Entrepreneurship 1: Lecture 11

Acquiring a Franchise
Avimanyu (Avi) Datta, Ph.D.
Definitions
 Franchising
◦ A marketing system revolving around a two-party
agreement, whereby the franchisee conducts business
according to the terms specified by the franchisor
 Franchisee
◦ An entrepreneur whose power is limited by a
contractual agreement with a franchisor
 Franchisor
◦ The party in the franchise contract that specifies the
methods to be followed and the terms to be met by
the other party
Buying someone else’s formula of
success
 Most Franchisors have already tired their business idea in the
marketplace to see whether they could create and maintain
customers for a profit.

 The franchisor have developed a formula for improving the

franchisees’ chances of being successful.

 Failure rate of people who buy franchise is lower than start-ups.

 Since they are in operation for 2-3 years the franchisor has
flattened the learning curve.

 Hit the ground running!

 Frees the franchisee of initiative for re-inventing the wheels.

The benefits of buying a franchise
◦ Probability of success
 Proven line of business
 Pre-qualification of franchisee
 Overall lower failure rates

◦ Training
 Franchisor-provided

◦ Financial assistance
 Loans & loan guarantees

◦ Operating benefits
 Location feasibility study
 Marketing assistance
 Quick start-up time
The benefits of buying a franchise
◦ Cooperative Advertisement Arrangements
 Franchisor subsidizes a portion of franchisee’ advertising
 Franchisors provide franchise with prepared artwork for
advertising.

◦ Grand Opening
 Sometimes Franchisor send specialist to help franchise with
the grand opening.
 Helps out during the first week or two.

◦ Circuit Riders
 Members from Franchisor who visit the franchise periodically
to assist in management

◦ News Letters, Conferences , Franchise hotline

The Drawbacks of Franchise
◦ Franchise costs
 Initial franchise fee: Can be hefty at times
 Investment costs
 Royalty payments: At times it exceeds the profit.
 Advertising costs

◦ Restrictions on business operations

 Products sold
 Hours of operation
 Restrictions on expansion/growth
 Franchisor only source of supplies

◦ Loss of independence

◦ Lack of franchisor support

 Termination/renewal clauses
An Attractive Franchise Opportunity
Includes:
 Registered trademarks

 Successful prototype stores with a track record of

profitability and a positive reputation

 A business that can be systematized so that it can be

easily replicated.

 A product or service that can be successful in many

different geographic regions.
An Attractive Franchise Opportunity
Includes:
 An operations manual that specifies all the functions
of the business and their associated policies

 A training and support system

 Site selection criteria and architectural standards

 A detailed prospectus that spells out the franchisee’s

rights, responsibilities, and risks.
Franchise Disclosure Requirements
 Rule 436 of the Federal Trade Commission
◦ Uniform Franchise Offering Circular (UFOC)
 A document accepted by the Federal Trade Commission as
satisfying its franchise disclosure requirements
 Litigation and bankruptcy history
 Investment requirements
 Conditions that would affect renewal, termination, or sale of
the franchise
 http://www.ftc.gov/bcp
Before Buying a Franchise

ASK QUESTIONS
Questions to Ask Before Buying a
Franchise
 Does the franchisor have an excellent reputation in the industry?
 Is the franchisor in partnership or any other legal relationship with
another franchisor? If so, how will the franchisee be protected should
that relationship fail?

 Is the franchisee required to do anything that appears questionable from

a legal or ethical perspective?

 Under what circumstances can the franchisee or franchisor terminate

the franchise agreement and what are the consequences to either party?

 Will the franchisor grant an exclusive territory? Is that area subject to

reduction or modification? If so, under what conditions?
Questions to Ask Before Buying
a Franchise - 2
 Will the franchisor reveal the certified financial figures for
one of its franchises and can those figures be verified with
the franchisee?

 Will the franchisor provide a management training

program, an employee training program, public relations
and advertising support, or credit?

 Does the franchisor assist in finding a suitable location?

 What is the financial health of the franchisor? Can

financial statements be verified?
 Questions to Ask Before Buying a
Franchise - 3
 What is the track record of the franchise?

 Has the franchisor conducted an in-depth investigation of

the franchisee to assure that he or she has the necessary
skills and financial requirements to operate the business
successfully?

 How much capital will be required to start and operate

the business to a positive cash flow? Does the initial fee
include an opening inventory of products and supplies?
What do royalties pay for and how are they calculated?
How Risky is the Franchise?
 Are the number of franchise units growing/staying constant/or
declining?

 Has there been an increase in litigation between franchisor and

franchisees during the last couple of years?

 Scrutinize the last three years’ audited financial

statements as part of the FDD.
◦ Strong capital reserves, cash flows, and good profits?
◦ Are accounts receivables increasing?

 Are the same-store sales figures increasing, holding steady, or

declining?

 What is the attitude of the existing franchisees? Call them

and ask…
◦ How do you feel about the business?
◦ How have the past couple of years been?
◦ Knowing what you know now, would you do it again?
Where to Find out about
Franchises
 www.franchise1.com
 www.franchising.com
 www.en.wikipedia.org/wiki/franchising
 www.entrepreneur.com/franchiseopportu
nities/index.html
 www.franchiseinfosite.com

Getty Images
The Top 20 Franchises for 2010
1. Subway Submarine sandwiches & salads $84,300 - $258,300 11. Jan-Pro Commercial cleaning $3,300 - $54,300

2. McDonalds Hamburgers, chicken, salads $1,057,200 - $1,885,000

12. Kumon Math Supplemental education $36,538 - $145,250

3. 7-Eleven, Inc Convenience stores $40,500 - $775,300

13. Stratus Building Commercial cleaning $3,450 - $57,750

4. Hampton Inn/Suites Hotels $3,716,000 - $13,148,800

14. Miracle-Ear Hearing instruments $122,500 - $570,000

15. Pizza Hut Inc Pizza, pasta, wings $302,000 - $2,100,000

5. Supercuts Hair Salons $112,600 - $243,200

16. Hardee’s Burgers, chicken, biscuits $1,182,000 - $1,583,500

6. H & R Block Tax preparation & filing $34,438 - $110,033

17. Denny’s Inc Full-service restaurant $1,200,000 - $2,600,000

7. Duncan Donuts Coffee, doughnuts, etc $537,750 - $1,765,300

18. Jazzercise Inc Dance/fitness classes $2,980 - $38,400

8. Jani-King Commercial cleaning $13,200 - $93,200

19. Matco Tools Mechanics Tools & Equip $79,926 - $188,556

9. Servpro Disaster restoration & cleaning $127,300 - $174,700

20. UPS Store Postal/Business Services $150,980 - $337,950

10. AmPm Mini Market Gas/Store $1,835,823 - $7,615,065

Source: Entrepreneur.com, “2010 Franchise 500 Rankings”

Top 12 Low-Cost Franchises -
2010
 H & R Block Tax preparation and electronic filing

$34,438 - $110,033

 Jani-King Commercial cleaning

$13,200 - $93,200

 Jan-Pro Intl Commercial cleaning

Vanguard Cleaning
$3,300 - $54,300


Kumon Math Centers
Commercial cleaning $8,125 -
 $38,100

 Supplemental education $32,958 - $131,070

 ServiceMaster Clean Disaster cleaning $20,926 -

 Stratus Building Solutions Commercial

$132,623

cleaning $3,450 - $57,750

 Bonus Building Care Commercial cleaning

 Jazzercise Inc Dance fitness classes

$9,000 - $15,000

$2,980 - $38,400  Merry Maids Residential cleaning $24,750 - $59,450

 Instant Tax Service Retail tax preparation

 Anago Cleaning Systems Commercial
$39,000 - $89,000
cleaning $8,543 - $55,306

Source: Entrepreneur.com “Top Low-Cost Franchises in 2010”

 The Top 20 New Franchises for
2010
1. Stratus Building Solutions Cleaning $3,450 -
11. Mister Sparky Residential electrical $24,420 - $490,740
$57,750

2. Senior Helpers In-home care for seniors $69,800 - $96,300

12. FocalPoint Business consulting $75,550 - $121,950

3. Mr. Sandless Wood floor refinishing $28,000 - $56,000

13. Synergy HomeCare Nonmed home care $53,300 -
115,300

4. HealthSource Nutrition & weight loss $52,950 - $249,795 14. Z-Coil Pain relief footwear $88,150 - $160,800

5. Oreck Home Cntr Vacuums, etc $84,600 - $221,000

15. Clix Studio & on-location photography $38,500 - $373,040

6. Guard-A-Kid Kids ID & safety products $19,900 - $20,900

16. Stroller Strides Stroller fitness program $4,009 - $17,889

17. Speedpro USA Large format imaging

Fresh Coat
$202,200 - $230,100
7. Interior painting $38,800 - $63,800

18. Superior Wash Onsite mobile fleet washing $59,820 –

8. Murphy Bus & Fin Bsns brokerage/real estate $61,600 - 108,405
$128,700
19. Ripicci’s Italian Ice Italian Ice $35,140 - $150,500

9. Oxi-Fresh Carpet cleaning $33,495 - $55,950

20. Soccer Shots Soccer programs for children 3-8 $13,935 -

10. Senior’s Choice $18,550

Nonmedical home care $54,000 - $72,000

Source: Entrepreneur.com, “Top New Franchises 2010”