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II. What is Franchising and How Does It Work?
III. Is Franchising for You?
IV. Advantages and Disadvantages of Owning a Franchise
V. Evaluating a Franchise.
VI. Common Pitfalls
Franchising is an excellent choice for many people. A 1992 Gallup poll found that 73 percent of franchisees felt that their franchise had met or exceeded their expectations. In fact, the growth rate for franchise operations often outpaces the economy. However, only you can decided if it is the right choice for you, and to do that you need information. Our goal at Duelllawfirm.com is to provide potential franchisees with the resources they need to determine if franchising is right for them, and to help them find the best franchise to suit your area in Georgia, interests and financial situation.
Many new entrepreneurs lack the support they need to make their business a success. A fledgling independent business is very vulnerable, and even a small setback can have severe consequences. Franchising reduces many of these risks. Franchisees have a significant and effective support system backing them up. After all, it’s to the franchisor’s benefit to help individual franchises succeed. Statistically, a low-cost franchise operation has a much lower risk of failure than an independent business. By franchising, you are able to take advantage of the momentum built up by the franchisor, rather than trying to generate that momentum yourself.
A franchise is far from risk-free, however. Franchise ownership has its own disadvantages and challenges. Still, it’s often a safer choice than striking out on your own.
Before you decide to purchase a franchise in Georgia of your own, you should familiarize yourself how franchises work, the advantages and disadvantages of the franchise system, your own abilities, and what qualities to look for in a franchise.
II. What Is Franchising and How Does It Work?
A franchise opportunity is a relationship between a franchisor (seller) and a franchisee (buyer). This relationship continues for the duration of the franchisee’s ownership of the business.
In some ways, buying a franchise is like buying a kit which you then assemble into a business. This kit comes with a box full of pieces, a screwdriver and a few other tools and a detailed set of instructions. While it may be tempting to jump right in, it’s best to read those instructions first.
When you a buy a franchise, you purchase the right to use the franchisor’s name as well as the franchisor’s assistance to help you run your business. You gain the right to operate a business in a given format and sell products or services produced for that format. This system and these products have been developed and refined by the franchisor.
Franchises reflect the ideals of the parent company, and the individual franchisees agree to abide by the franchisor’s rules when they buy their own franchises. Franchisors may have the right to approve your business location, building design and décor, the products and/or services you offer and even your hours of operation. Make certain you understand and can function within the limits set by the franchisor before you purchase a franchise. Be aware that a franchisee can lose the right to his or her business if the franchise contract is breached.
III. Is Franchising for You?
Many franchisees are former CEOs, CFOs and other high-ranking corporate officers. They may have been downsized or have chosen to leave their corporations for personal or professional reasons. These people often have skills that make them excellent franchisees. Some companies look for franchisees who have a sales or marketing background and some prefer people without preconceived notions whom they can train in the franchisor’s system.
Before purchasing a franchise in Georgia, you need to ask yourself, “Am I prepared to run my own business?” A franchise doesn’t run itself. A good leader can turn a weak franchise into a profitable business, and a poor leader can drive a good franchise into the ground.
Successful franchise owners can answer ‘yes’ to all of the following questions:
- Are you willing to work long hours to get your business up and running?
- Do you have the skills and education needed to run this franchise? If not, are you willing to learn?
- Will you be content to operate your business with in the parameters set by the franchisor?
- Are you disciplined enough for business ownership?
- Are you confident enough to be the boss and make decisions?
- Do you work well with people from all walks of life?
- Do others respond positively to your leadership?
- Can you make a plan and carry it out?
- Do you enjoy competing in the marketplace?
- Can you successfully network with various groups in Georgia and surrounding areas?
- Can you recognize when you need help and then ask for it?
- Are you willing to lead by example?
Possessing these skills is an excellent start, but you must be financially prepared as well.
Capital – You will need a certain amount of capital to buy your franchise and to support yourself as the franchise grows. A business owner always pays himself or herself last. You must first meet your financial obligations to your suppliers and your employees before you pay yourself.
Goals – Set realistic financial goals and examine how franchise ownership will further them.
Risk – There is some risk to purchasing a franchise. You must be prepared to face that risk, as well as having a plan in mind should your franchise not do as well as you’d expected, or even fail entirely.
IV. Advantages and Disadvantages of Owning a Georgia Franchise
Before purchasing a franchise, familiarize yourself with both the advantages and disadvantages of franchising in general and of the particular franchise you are considering.
- Purchasing Power
- Expert Assistance
- Proven Success
- Start-Up Costs
- Long-term Commitment
- Possibility of Nonrenewal
When you purchase a franchise, you become part of a group of many nearly-identical businesses. This gives you some powerful advantages that can make the difference between the success and failure of your business.
Purchasing Power – When you buy a franchise, you become part of a large group of businesses, all of which are purchasing identical (or nearly identical) supplies. Thus, franchisees can often purchase goods at a lower price than they could as individuals. Most franchisors restrict their franchisees from purchasing goods from other sources. This protects the purchasing power of the group, but it does limit the franchisee’s ability to make his or her own choices.
Familiarity – When you buy a franchise, much of the work has already been done for you. The public already knows your product and knows what to expect. Brand recognition is a precious commodity, especially in retail. It’s not enough for an independent business to provide a quality product or service. The independent business in Georgia and throughout the United States must also reach potential customers and convince them to try a new product or service.
For a franchisee, however, this work has already been done. When the franchisor implements a marketing campaign, all of its franchisees benefit. A franchise is able to undertake a more-intense and calculated marketing campaign than an individual business because of its greater resources. However, many franchisors require franchisees to contribute a percentage of their gross income to a co-operative marketing fund. Just as when purchasing goods, the franchisee will be purchasing advertising as part of a larger unit and get more bang for his or her advertising buck.
Expert Assistance – You don’t have to reinvent the wheel. As a franchisee, you will benefit from the franchisor’s years, or even decades, of experience. Experienced management teams can advise the franchisee and increase his or her chances of success in Georgia. Many franchisors offer formal and on-the-job training in areas including accounting procedures and personnel and facility management. Even individuals experienced in these areas can learn more quickly how to apply their skills to a new environment. Because franchisees can draw on the experience of the franchisor, the trial-and-error period is shorter and less painful and costly. This support is on-going for the duration of the relationship. A franchisee won’t be left to face unexpected difficulties alone.
Proven Success – The simplest and most-profound advantage of any franchise is that it works. Each franchise has a proven system of operation that has been tested and refined by the franchisor. If it didn’t work, it wouldn’t have survived to become a franchise.
All potential franchisees must ask themselves, “Is franchising right for me?” To make a sound decision, you need to examine the costs, risks and limitations of a particular franchise and of franchises in general. A franchise has the support of the franchisor behind it. However, each franchise is tied, good or bad, to the ups and downs of its franchisor.
Start-Up Costs – The cost of a franchise can range from thousands to hundreds of thousands of dollars. All potential franchisees must determine if they can afford this initial cost and if they can expect a reasonable return on their investment.
Conformity – All franchisees must be willing to limit their independence as entrepreneurs. They are subject to decisions made in the franchisor’s central office. In that respect, owning a franchise is like being a team leader within a larger company. The franchisee can make some decisions, but is always bound by the rules set down by the franchisor. This protects the brand as a whole for the benefit of all franchisees.
Each individual franchise is a member of a group of very similar franchises. Most franchisors insist that all franchisees follow their standard operating procedure. This insures that consumers can expect a familiar product or service whenever they enter any one of a given franchisor’s franchises, whether those franchises are in Georgia or hundreds of miles apart. Even if a franchisee feels he or she knows a better way, or that the standard operating procedure isn’t a good fit for a particular area, he or she is still constrained to follow it. This may be frustrating to individuals who want to experiment and innovate.
Many franchisors also prohibit individual franchisees from selling products or services other than those approved by the franchisor. As residents of their communities, individual franchisees in Georgia may see demand for a new or different product and be unable to address that demand because of limits set by the franchisor. They may become frustrated by this inability to use their own best judgment and seize opportunities. While many franchisors have a method in place for making suggestions, it’s often a confusing and time-consuming process.
Fees – Most franchisors require franchisees to pay a percentage (usually less than 10 percent) of their gross income as a continuous royalty fee. Some franchisees may begin to resent this fee after several years. They may feel that their success is a result of their own hard work and that the franchise could continue to thrive without the franchisor. Many franchisors also require a cooperative marketing payment, which usually amounts to a small percentage of the franchise’s gross income.
Long-term Commitment – Usually, the only way a franchisee can leave the franchisor/franchisee relationship is to sell the business. Ask yourself, “Do I want to be involved with this franchisor for years?” Make sure you know any restrictions on selling the franchise to another person. It’s also important to know under what conditions the franchisor is required to buy back the business.
Dependence – An individual franchise’s success is bound to the success of the franchisor. Before purchasing a franchise, carefully examine the franchisor’s financial reports and business plans and look for potential weaknesses. Unfortunately, it’s not uncommon for a franchisor to have problems when purchased by a larger corporation or when there is a change in leadership. A franchisee has no control over these conditions.
Possibility of Nonrenewal – Keep in mind that most franchise rights are for a limited time and the renewal of the franchise contract is not guaranteed.
V. Evaluating a Franchise
Perhaps more than any other investment, buying a franchise requires careful research and analysis of potential risks and rewards. Before choosing a franchise, you must consider your goals, interests and what resources you have available to you. Examine all facets of any franchise you are considering buying, and choose the one that fits you best. This is a long-term commitment, so don’t settle for a franchise that isn’t right for you. Consider your own skills, the advantages the franchise offers you and the Georgia market.
This process has six steps:
1. Evaluate Yourself
2. Gather Information
3. Review the Franchise Disclosure Document (FDD)
4. Contact Current Franchisees
5. Eliminate the Least-Suitable Choices
6. Make Your Final Decision
1. Evaluate Yourself
Before you begin looking at franchises, first evaluate yourself and your own skills. You are the single most-important component of a franchise. List what you need from your business and what you have to offer. Keep in mind that, until your team is well established, you will (and should) be your own best employee. You must be willing to put in as much time as necessary to be certain that everything is done correctly on time. If you’re a good manager, then this should only last as long as it takes you to build a reliable team.
You must also honestly evaluate your own skills. List your past jobs and what skills you learned. What weaknesses did you discover in yourself and how did you address them? What did you like best and least about each job?
Consider your own interests as well. Some people can successfully run a business that sells a product or service that they aren’t passionately interested in, and some can’t. You need to consider which type of person you are. Is running a business enough for you, regardless of the product? Or do you want to use your franchise as a way to get involved in an industry in Georgia that interests you? Neither of these answers is wrong, but you must decide which type of person you are before you choose your franchise.
Let’s say you’re a vegetarian looking at purchasing a franchise. You may find great satisfaction in managing a successful business, and be perfectly content to own and manage a fast-food franchise that sells a lot of burgers. On the other hand, perhaps you are strongly dedicated to a vegetarian lifestyle and the idea of owning a business that serves burgers makes you uncomfortable. Once you’ve purchased a franchise you could easily spend years managing it. Make certain you’re choosing something that will bring you satisfaction.
On the other hand, don’t limit yourself. Consider all of the possibilities available to you before making your final choice. Let’s say that, as a person who is a vegetarian and interested in health food, you decide your franchise should be vegetarian restaurant. You’ve already eliminated a huge number of possibilities based on only one (rather whimsical) criterion. By limiting yourself to just one or two business concepts, you may very well eliminate the franchise that would suit you perfectly. You might discover that the territory you’d like to operate in isn’t available, or that you don’t have the capital to cover the start-up costs. Perhaps vegetarian food isn’t very popular in your area. Consider your interests, your resources and the Georgia market in your search for the right franchise for you.
You should evaluate yourself just as thoroughly as your potential franchisor will be evaluating you. That’s right – you don’t just hand over some money and sign a contract. Franchisors want successful franchisees. They’ve seen what works and what types of people make successful franchisees in Georgia and throughout the world.
Capital – Most franchisors look for a certain amount of liquid capital and minimum net worth in their franchisees. While some franchisors offer financing assistance, a good franchise won’t want to see its franchisees start out heavily in debt. Franchisors generally have a good idea how long it will take for a franchisee to start making money, and they want their franchisees to have the capital to weather that period.
Personal Qualities – Some qualities are nearly universal in successful franchisees, and others are specific to a franchise or an industry. Franchisors know this and will look for these qualities in potential franchisees.
Skills – Franchisors are interested in certain skills in their potential franchisees. One skill that almost all franchisors look for is an understanding of how a business works. Others include leadership and discipline.
Experience – Franchisors generally prefer franchisees who have experience in business, leadership and organization. However, most would rather their franchisees not have a lot of experience with another franchise. They don’t want to have to un-teach an old system in order to teach a new one. Most franchises have extensive training programs, so your specific experience isn’t as important as it might be when seeking a job. For example, both a nurse and a teacher have learned to handle pressure, deal with the public, and make important decisions. Both of these professions could be a good training ground for potential franchisees.
Every franchisor wants successful franchisees. They want to find the franchisees who are right for their business, just as franchisees want to find the franchise that’s right for them. Make sure you meet the franchise staff who will be working with you and evaluate their competence and style. If they seem hurried or stressed, the franchise might not have the staff resources to support your franchise.
You might encounter franchisors that are looking for quantity over quality. Avoid these franchises. They will not be vested in your success and long-term goals. Instead, they are hoping that by starting a large number of franchises that a few will become successes.
2. Gather Information
Once you have a list of some potential franchises, do some research and look over the company’s web page. Call Duell Law Firm in Birmingham, Alabama.
Find the answers to these questions:
- How many franchises are in operation?
- How long have the franchisor and its franchisees been in operation?
- How many franchises have failed, including those bought back by the franchisor?
- How well-known is this franchise in Georgia?
- Is this franchise continuing to grow and innovate in Georgia, or is it becoming stale?
These factors are important indicators of potential risk. A relatively-new franchise has both a greater chance of failure and a greater potential for reward. A well-known franchise’s potential reward might not be as great, but it may be more of a ‘sure thing’. Consider your own tolerance for risk as you examine potential franchises.
Once you have some general information, contact the franchisors and request information about franchising. You’ll probably get a call from personnel in the franchise development department who will answer some of your questions and ask you a few in return. This is your first contact with this company. Have pen and paper ready and record your initial impressions of the franchise, and have your list of questions handy. Carefully review any materials they send.
Remember, as a franchisee you should expect help and support from the franchisor. Poor service from the franchise development department could be indicative of other problems. These people and the support they provide will be crucial in the early stages of your franchise. Make sure they are professional and competent. A good staff will be helpful and professional. They will answer your questions. A rushed staff may simply not have the time to give you the support you need.
Make sure to learn the following from the franchisor:
- Are you being offered an exclusive territory for the length of the franchise or can the franchise sell a second or third franchise in your market area?
- Do you have the right of first refusal to adjacent areas?
- Are there any fees in addition to those listed in the FDD?
- How does the franchisor use the initial franchise fees?
Examine the growth rate of each potential franchise. A healthy franchise will attract a number of new franchisee. However, you don’t want a franchise that’s growth is so rapid that it threatens to outpace the franchisor’s ability to support the franchisees. To evaluate a franchise’s growth rate, examine these areas:
New Franchises Added Each Year – This information is not usually available in the UFDD, so you’ll need to ask the franchisor for these numbers. You should also find out the size of the staff that supports new franchisees. If an established franchise is adding very few new franchisees each year, this could be a sign of problems in the company. Perhaps their business model is problematic and is rejected by many potential franchisees, or perhaps their support staff is small, forcing them to reject a number of qualified franchisees.
A healthy medium-sized company usually adds new franchisees equaling 10% to 35% of their total franchises, and should have the resources and support staff to grow 35% of their total franchises each year.
For very large or small companies, compare the number of support personnel to new franchisees. A ratio of 1 support person for every 10-20 new franchisees is an indicator that a company can prepare and support their new franchisees.
The assistance a franchisor offers new franchisees can be critical to their success.
Training – Look for a combination of classroom and on-the-job training at least a few weeks in length.
Management Assistance – While there should be extensive assistance available to new franchisees, a franchisor should also be prepared to offer continued and emergency assistance.
Financial Assistance – Determine what financial assistance the franchisor can offer. This might include the franchise fee, equipment, building, supplies and operating capital. A less-reliable franchisor may not obtain the financing that is most-beneficial to franchisees. Review the interest rates and loan conditions with a professional attorney or accountant.
Site Location – An experienced franchisor should be able to offer you assistance in choosing an advantageous location for your franchise.
Building – Assistance in planning and constructing your building can help you save a great deal of money. Find out if there is an additional fee for this assistance.
Consider the Georgia Market
To be successful, a business requires the support of its community. It’s important to understand a community’s needs and demands before opening a business there.
- Is there a demand for the product or service this franchise offers?
- What competition will I be up against? (Consider both existing and potential competition.)
- Does my franchisor have a good reputation in the Georgia area?
- Can I make the necessary changes to meet Georgia’s specific needs and demands?
Once you’ve found a franchise that interests you, research it thoroughly. Seek information from the following sources:
- A directory of franchise
- The Federal Disclosure Document
- Current franchisees
- The Federal Trade Commission
- Chamber of Commerce
- Small Business Administration
- Professional advisors
- “Dun & Bradstreet” reports or magazine articles
3. Review the Franchise Disclosure Document (FDD)
After the success of McDonald’s, many other companies began franchising. In 1979 the Federal Trade Commission’s Franchise Rule became effective. One of its requirements is that franchisors supply franchisees with their disclosure document.
Every franchise in the United States is required by law to provide the FDD to potential franchisees. It will clearly explain the responsibilities of the franchisee (including what costs, royalties and fees you will be required to pay) and the franchisor (including training and marketing programs) as well as the company’s history. If the FDD provides the franchise’s earnings claims, study these carefully. Take note of litigations with franchisees and the closing rate of units. An unusually high number of either could be a sign of a troubled franchise.
The FDD must contain the following information:
History and Experience – This should include information on the company and its officers and directors, the company’s principles, business experience and any recent litigation or bankruptcy history.
Financial Factors – This should include all relevant financial terms of the franchise opportunity, including initial franchise fees, other start-up costs and an investment range estimate for your total cost to enter this business, royalties, marketing fees and renewal fees that you will have to pay throughout your career as a franchisee with this company.
Exhibits – This should include audited financial statements, current franchisee lists with contact information, contracts and receipts.
Obligations and Restrictions – This should include your obligations to the franchisor and the franchisor’s obligations to you, as well as any mandated restrictions under which you are required to operate your business.
Other Information – This should include information on financing programs, territory, trademarks and patents, public figures and renewal or transfer provisions.
Financial Performance Representations (formerly Earnings Claims) – The FTC allows the franchisor to decide how much information (if any) about earnings it will provide to potential franchisees. If they do choose to provide this information, there are very strict rules about how this information can be given to the potential franchisee. The data must be accurate, as representative as possible and all assumptions and qualifications must be clearly labeled. Financial performance representations can be presented in a number of ways, so review this information very carefully.
These states currently have additional requirements beyond those mandated by the FTC:
- New York
- North Dakota
- Rhode Island
- South Dakota
Any additional information required by these states should be included in your FDD.
Make sure you thoroughly understand all of the information contained in the FDD. The FTC requires that this information be presented in understandable English, so if this document seems confusing, vague or unclear to you, seek advice from an experienced professional. These legal requirements exist to protect potential franchisees. However, they won’t be of any use if you don’t take the time to understand them.
4. Contact Current Franchisees
Existing Georgia franchisees are your best source for information on the culture and daily operations of the franchise. Ask them what they like and dislike about the franchise, if they are happy with the support they are receiving from the franchisor and the franchisor’s marketing effectiveness. You should also be able to get a general idea of how profitable the franchise is. Spend a significant amount of time learning about the training they received and initial and ongoing support. Make sure to speak with several new franchisees, because their answers will be more reflective of the current state of the company’s support system.
By gathering opinions from different franchisees, you’ll get a clear understanding of the franchise itself and how you’ll fit into it.
5. Eliminate the Least-Suitable Choices
After you’ve used the information gathered during the first four steps to narrow down your choices, you should be left with at least one franchise (hopefully more) that suits your purposes. Now it’s time for an on-site meeting with a franchisor. You’ll meet some of the top people in the home office and possibly make a visit to a Georgia franchisee. This will allow you to ask more questions and get a hands-on feel for the business.
Keep in mind that your potential franchisor will also be evaluating you. Be professional and ask intelligent questions.
6. Make Your Final Decision
Here it is. By this point you should have eliminated all but the very best possibility. As Sherlock Holmes said, “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” Perhaps our vegetarian friend never imagined owning a beauty salon or an auto-parts store, but finds that it fits his or her skills, needs, resources and market perfectly. Even if your journey has ended at an unexpected place, you should be very comfortable in your decision.
If not, step back and repeat steps 1-5. Don’t allow anyone to rush you into a decision.
As you evaluate each franchise, keep an eye out for warning signs of trouble ahead.
- Vague or incomplete documentation
- Unprofessional or unsatisfactory service from the franchise development department
- Large numbers of lawsuits and franchisees leaving the company (compare this to the overall size of the organization)
VI. Common Pitfalls
While a franchise, like any other business, is fraught with opportunities for missteps, there are a few areas where franchisees make the most mistakes.
Be sure to retain an attorney that is experienced in franchising. Duell Law Firm would be glad to help you review your new franchise.
FDD – Make sure that you understand all of the information in the FDD, and ask questions. These documents may be as long as 100 pages.
Feel free to contact the franchisor’s legal advisors and ask them to explain their understanding of the information and terms in the FDD. After all, they wrote it. Check over any remaining concerns with your attorney. If the document has a current date, ask for previous documentation and compare them.
Franchise Agreement and Other Legal Agreements – Review the franchise agreement, lease or real estate agreements and other contracts carefully with your attorney. If you have any concerns, contact the franchisor and get the franchisor’s clarifications in writing.
Contacts with Current Franchisees – Discuss any concerns and doubts about the company you are about to join with current franchisees. A franchisor may introduce you to specific franchisees who are compensated for helping the franchisor solicit new franchisees. Ask them directly about this, and then follow up with a letter stating their answers to your questions. People are often more careful to answer accurately when they are committing their answers to paper.
Cover a large cross-section of franchisees, including those in locations other than Georgia, with one franchise, with multiple franchises, long-term, new, successful and struggling. Try to determine what difficulties struggling franchisees are facing. Is the franchisor exercising too much control, or not enough? Has the franchisor met its obligations to the franchisee?
Also ask if the disclosure documents you have received are accurate in their experience.
Information on Failed Franchises – Select a few franchises that have been sold, closed or whose ownership has returned to the company. Contact the original owners and find out why these franchises failed. If there seems to be a common thread, examine the underlying problem. To be fair, get the franchisor’s version as well.
Working Capital – You’ll need enough working capital to cover all pre-opening costs, your family’s living expenses and keep your business afloat until you reach the break-even point.
Financing – Develop an accurate financial statement and be prepared to seek a loan if necessary.
Market – Analyze and understand the Georgia market before you open your franchise. Evaluate your franchisor’s marketing strategy. Consider your competition’s strengths and weaknesses.
As you may have noticed, all of our advice boils down to “seek more information”. A well-chosen franchise can enrich you financially and professionally. A poorly-chosen franchise can quickly drive you to ruin. Arm yourself with information and professional guidance.
Below are links to other websites and resources that may help you as a franchisee. We hope the information we've provided is helpful as you grow your franchise. Our franchise attorneys would be glad to answer any additional questions that you might have regarding franchising.