Franchisee Business Plan

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Roger C. Rule

The Complete Franchise Business Plan

What's the big difference between a traditional start-up business plan and a start-up franchiseplan? Essentially, the lattermust combine components of both the franchisee and thefranchisor. A franchise business plan, in effect, merges elements of both companies. If you'recrafting such a plan, be sure to cover the following eight basic sections, or chapters. Readcarefully, as some are slightly different from those found in traditional plans.

Abstract. The abstract in your franchise business plan is briefer than an executive

summary. It serves as a prologue.

Business summary. This summary retrieves the omitted subjects of a conventionalexecutive summary and combines them with elements of the traditional companydescription. Nothing is left out, just rearranged.

Franchise overview. The overview replaces the usual industry analysis.

The market. Treatments of the market and the competition combine to form the market

section.

Marketing plan. Marketing and sales strategies are conventionally included together in

the marketing plan.

Management qualifications. Essentially the same as in traditional business plans, thissection describes your management staff and your operational framework.

Financial pro formas. Also a traditional section, it groups together your financialprojections for the first year and for a longer range of three or five years.

Exhibits. This final section is where you put supporting documents needed to evaluate

your business plan - either to support information in other sections or to provide auxiliaryinformation not covered. If you have lots of exhibits, consider inserting some in thesections where they apply.

A final thought: If the goal of your franchise business plan is to secure financing, include aspecific chapter that doubles as a loan request or as an investment offering proposal.

Copyright 1998 Roger C. Rule. Adapted from the author's bookNo Money Down Financingfor Franchising(Central Point, Ore.: The Oasis Press/PSI-Research)

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10 Common Mistakes of ProspectiveFranchisees

1. Not reading, understanding or asking questions about the disclosure document. Thesedocuments are typically long, sometimes 80 pages, but it is very important that you read andunderstand each item, 1 through 23, of the Uniform Franchise Offering Circular (UFOC). As youread the document, keep notes on those areas that are confusing and unclear. While you maywant your attorney's opinion, give the franchisor the benefit of the doubt and first ask itsrepresentatives to explain their understanding. Then check the remainder of your concerns withyour attorney. Check the document's date. If it is current, you may want to request a previousdocument for comparison.

One of the most common problems between new franchisees and the franchisor is amisunderstanding as to responsibilities. Among other things, this can cause problems in meetingthe schedule for Grand Opening dates. Read the disclosure document and the franchiseagreement carefully as to your responsibilities. Also pay attention to the stated obligations of thefranchisor, especially item eleven of the UFOC. Do not assume the franchisor is responsible fordetails of a particular support service. If it is not spelled out, get it in writing. List all of yourconcerns, and clarify which duties, obligations and responsibilities belong to whom.

2. Not understanding or having an inaccurate or incomplete interpretation of the franchise

agreement and other legal documents to be signed. You and your attorney should carefullyreview the franchise agreement, the lease or real estate agreements, and any other contracts.First, make a list of questions to go over with your attorney, then present your concerns to thefranchisor. Get the franchisor's clarifications in writing. There may be very little that you canchange in these standardized agreements, but things can be added. There is no reason thefranchisor cannot give you additional documentation to clarify something in the agreement thatis confusing to you or your attorney.

3. Not seeking sound legal advice. Locate and retain an attorney, preferably one experienced infranchising.

4. Not verifying oral representations of the franchisor. You can avoid this mistake if you takethe proper precautions. You may want to tape-record all your meetings with the franchisor. Ifyou ask permission to do so, it is generally admissible in court if the need arises later. It also letsthe company representatives know that you are tracking their words. You can do this politely,but if you prefer, take compendious notes of all your meetings. Later, review and summarize thedetails of your discussion, noting any items requiring clarification. Send a registered letter to thefranchisor and a copy to the representatives memorializing your notes with a request for theirresponse to any items you want clarified. Do not leave anything unresolved.

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Due diligence also includes verification. If there have been any oral representations, of whichyou are uncertain, try to verify these with previous and current franchisees as well as throughadditional meetings with the franchisor. As stated in item 2 above, get anything orally promisedin writing if it differs from other literature and the disclosure document.

5. Not contacting enough current franchisees. The section of the disclosure information on"Past, Current and Future Franchisees" is a valuable starting point for locating franchisees. It isimperative to discuss any concerns you may have with existing franchisees. If the franchisorgives you a tour that includes two or three franchisees, get back to them later and ask anyquestions that could have been confrontational or embarrassing if asked in front of thefranchisor. Another important factor here is to find out whether the franchisor has introduced youto specific franchisees compensated for their help to solicit new franchisees. Ask them directly,then follow up with letter stating their answers to your questions. It is surprising how aninaccurate response might change once it is in writing.

Other than the franchisees introduced to you by the franchisor, to get a true picture, you can

survey others listed in the disclosure document not versed in soliciting prospective franchisees.Find out from them if the franchisor has a reputation for honesty and fair dealing. It is ofparamount importance to contact existing franchisees of the franchisor to verify their experienceof the accuracy of previous disclosure documents. Also, ask their opinions of the accuracy andcompleteness of the current one. Further, you can solicit their help in verifying any otherinformation not provided in the disclosure document.

When interviewing other franchisees, try to cover a large cross section of franchisees. Seekanswers from those that:

Are in different locations,

Have one franchise,

Have multiple franchises,

Have been in business a long time,

Are still new,

Are successful, and

Are not doing so well.

For the latter, try to determine the reasons. Specifically, ask the franchisees if they feel that thefranchisor exercises too much control, or not enough. Is the franchisor always willing to help?Has the franchisor held up its end of the obligations regarding ongoing support assistance andtraining?

Information from franchisees about their first year in business and their experience with thefranchisor can be extremely enlightening. Under the FTC requirement, while the offering circular

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must disclose a list of existing franchisees, this record does not have to be complete. If you findthe list provided to you is incomplete, ask the franchisor for a complete registry.

6. Not confirming the reasons for failed franchises. Locate some franchise outlets that areclosed, sold, or have changed ownership to company-owned, and find out the reasons for their

change of status. Contact the original owners and get their stories. If no two are alike, you maywant to pay them less heed. If, on the other hand, there is a common story, the underlyingproblem may be something you want to avoid. Nevertheless, for fairness, get the franchisor'sversion.

7. Not having enough working capital. Make sure you have enough capital to cover every costassociated with the business including all pre-opening costs, enough set aside for your familybudget, and enough operating cash for the business to make it through the break-even point.

8. Not recognizing the need for financing, not knowing how to make a proper loan request

and not developing a true and accurate financial statement. If business accounting is not

your forte, solicit the help of a good accountant.

9. Not meeting the franchisor's key management personnel at their headquarters and the

field representative assigned to your territory. Quite often, the sales representative will dosuch a good job in building your confidence that you may not bother with trying to meet theother important personnel or traveling to the headquarters before signing the franchiseagreement. Do not make this mistake. Meet the other franchisor personnel and verify theinformation provided by the sales representative.

After the franchisor defines your territory, also meet the field representative or district supervisorthat will be working with you. It is important that your personalities are sufficiently harmonious

to be able to work effectively together. Although you may not be able to determine this at first,you can find out the field representative's length of time on the job, training, and otherexperience levels. If you foresee problems, it is better to address them and try to work them outbefore you sign the agreement.

10. Not analyzing your market in advance. While the franchisor may help with site selection,it is still your responsibility to decide for yourself whether a particular location is desirable andpromising. It is important to confirm the market for your product or service in this area.

If competition exists, there are several things to consider. Do the competitors have anyweaknesses that you will be able to avoid in your business to capture more market? Are the

competitors so strong that their market saturation may be hard for you to penetrate? If a localcompetitor dominates the market, entering it may turn into a competitive struggle that willincrease your working capital requirement.

Also, evaluate your franchisor's marketing strategy; find out the amount of advertising andpromotional dollars intended to help. Although helpful, it is not a good idea to rely totally onyour franchisor for your market research. It is to your advantage to do your own market analysisand to develop your own marketing plan.

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If your findings support a strong market for a "virgin" area, you may want your agreement toinclude a right of first refusal to buy additional franchised outlets in the subject territory beforethe franchisor considers other prospective franchisees. If you consider this, you will be under atimetable to expand according to the franchisor's goal. If you can not meet the stated expansiongoal, you will forfeit the area.

If you are looking into a franchised area controlled by a subfranchisor, research the subfranchisorwith the same determination and persistence you used evaluating the franchisor--maybe evenmore.

Copyright 1999 Robert C. Rule

Questions and Answers for First Time

Franchise Buyers

What you need to know when buying your first franchise

business

Author: Jason Rager

Organization: Franchise Analyzer

About the Author:

Jason Rager is the author of: The Franchise Insider's Guide, the most comprehensive franchiseresource available, andNo Money Down Franchising, the only system developed to help youbuy a franchise business for little or no money down. Mr. Rager has over seven years offranchising experience owning six different franchise brands in three industries. He is also

Founder and President ofFranchise Analyzera software company that develops softwaresolutions for the franchise industry.

Free Franchising Webinar: Every Wednesday at 2pm EST, 11am PST Call: (218) 339-2409,enter your PIN: 7014389 and log on to the free webinarhere.

Date Published: 11/07/2011

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Today I want to answer some of the most common questions that people ask me about startingtheir first franchise business .

Question: What is the typical process for buying a franchise?

Answer: The first step in buying a franchise is having a phone conversation with a representative

from the franchise. Believe it or not, every single person who has developed a successful careerowning a network of multiple franchise businesses that spans across a region of the UnitedStates, took the initial step of speaking with the franchisor on the phone to learn more about afranchise opportunity and how it appeals to them on a personal and financial basis.

Once you have become comfortable with the franchise system, its employees, and theopportunity, you will be invited to a discovery day or to speak with other franchisees. At thisjuncture, you will know whether the opportunity is right for you. I always recommend visitingthe franchisor and meeting the franchise's management face-to-face; face time and relationshipsare always important in any business venture.

Question: How much money will I make owning a franchise business?Answer: Many factors affect how much money you will make owning a franchise business.These factors include: location, size of your initial investment, industry, the direction of theoverall economy, the amount of time and effort you put into your business, and much more. Ihave said it numerous times: the best way to find out how much money you will make is bycalling other franchise business owners that have been in the system for many years. You canfind a list of current franchise business owners by looking in the Franchise DisclosureDocument(FDD) or you can just search on Google, make a phone call to the business and ask tospeak directly with the owner. It's important to note that many franchises are unable to tell youhow much money you will make because doing so may be breaking the law in their state orcountry, as a result they will often give you a list of franchisees to call.

Question: What is the typical time period from when I sign the franchise agreement until I

open my doors for business?

Answer: The period of time from signing the franchise agreement to opening your businessvaries based upon many factors. I think the major factor that delays most franchisees fromopening their franchise business is choosing a location and signing a lease, note that this appliesonly to retail franchise businesses. Financing is also another significant factor that can delay youfrom opening your franchise business but if you have decent credit and/or significant assets thenyou will receive your financing in about two weeks. Otherwise, the schedule outlined by thefranchisorand displayed within the FDD is sufficient.

Question: As a successful franchise business owner what do you think is the most beneficial

part of owning a franchise business?

Answer: The most beneficial part of owning a franchise business is having the freedom ofowning your own business while not being in business by yourself. By becoming a member of afranchise, you are receiving the right to use one of the most powerful brands in your industrywhich ensures you guaranteed customers beginning from the day you open business.Additionally, you have access to a support network of like-minded franchise business ownerswho are all driving at one goal: maximizing their profitability. With this support network in

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place, you can avoid mistakes and share information to help you maximize your business'sprofitability.

Question: How long will it take before my business is profitable?

Answer: Many factors affect your profitability which can make it difficult to forecast. However,

to build a realistic picture of when your business will become profitable I recommend callingabout 10 franchise business owners of your desired brand and calculate the average of yourresponses. Note that the single most important driver of your business's profitability is the timeand effort you dedicate towards making it succeed. For a retail business, your location will alsobe a significant determinant of your profitability. Be aware that businesses which require lessstartup capital and whose financial outcomes are based greatly on how hard and how many hoursyou work, generally will become profitable very quickly because your profits are driven mostlyby your work ethic.

Question: Should I take out a loan to start my franchise business ?

Answer: I believe that using debt to purchase a home, a business, commercial real estate, stocks,

bonds, and other assets is generally a good policy because it will drive your return on investmenthigher. However, with higher returns comes greater risk; so it's important not to go overboardwhen considering how much debt your business should have. Also, plan for negative outcomesin your business such as: unforeseen costs, lower than projected sales, and other scenarios whendetermining how much debt your business will have so that you can maintain profitability duringdifficult times - doing so often separates the winners from the losers in business ownership.

Question: What options are available for selling my franchise business in the future?

Answer: I always recommend having an exit strategy in place from day one. Keep in mind thatone of the greatest benefits of owning a franchise business is your ability to sell it in the future orto pass it on to your heirs later down the road. Additionally, owning a franchiseprovides anadditional option that typical small business owners don't have: you may be able to sell yourbusiness to the franchisor in the future. Therefore you should never hesitate to speak openly andhonestly with the franchisor about your plans for growing your business and your successionplan in the event that something unfortunate happens to you and you are unable to manage theday-to-day business. Planning for such unforeseen events can help you avoid a complete disastershould such a situation arise.

Question: How many hours per week will I work owning a franchise?,br>Answer: Thisvaries greatly depending upon the level of investment, industry, and type of franchise you arebuying in to. Generally, you will work a significant amount in the preliminary and startup phaseof your business. Once policies, procedures, and general management has been ingrained in thestaff and business, your daily work hours should diminish significantly and you may choose toopen an additional location. I recommend speaking with individual franchise business ownersand ask them how many hours per week they work and then average the results. This will giveyou a good idea of what you are getting yourself in to.

I wish you a successful journey towards business ownership.

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Buying a Franchise: A Consumer Guide[PDF]

Order Free Copies

When you buy a franchise, you often can sell goods and services that have instant namerecognition, and get training and support that can help you succeed. But purchasing a franchise islike every other investment: theres no guarantee of success.

The Federal Trade Commission, the nations consumer protection agency, has prepared thisbooklet to explain how to shop for a franchise opportunity, the obligations of a franchise owner,and questions to ask before you invest.

I. The Benefits and Responsibilities of Franchise Ownership

II. Advance Work: Before You Select a Franchise System

III. Selecting a Franchise

IV. Finding the Right Opportunity

V. Investigating Before You Invest

VI. Before You Sign the Franchise Agreement

I. The Benefits and Responsibilities of Franchise Ownership

A franchise enables you, the investor or franchisee, to operate a business. You pay a franchisefee and you get a format or system developed by the company (franchisor), the right to use thefranchisors name for a limited time, and assistance. For example, the franchisor may provide

you with help in finding a location for your outlet; initial training and an operating manual; andadvice on management, marketing, or personnel. The franchisor may provide support throughperiodic newsletters, a toll-free telephone number, a website, or scheduled workshops orseminars.

Buying a franchise may reduce your investment risk by enabling you to associate with anestablished company. But the franchise fee can be substantial. You also will have other costs: for

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example, you may be required to give up significant control over your business while you takeon contractual obligations with the franchisor.

Typically, franchise systems have several components.

Costs

In exchange for the right to use the franchisors name and assistance, you will pay some or all ofthe following fees.

Initial Franchise Fee and Other Expenses

Your initial franchise fee, which will range from several thousand dollars to several hundredthousand dollars, may be non-refundable. You may incur significant costs to rent, build, andequip an outlet and to buy initial inventory. You also may have to pay for operating licenses andinsurance, and a grand opening fee to the franchisor to promote your new outlet.

Continuing Royalty Payments

You may have to pay the franchisor royalties based on a percentage of your weekly or monthlygross income. Often, you must pay royalties even if your outlet isnt earning significant income.As a rule, you have to pay royalties for the right to use the franchisors name. Even if thefranchisor doesnt provide the services they promised, you still may have to pay royalties for theduration of your franchise agreement. Indeed, even if you voluntarily terminate your franchiseeagreement early, you may owe royalties for the remainder of your agreement.

Advertising Fees

You also may have to pay into an advertising fund. Some portion of the advertising fees may beallocated to national advertising or to attract new franchise owners, rather than to promote yourparticular outlet.

Controls

To ensure uniformity, franchisors usually control how franchisees conduct business. Thesecontrols may significantly restrict your ability to exercise your own business judgment. Here area few examples.

Site Approval

Many franchisors pre-approve sites for outlets, which, in turn, may increase the likelihood thatyour outlet will attract customers. At the same time, the franchisor may not approve the siteyouve selected.

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Design or Appearance Standards

Franchisors may impose design or appearance standards to ensure a uniform look among thevarious outlets. Some franchisors require periodic renovations or seasonal design changes;complying with these standards may increase your costs.

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Restrictions on Goods and Services You Sell

Franchisors may restrict the goods and services you sell. For example, if you own a restaurantfranchise, you may not be able to make any changes to your menu. If you own an automobile

transmission repair franchise, you may not be able to perform other types of automotive work,like brake or electrical system repairs.

Restrictions on Method of Operation

Franchisors may require that you operate in a particular way: they may dictate hours; pre-approve signs, employee uniforms, and advertisements; or demand that you use certainaccounting or bookkeeping procedures. In some cases, the franchisor may require that you sellgoods or services at specific prices, restricting your ability to offer discounts, or that you buysupplies only from an approved supplier even if you can buy similar goods elsewhere for less.

Restrictions on Sales Area

A franchisor may limit your business to a specific territory.While territorial restrictions mayensure that you will not compete with other franchisees for the same customers, they also couldhurt your ability to open additional outlets or to move to a more profitable location. In addition, afranchisor may limit your ability to have your own website, which could restrict your ability tohave online customers. Moreover, the franchisor itself may have the right to offer goods orservices in your sales area through its own website or through catalogs or telemarketingcampaigns.

Terminations and renewal

You can lose the right to your franchise if you breach the franchise contract. Franchise contractsare for a limited time; your right to renew is not guaranteed.

Franchise Terminations

A franchisor can end your franchise agreement for a variety of reasons, including your failure topay royalties or abide by performance standards and sales restrictions. If your franchise isterminated, you may lose your investment.

Renewals

Franchise agreements may run for as long as 20 years. At the end of the contract, the franchisormay decline to renew. Renewals are not automatic, and they may not have the original terms andconditions. Indeed, the franchisor may raise the royalty payments, impose new design standardsand sales restrictions, or reduce your territory. Any of these changes may result in morecompetition from company-owned outlets or other franchisees.

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II. Advance Work: Before You Select a Franchise System

Before you invest in a particular franchise system, think about how much money you have toinvest, your abilities, and your goals. Be brutally honest.

Your Investment How much money do you have to invest? How much money can you afford to lose?

Are you purchasing the franchise alone or with partners?

Do you need financing? Wheres it coming from?

Whats your credit rating? Credit score?

Do you have savings or additional income to live on while you start yourbusiness?

Your Abilities

Does the franchise require technical experience or special training oreducation (for example, auto repair, home and office decorating, or taxpreparation)?

What special skill set can you bring to a business, and, specifically, to thisbusiness?

What experience do you have as a business owner or manager?

Your Goals

Write down your reasons for buying a particular franchise:

Do you need a specific annual income? Are you interested in pursuing a particular field?

Are you interested in retail sales or performing a service?

How many hours can you work? How many are you willing to work?

Do you intend to operate the business yourself or hire a manager?

Will franchise ownership be your primary source of income or a supplementto your current income?

Do you get bored easily? Are you in this for the long-term?

Would you like to own several outlets?

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III. Selecting a Franchise

Purchasing a franchise is like any other investment: it comes with risk. When you think about aparticular franchise, think about the demand for the products or services it offers, competitorsthat offer similar products or services, the franchisors background, and the level of support you

will receive.

Demand

Is there a demand for the franchisors products or services in your community? Is it seasonal orever- green? Could you be dealing with a fad? Does the product or service generate repeatbusiness?

Competition

Whats the level of competitionnationally, regionally, and locally? How many franchised andcompany-owned outlets are in your area? Does the franchise sell products or services that areeasily available online or through a catalog? How many competing companies sell similarproducts or services? Are they well-established or widely recognized by name in yourcommunity? Do they offer a similar product at a similar price?

Your Ability to Operate the Business

Sometimes, franchise systems fail. What will happen to your business if the franchisor closes upshop? Will you need the franchisors ongoing training, advertising, or other help to succeed?Will you have access to the same suppliers? Could you conduct the business alone if you have to

cut costs or lay anyone off?

Before you invest in a particular franchise system, think about how much money you have toinvest, your abilities, and your goals. Be brutally honest.

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Name Recognition

Buying a franchise gives you the right to associate with the companys name or brand. The morewidely recognized the name, the more likely it is to draw in customers.

Consider:

name and brand recognition for the company and its product or service whether the company has a registered trademark

how long the franchisor has been in business

whether the companys reputation is for quality products or services

whether consumers have filed complaints against the franchise with theBetter Business Bureau or a local consumer protection agency

Training and Support Services

What training and continuing support does the franchisor provide? Does the franchisors trainingmeasure up to the training for workers in the particular industry? Can you compete with otherswho have more formal training? What backgrounds do the current franchise owners have? Isyour education, experience, or training similar?

Franchisors Experience

Many franchisors operate well-established companies with years of experience both in sellinggoods or services and managing a franchise system. Some franchisors started by operating theirown business. There is no guarantee, however, that a successful entrepreneur can successfullymanage a franchise system. Find out:

how long the franchisor has managed a franchise system whether the franchisor has enough expertise to make you feel comfortable. If

the franchisor has little experience managing a chain of franchises, take anypromises about guidance, training, and other support with the proverbialgrain of salt.

Growth

A growing franchise system increases the franchisors name and brand recognition and mayenable you to attract customers. But growth alone doesnt ensure successful franchisees. Indeed,a company that grows too quickly may not be able to support its franchisees with the supportservices it promises them. Investigate the franchisors financial assets and resources; are theysufficient to support the franchisees?

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IV. Finding the Right Opportunity

There are many, many ways to find franchise opportunities. Some franchisors have websites withinformation about their franchises. Franchise expositions are another good source of information,as are franchise brokerscompanies or people that specialize in matching individuals with

franchise companies. Its always a good idea to visit franchised outlets in your area and talk tothe owners about their experience with particular franchisors.

Shopping at a Franchise Exposition

Attending a franchise exposition allows you to see and compare a variety of franchisepossibilities under one roof. Before you attend, research the kind of franchise that may best suityour budget, experience, and goals. When you attend, visit several franchise exhibitors who dealwith the type of industry that appeals to you. Ask questions.

How long has the franchisor been in business? How many franchised outlets exist? Where are they?

What is the initial franchise fee? What additional start-up costs can youexpect? Are there continuing royalty payments? How much? What do otherfranchisees pay?

What management, technical, and other support does the franchisor offer?

What controls does the franchisor impose?

Exhibitors may offer you incentives to attend a promotional meeting to discuss the franchise ingreater detail. These meetings can be another source of information and another opportunity to

raise questions. Be prepared to walk away from any franchise opportunityand promotionthatdoesnt fit your needs.

Using a Franchise Broker

Franchise brokerswho also refer to themselves as business coaches,advisors,referralsources, or sales consultantshelp people who want to buy a franchise. They often advertiseon the Internet and in business magazines that they will help you select among various franchiseoptions.Typically, a broker reviews the amount of money you have to invest and then directs youto opportunities that match your interests and resources.A broker also may help you completeapplications and the paperwork to consummate the sale. Remember that franchise brokers often

work for franchisors, and get paid only if a sale is completed.

Limited Opportunities

Some franchise brokers may claim to be able to match you with the perfect opportunitybecause they represent a wide range of business sellers. That may be trueor not. In some

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instances, franchise brokers represent only a few franchisors, and, as a result, their suggestionsmay be limited.

Selection Standards

Some franchise brokers may claim that they will suggest only those franchises that meet certainstandards. You may think this means that your financial risk is limited because the broker isweeding out the poor investments. In fact, some brokers represent any franchisor willing to paythem a commission for a sale. If you rely on a broker, be skeptical: you may be directed to afranchise that is failing or that doesnt have a track record.

Upselling

Some brokers earn a flat fee regardless of the price of the franchise they sell; others earn acommission pegged to the price of the franchise the broker sells. The more costly the franchise,the bigger the brokers commission. Some brokers may steer you toward a more costly franchise

to beef up their own commission.

Unauthorized or Misleading Earnings Representations

To convince you to buy a particular franchise, a broker may make certain representations aboutincome. Earnings claims may not be true, and sometimes, can be misleading even if literally true.For example, the figures may be based on earnings in an area where demand for the businessgoods or services is high. Or the earnings claimed may be based on outdated industry data. Insome instances, earnings claims may be gross sales figures: when you factor in likely expenses,actual earnings can be far less. Because earnings representations may be misleading, manyfranchisors prohibit their sales representatives from making them.

Before using a franchise broker, ask yourself:

whether you need the services of a franchise broker. Can you get enoughinformation shopping online or reading trade magazines?

whether the broker is paid by the franchisor. Are there any fees you must paythe broker? If so, how much you are willing to pay?

whether the brokers commission depends on the price of the franchise. If itdoes, consider the fact that the broker may be leading you toward a higher-priced franchise. Ask about alternatives in the same field that may cost less.

how many franchisors the broker represents. If its a small group, thepotential match-ups may be limited.

how the broker selects franchisors to represent. Are the selection criteria inwriting? Ask to see them. How many franchisors has the broker turned downin the recent past?

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Speak to them about their experience within the franchisor.

V. Investigating Before You Invest

The All-Important Disclosure Document

Before you invest in any franchise system, get a copy of the franchisors disclosure document.Under the Franchise Rule, which is enforced by the FTC, you must receive the document at least14 days before you are asked to sign any contract or pay any money to the franchisor or anaffiliate of the franchisor. You have the right to ask forand geta copy of the disclosuredocument once the franchisor has received your application and agreed to consider it. Indeed,you may want to get a copy of the franchisors disclosure document before incurring anyexpenses to investigate the franchise offering.

The franchisor may give you a copy of its disclosure document on paper, via email, through a

web page, or on a disc. The cover of the disclosure document should have information about itsavailability in other formats. Make sure you have a copy of the document in a format that isconvenient for you, and keep a copy for reference.

Read the entire disclosure document. Dont be shy about asking for explanations, clarifications,and answers to your questions before you invest. Among the key sections in a completedisclosure document are:

Franchisors Background

This section tells how long the franchisor has been in business, likely competition, and anyspecial laws that pertain to the industry, like any license or permit requirements. This will helpyou understand the costs and risks you are likely to take on if you purchase and operate thefranchise.

Read the entire disclosure document. Dont be shy about asking for explanations, clarifications,and answers to your questions before you invest.

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Business Background

This section identifies the executives of the franchise system and describes their experience. Payattention to their general business backgrounds, their experience in managing a franchise system,

and how long theyve been with the company.

Litigation History

This section discusses prior litigationwhether the franchisor or any of its executive officershave been convicted of felonies involving fraud, violations of franchise law, or unfair ordeceptive practices law, or are subject to any state or federal injunctions involving similarmisconduct. It also says whether the franchisor or any of its executives have been held liable foror settled civil actions involvingthe franchise relationship. A number of claims against thefranchisor may indicate that it has not performed according to its agreements, or, at the veryleast, that franchisees have been dissatisfied with its performance.

This section also should say whether the franchisor has sued any of its franchisees during the lastyear, a disclosure that may indicate common types of problems in the franchise system. Forexample, a franchisor may sue franchisees for failing to pay royalties, which could indicate thatfranchisees are unsuccessful, and therefore, unable or unwilling to make their royalty payments.

Bankruptcy

This section discloses whether the franchisor or any of its executives have been involved in arecent bankruptcy, information that can help you assess the franchisors financial stability andwhether the company is capable of delivering the support services it promises.

Initial and Ongoing Costs

This section describes the costs involved in starting and operating a franchise, including depositsor franchise fees that may be non-refundable, and costs for initial inventory, signs, equipment,leases, or rentals. It also explains ongoing costs, like royalties and advertising fees. In addition,ask about:

continuing royalty payments advertising payments, both to local and national advertising funds

grand opening or other initial business promotions

business or operating licenses

product or service supply costs

real estate and leasehold improvements

discretionary equipment, such as a computer system or a security system

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training

legal fees

financial and accounting advice

insurance

the costs of compliance with local ordinances, such as zoning, waste removal,and fire and other safety codes

health insurance

employee salaries and benefits

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Starting your business may take several months. Estimate your operating expenses for the firstyear and your personal living expenses for up to two years. Compare your estimates with whatother franchisees have paid and with competing franchise systems. You may be able to get abetter deal with another franchisor.An accountant can help you evaluate this information.

Restrictions

This section tells whether the franchisor limits:

suppliers from whom you may purchase goods the goods or services you may offer for sale

your customers

where you can sell goods or services

your use of the Internet to sell goods or services to customers in and out ofyour territory and the right of the franchisor (or other franchisees) to use theInternet to solicit customers or to sell in your territory

These kinds of restrictions may limit your ability to exercise your own business judgment inoperating your outlet. That said, if the franchisor does not limit the territory where eachfranchisee can sell, the franchisor and other franchisees may compete with you for the samecustomers, either by establishing their own outlets, or by selling to customers in your areathrough the Internet, catalogs, telemarketing, and the like.

Terminations

This section spells out the conditions under which the franchisor may end your franchise andyour obligations to the franchisor after termination. It also defines the conditions under whichyou can renew, sell, or assign your franchise to others.

Training

This section explains the franchisors training and assistance program. Check for informationabout:

who is eligible for training

whether new employees are eligible for training and, if so, at what cost. Whopays?

how long the training sessions take. How much time is spent on technicaltraining, business management training, and marketing?

who conducts the training and their qualifications

whether the company offers ongoing training and at what cost

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support staff available for trouble-shooting: Are they assigned to your areaand how many franchisees they are responsible for?

whether on-site individual assistance is available and at what cost

The training you need will depend on your business experience and your knowledge of the

franchisors goods and services. If you have doubts about whether the training offered issufficient to give you the tools you need to handle day-to-day business operations, consideranother franchise opportunity.

Advertising

This section has information on advertising costs. Franchisees often are required to contribute apercentage of their income to an advertising fund. Find out:

what part of the advertising fund is devoted to administrative costs what other expenses are paid from the advertising fund

whether franchisees have any control over how the advertising dollars arespent

what advertising promotions the company has already engaged in and whatson the drawing board

what percentage of the fund is spent on national advertising

what percentage of the fund is spent on advertising in your area

what percentage is devoted to selling more franchises

whether all franchisees contribute equally to the advertising fund

whether you need the franchisors consent to develop and buy your ownadvertising

whether there are rebates or advertising contribution discounts if you do yourown advertising

whether the franchisor gets any commissions or rebates when it placesadvertisements, and who benefits from thoseyou or the franchisor

Current and Former Franchisees

This section has very important information about current and former franchisees. Manyfranchisees in your area may mean more competition for customers. The number of terminated,cancelled, or non-renewed franchises may indicate problems.

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Some companies may repurchase failed outlets and list them as company-owned outlets.

Look for contact information for current franchisees and franchisees who have left the systemwithin the last year; talking to them may be the most reliable way for you to verify the

franchisors claims. Visit or phone as many of the current and former franchisees as possible tochat about their experiences, and the volume and type of business theyre doing. Note that someof them may have signed confidentiality agreements that prevent them from speaking with you.If thats the case, try contacting others on the list.

If you buy an existing outlet that was reacquired by the franchisor, the franchisor must tell youwho owned and operated the outlet for the last five years. Several owners in a short time mayindicate that the location isnt profitable or that the franchisor hasnt supported that outlet aspromised. Consider contacting several previous owners to learn more about their experienceoperating the particular outlet. You will want to learn:

how long the franchisee operated the franchise where the franchise was located

whether they were able to open the outlet in a reasonable time

their total investment, including any hidden or unexpected costs

how long it took them to cover operating costs and earn a reasonable income

whether they were satisfied with the cost, delivery, and quality of the goodsor services they sold

their backgrounds before becoming a franchisee

If you have doubts about whether the training offered is sufficient to give youthe tools you need to handle day-to-day business operations, consideranother franchise opportunity.

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whether the franchisors training was adequate

whether the franchisor provided ongoing help

their satisfaction with the franchisors advertising program

whether the franchisor fulfilled its contractual obligations

whether the franchisee would invest in another outlet

whether the franchisee would recommend the investment

Some franchisors may give you a separate reference list of franchisees to contact. To ensure thatyou get the full picture, you may want to contact at least some references listed in the disclosuredocument that are not on the separate list.

Associations of Franchisees Operating Similar Outlets

Theres no question that the disclosure document is critical reading for potential franchisees.Associations of franchisees who are operating similar outlets are another important source ofinformation. Whether or not these associations are sponsored or endorsed by the franchisor, theycan provide information about the state of the relationship between the franchisor and itsfranchisees. You may want to ask a franchisee association about:

its membership its history

its goals

its relationship with the franchisor

any benefits in buying from one franchisor versus a competitor

any problems franchisees are facing in the operation of their outlets

Earnings Information

You may want to know how much money you can make if you invest in a particular franchisesystem. Be careful. Earnings information can be misleading. Insist on written substantiation forany information you may receive that suggests your potential income or sales.

Franchisors are not required to disclose information about potential income or sales, but if theydo, the law requires that they have a reasonable basis for their claims and that they make thesubstantiation for their claims available to you. When you review any earnings claims, consider:

Sample Size

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Say a franchisor claims that franchisees in its system earned $50,000 last year. The claim may bedeceptive if it doesnt represent the typical earnings of franchisees. The disclosure documentshould tell the sample size and the number and percentage of franchisees who reported earningsat the level claimed.

Average Incomes

A franchisor may claim that the franchisees in its system earn an average income of, say,$75,000 a year. Average figures tell very little about how individual franchisees perform. Anaverage figure may make the overall franchise system look more successful than it is becausejust a few very successful franchisees can inflate the average.

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Gross Sales

5 Some franchisors provide figures for the gross sales revenues of their franchisees. Thesefigures dont really tell about the franchiseesactual costs or profits. An outlet with a high gross

sales revenue on paper may be losing money because of high overhead, rent, and other expenses.

Net Profits

Franchisors often do not have data on net profits oftheir franchisees. If you get net profitinformation, ask whether it includes information about company- owned outlets; they often havelower costs because they can buy equipment, inventory, and other items in larger quantities, orthey may own, rather than lease, their property.

Geographic Relevance

Earnings may vary with geography. If its reported that a franchisee earned a particular income,ask about the franchisees location. The disclosure document should note geographic or otherdifferences among the group of franchisees whose earnings are reported and your likely location.

Franchisees Backgrounds

Keep in mind that franchisees have different skill sets and educational backgrounds. The successof some franchisees doesnt guarantee success for all.

Reliance on Earnings Claims

Franchisors may ask you to sign a statement sometimes presented as a written interview orquestionnairethat asks whether you received any earnings or financial performancerepresentations during the course of buying a franchise. If you heard or got any earningsrepresentations, report it fully during an interview or on a questionnaire or other statement. Ifyou dont, you may be waiving any right to contest the earnings representations that were madeto you and that you used to make your decision to buy.

Financial History

The disclosure document gives important information about the companys financial status,

including audited financial statements. You can find explanatory information about thefranchisors financial status in notes to the financial statements. Investing in a financiallyunstable franchisor is a significant risk; the company may go out of business or into bankruptcyafter you have invested your money.

Its a good idea to hire a lawyer or an accountant to review the franchisors financial statements,audit report, and notes. They can help you understand whether the franchisor:

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has steady growth has a growth plan

makes most of its income from the sale of franchises or from continuingroyalties

devotes sufficient funds to support its franchise system

VI. Before You Sign the Franchise Agreement

The companys disclosures may change between the time you receive the disclosure documentand the time you sign the franchise agreement. For example, the company may have updated itsdisclosures; it is required to do that at least annually after its fiscal

year ends. You have the right to ask for a copy of any updated information before you sign thefranchise agreement. An updated disclosure document may indicate the filing of new suits by oragainst the franchisor, changes in the franchisors management team, new financial data, and

more current financial performance data, among other information.

Additional Sources of Information

Accountants and Lawyers

In addition to reading the companys disclosure documentincluding any updatesandspeaking with current and former franchisees, consider talking to an accountant and a lawyer. Anaccountant can help you understand the companys financial statements, develop a business plan,assess any earnings projections and the assumptions theyre based on, and help you pick a

franchise system that is best suited to your investment resources and your goals.

A lawyer can help you understand your obligations under the franchise contract. These contractsusually are long and complex. A contract problem that arises after you have signed the contractmay be very expensive to fixif it can be fixed at all. Choose a lawyer who is experienced infranchise matters, but rely on your own lawyer or accountant for a recommendation, rather thanthe franchisors recommendation.

Banks and Other Financial Institutions

These organizations can offer an unbiased view of the franchise opportunity you are considering.

They should be able to get a Dun and Bradstreet report or similar financial profile of thefranchisor.

Better Business Bureau

Check with the local Better Business Bureau (BBB) in the city where the franchisor has itsheadquarters. Ask whether there are complaints on file about the companys products, services,or personnel.

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Government

Several states regulate the sale of franchises. Check with the state office that regulatesfranchisingit may be the Office of the Attorney Generalfor more information about yourrights as a franchise owner in your state.

The Federal Trade Commission (FTC) enforces the Franchise Rule. The FTC publishes a numberof business guidesfor example, Getting Business Credit , Dot Com Disclosures, BusinessGuide to the Mail and Telephone Order Merchandise Rule, and Complying with theTelemarketing Sales Rule that may be helpful to your business.

The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practicesin the marketplace and to provide information to help consumers spot, stop, and avoid them. Tofile a complaintor to get free information on consumer issues, visitftc.govor call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters consumer complaintsinto the Consumer Sentinel Network, a secure online database and investigative tool used by

hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

February 2008

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https://www.ftccomplaintassistant.gov/https://www.ftccomplaintassistant.gov/http://www.ftc.gov/bcp/consumer.shtmhttp://www.ftc.gov/http://www.ftc.gov/http://www.ftc.gov/http://www.ftc.gov/sentinelhttps://www.ftccomplaintassistant.gov/http://www.ftc.gov/bcp/consumer.shtmhttp://www.ftc.gov/http://www.ftc.gov/sentinel

Franchisee Business Plan

Documents

Transcript of Franchisee Business Plan