Steps to Franchise Ownership

(1) Franchising 101

Franchising is a way of doing business that has been popular in the U.S. since the 1950s. Every franchise is based on a contract between an individual, or "franchisee," and a company, called a "franchisor." The franchisor provides its business model, brand name, operating system, training and ongoing support. In exchange, the franchisee pays an initial franchise fee, agrees to open and operate a business according to the franchisor’s specifications, and pays the franchisor a percentage of his or her monthly revenues, called a royalty.

The U.S. has at least 3,000 franchise companies and more than a million individual franchisees who operate restaurants, hair salons, fitness centers, carpet cleaning vans and hundreds of other types of businesses. Joining a franchise provides you with a ready-made business, but, like any business, there is no guarantee of success.

Here are some things to think about if you’re considering franchising:

  • Are you able to work within a system? The franchisor determines what your business will look like, which products or services you provide and often, your store’s hours.
  • Do you like dealing with people? Franchisees must promote their businesses within their communities, serve their customers and inspire their employees.
  • Do you have plenty of stamina? Often, launching a franchise means working seven days a week for many months.
  • Do you have the capital? Like all new businesses, franchises take a long time, often a year or more, to break even, longer to turn a profit. How will you pay your living expenses in the meantime?
  • Do you have the support and understanding of your partner and/or your family?

(2) Getting Started

If you still feel confident that you could become a franchisee, here are some tips to help you get started:

  • Do some research. Read "The Franchise Times Guide to Selecting, Buying & Owning a Franchise" and other books on the subject. Look through directories of franchises, including those listed in the SuperBook and on the International Franchise Association's web site, www.franchise.org.
  • Drive around and try to spot franchises in your community. Can you see yourself operating one of them? Can you think of businesses your community doesn’t have that you’ve seen elsewhere?
  • Narrow your search, by making lists of franchise types that interest you and/or are in an industry in which you have previous experience.
  • Franchises vary in price, from a few thousand dollars to several million. Check out the total investment required for the franchises you like. Cross out those that are way beyond your means.
  • Take your time. The average person spends six months choosing a franchise; many successful franchisees devoted years to the process.
  • Be open to new ideas. Rarely does anyone buy the first franchise that grabs him or her.

(3) Contacting Franchisors

Online application – Carefully read through the Web sites of the franchises you like that are within your estimated price range. Is there one already operating in your community? If not, or if you think there's room for more than one, scroll down to the “request franchise information” section and fill out the online form. Franchisors get hundreds, sometimes thousands, of these online requests each month, mostly from people who are not financially qualified to own one of their franchises. Be honest when filling in the "total net worth" and "total liquid capital" sections; the franchisor will check your bank statements and credit score before accepting you as a serious candidate.

First phone call – If you fit the franchisor's financial parameters and if the company wants to sell more franchises in your area, a representative will telephone you to further assess your qualifications. Again, be honest about your reasons for showing an interest in this particular franchise. Ask questions. If the initial caller is pushy, claiming that you have to act quickly, hang up and go to another franchise on your list.

Second phone call – Once you've passed pre-screening muster, a franchise salesperson will call or e-mail with a request for a longer conversation. Set aside a couple of uninterrupted hours, make a list of what you want from a franchise, in terms of income and personal rewards, then frame questions to determine if this franchise will fill those needs. During the phone call, if you like what you hear, show some enthusiasm. The salesperson will be assessing whether you have the personality to fit into this concept.

Franchise Disclosure Documents – At the end of the conversation, the salesperson may offer to send you a link to the company’s Franchise Disclosure Documents. An FDD, which can be quite long, contains the 23 items every franchisor must disclose to all prospective franchisees. Before you consider buying a franchise, you will want to go through its FDD carefully with an attorney. At this point, read it carefully, noting all fees you will have to pay to operate this franchise and all franchisee obligations. Pay particular attention to:

  • Item 3 – Litigation. Is the franchisor involved in lawsuits with current or former franchisees?
  • Item 4 – Bankruptcy. Has the company, any of its predecessors, or any of its principals filed for bankruptcy?
  • Item 20 – Franchisees. Have a lot of franchisees left the system recently?

Discovery Day – At some point, you will want to meet the people who run the franchises you’re exploring. Most franchisors host regular Discovery Days at their headquarters to:

  • Introduce prospective franchisees to their company’s executives, training, technology and support people
  • Provide in-person demonstrations of their franchise’s products and services
  • Assess whether franchisee candidates will fit into their culture
  • And, most important, convince you to buy their franchise.

Tips for Attending Discovery Days

  • If franchise headquarters is far from your home, ask the franchise representative if they'll pick up a share of your travel expenses.
  • Plan to take along your spouse or partner.
  • Plan to attend Discovery Days at more than one franchise. Only about half the prospective franchisees who attend these events end up buying that franchise.
  • Prepare a list of questions based on your reading of the FDD, your phone conversations with some of the existing franchisees you’re found listed in the FDD's Item 20, and any news articles you’ve read about the company. Do the executives answer candidly or are they vague and unhelpful? If it's the latter, move on to another franchisor.
  • Distribute your business cards to the other attendees and collect their contact information. 
  • If you feel comfortable with what you see, show the franchise company representatives that you're interested.
  • Do not make a decision during this visit. Leave your checkbook at home.
     

(4) If it looks like a franchise …

To save money, some business owners try to skirt franchise laws by granting licenses, rather than franchise agreements.

Here’s how to tell if a business opportunity is actually a franchise, according to Lee Wright, a partner and franchise attorney with Kirton & McConkie.

According to Wright, businesses are considered franchisors based on three criteria:

  1. It takes money for the use of a name (and trademarks, in some cases);
  2. It provides training;
  3. It provides a structure for the business.

 If the company meets all three criteria, failure to adhere to franchise law can trigger a range of negative consequences.

Source: Gaebler.com