment

FM Chart 2

Click on this chart to enlarge it

But there is another potential expense for start-up not part of the initial investment that we encourage every franchise prospect to consider:

Professional Costs- In making a life-changing purchase like buying a franchise, you may want to hire an attorney to help you make a sound decision. The attorney will review all of the franchise documents to make sure they comply with local and state laws as well as to ensure you understand the franchisor’s and your obligations stated in the language of the franchise agreement.

If you need to set up a corporation and need help setting up your books, you may need to hire an accountant also.

Hire professionals who are familiar with the way franchises work.

Obviously, it’s important to understand what you will initially pay out and be comfortable about where that money is going and how it will come back to you with a profit. Never be too embarrassed to ask as many questions as it takes for you to fully understand what you’re paying for.

Small vs Big Franchises

FM Franchises on StreetFranchising is a uniquely American business model. In fact, the entire idea of selling a proven business formula to others with support over a period of years in return for royalties became popular in the US just after WWII. Since then, franchises have grown to account for a third of the businesses in the US There isn’t a small town or busy city street that doesn’t have a store or service truck operated by a franchisee.

An important factor in considering a franchise is deciding if you prefer a big or small franchise system.

Big Franchise Chains

These well-known organizations offer brand recognition that brings people to the business whether online, on the phone or on the street. You pay for the brand recognition in the initial investment as well as to an ongoing fund to continue promotion of the awareness and good image of the company. For example, some of them can cost as much as $500k for the total initial investment and up to 8.5% of your monthly sales.

Also, as a franchisee, you will work with staff operations, business development or marketing departments of these franchisors. Programs are sophisticated and typically originate and are directed from headquarters. Individual face-to-face attention is emphasized less and implementation of standardized programs are the most common solutions to business challenges.

Smaller Franchise Chains

Choosing a lesser known franchise brand, usually smaller but with a proven business model, are ideal for people who have fewer capital resources, seek flexibility in operating the business, and are prepared to do much of the marketing effort locally. The initial investment is less and the ongoing marketing cost, usually, is less. Initial costs may be as little as a few thousand dollars and ongoing royalties are generally low.

Points to Ponder

To help you decide what size & brand development fits your goals, here are three things to consider:

  • Be sure the franchisor is committed to be in business with you. This means the franchisor is “with you” as you set up the business. He thoroughly explains the business formula so you understand the financial model, the best sites to look for and how to work with vendors. Check to see if he can be reached in a timely fashion. Will he come to visit you when needed? Does he demonstrate understanding of your business goals and will he help you achieve them?
  • Be sure to know what resources are available to you through your franchisor. This includes working with you on a step by step basis in organizing the necessary opening resources needed to open your store.

FM logo 3Find out if your franchisor has a non-fiduciary relationship with any funding sources he might be recommending. Check out how the training program is run including the franchisor’s commitment to it.

  • Whether the franchise is large or small, make sure the business model is proven. That’s what you’re paying for. It’s supposed to have all of the bugs worked out of it and be ready to generate a profit assuming you put in the required effort.

One thing that cannot be discounted is how you feel after you meet with the franchisor. Are you getting a good vibe? No matter which route you take, a large or small franchise business, it has to feel right.

(Image from the William Rosenberg International Center of Franchising: