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8 Steps to Take Prior to Buying a Franchise- Franchise Fred

As with any major purchase, especially one that will become your life’s work, perform your due diligence. Below are eight steps you need to take prior to buying a franchise:

  • Make sure your own finances are in order. Franchisors will want to know that you are financially secure before awarding you a franchise.
  • Carefully review the Franchise Disclosure Document (FDD). This document is a treasure chest of information about the Franchisor. Among other things, check for any litigation issues, your obligations to the franchisor and vice versa and any financing the franchisor may provide.
  • Understand exactly what the franchise fee covers. Some franchise fees cover for all of the start-up costs and some exclude marketing and training. Make sure you know what you will have to pay in addition to the fees to get a good start in your business.
  • Ask about support. Find out what level of support you will receive from the franchisor. Will they create ads for you? Assist you with hiring? Provide continual training?
  • Talk to current franchisees. Ask them about any disputes, if the franchisor does what they say they’re going to do and how long it took them to get to their break-even point.
  • Make sure there is a territorial clause in the franchise agreement you will be signing. This is defined as an exclusive territory around the business location. The agreement will specify that no other franchisee will be allowed to open in that territory. The territory could be stipulated by zip codes, the number of households in the area, highway boundaries or any number of other definitions.
  • Check for the existence of franchisee advisory groups and associations. In general, franchise advisory groups are organized by the franchisor. They are comprised of franchisees and representatives of the franchisor. An association usually is independent of the franchisor. As a franchisee, you may have to pay dues to join so the group can be funded. The presence of one or both of these groups generally indicates that the franchisor welcomes input and closely listens to franchisee concerns.
  • Know the franchisor. Any agreement is only as good as those who make it. Do your research on the internet and elsewhere about the franchisor. Check the franchisor’s employment history, how long they have been managing franchisees and any litigation history they may have been a party to.

Finally, consider retaining the services of an experienced franchise attorney to review the franchise agreement with you. This will help ensure you have a clear understanding of all of its contents.

The Impact of Franchising in America

Periodically, the International Franchise Association Educational Foundation publishes a study developed by PwC that measures the contributions of franchising to the US economy.  The key economics measured in the study were jobs, payroll output and GDP establishments. It’s exhaustive research that even presents the impact on a state by state basis.

Following are some of the findings from that study (2007 data, the latest data available):

More than 828,000 establishments operated out of US franchise systems. They produced the following:

  •  9.1 million jobs
  • $304.4 billion in payroll
  • $802.2 billion of economic output
  • $468.5 billion to the GDP

In addition, franchised businesses were 2.8% of all non-farm business establishments and their output contributed to 3.4% of the total US GDP.

Job Data

Franchising is a prolific employer. This is how jobs generated by franchising stack up compared to other sectors of the economy:

  • Durable goods manufacturing 9,171,500
  • Franchised businesses 9,125,700
  • Financial and insurance 8,801,600
  • Real estate and rental and leasing 7,765,500
  • Wholesale trade 6,582,600
  • Transportation and warehousing 5,949,900
  • Nondurable goods manufacturing 5,300,300
  • Information 3,556,900

Jobs generated by franchising are number two to durable goods manufacturing.

FF pie chartThis pie chart from the report that shows how franchising jobs are distributed among the different businesses.

When you break it down by state the number of people employed because of franchised businesses was the greatest in New York, Illinois, Florida, Texas and California. On total jobs in a state, franchising had the greatest impact in Mississippi with 15.8% of Mississippi’s private sector jobs related to franchising. In fact, in every state franchising ranked over 10% of private sector jobs except in New York, Rhode Island, Massachusetts and the District of Columbia.

This data underscores the considerable contribution franchising systems make to the US economy. You can read a PDF version of the study at http://www.buildingopportunity.com/download/Part1.pdf.

Fred Morache has spent many years in the franchising business and is currently the managing franchisor partner for iSold It and Postal Connections of America franchises

How to Decide Between an Independent or Franchise Business

FF te-deum blogspot.comHow to Decide Between an Independent or Franchise Business

When you decide to buy a business, one of the first decisions you will face is whether to purchase an independent or a franchise business. People succeed in both kinds of enterprises but there are significant differences between the opportunities. A big part of the choice may also be how well either one meshes with your personality. Talk with family, friends and trusted advisors to help get insights to this major career choice. Here are some points to consider:

Business Model

As an independent business you can change, add or eliminate products and services as you assess what works best in your market or even determine what your personal feelings are about what you sell.

A franchisor usually makes those decisions for a franchisee.

However, an independent business owner does not possess the security knowing that product lines and services have already been tested and maximized for the market. Franchisees give up the decision-making independence but reap the benefits of the tried and true.

Costs

In most cases, franchises have lower total investment expenses, especially up front. But, they have to pay ongoing royalties and may have little say in the timing and scope of other investments and renovations.

If an independent business owner is having a cash flow issue, expansion can be delayed. The owner can dictate the terms of any projects they pursue.

Brand

This can be a big advantage for franchise buyers. If the brand is well known and constantly cultivated, they will benefit from that exposure. It’s unlikely that an independent business owner will have the advantage of brand recognition unless it has been proactively marketed.

Resources

Franchisees have the advantage of a business system, a network of suppliers, marketing support and other services. These are especially helpful to those who might be lacking formal business education and experience.

Independent business owners are on their own. They have to develop their own supplier network, set price points and develop marketing strategies, all vital and daunting tasks, particularly for the novice. It can also result in a lot of trial and error to help figure out what works best which costs time and money. The independent business owner, however, retains complete control.

Support

Who can an independent business owner call in times of trouble? Maybe an outside advisor. A franchisee can call other franchise owners knowing they are experiencing the same situation. They can also call the corporate headquarters to get assistance in everything from training to troubleshooting.  That can bring a significant degree of comfort to the entrepreneur taking the business ownership plunge for the first time.

At the end, make sure whichever opportunity you select matches your personality.

Fred Morache has spent many years in the franchising business and is currently the managing franchisor partner for iSold It and Postal Connections of America franchises. 

(Pic from Te-deum blogspot)