It is important that you believe in the product or service that you will sell in your franchise business. Otherwise, you may end up not feeling passionate or involved in selling them.
This is where the target customers will be, and where your business will be set up. The franchisor will also have a huge say in the site selection. Will their selection coincide with your preference of location? How much will you need to get the franchise business up and running?
Take into consideration all the fees that you will pay when entering a franchise agreement, and if there are any other added costs that you are expected to incur outside of what was agreed upon. The franchisor will provide you the cost budgets, so that is a good starting point to evaluate your fiscal capability for this venture.
You may opt to personally run and manage the business, or you may appoint a team to work with you. Either way, you are going to need training that will supplement the knowledge that you already possess. You may want to check the financials of the franchise company. What do the numbers say? What is the profitability enjoyed by the franchisor? By the other franchisees? Aside from existing historical earnings statements , you should also look into earnings projections, if available.
When perusing the income statements, whether historical or forecasts, do not just look at the bottom line or the net income. You should also try to analyze the other components, such as sales, sales per period, cost of sales, and the various expenditures and costs that will be incurred. When evaluating franchising opportunities, you have to take a look at the amount of support that the franchisor will provide.
What help can you expect from the franchisor? Those who have a good eye for franchising opportunities often look for the following support services:. This is the most important document in franchising since it contains most, if not all, the relevant and important information about the franchise company. It also gives you a better and clearer picture on what will be in store for you once you enter into a franchising agreement with the company.
17 Things to Know About Franchise Contracts
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In addition, you are included in the company recommendation widget so you reach more passive job seekers. This part of the contract outlines the specific ways a franchisee is permitted to use those entities, as well as the ways they are not permitted to use them. Each franchise has specific rules for the way franchisees must run their units. These can include hours of operation, specific items or services sold, and pay scale for employees, among many other things.
Managerial structure, software programs used, and the way a franchise location must be laid out are other items that may fall under rules for operating. Specifics about how a franchise can be renewed and under what conditions it can be terminated are included here. If a situation arises where the franchisor and franchisee are in conflict, there may be an Arbitration clause that would prevent either side from going to court unless an arbitrator reviews the case and makes a recommendation first. The vast majority of franchisors are not open to negotiating their franchise contracts.
It is advisable to have a lawyer with franchise experience look at any potential franchise contract and give you an honest assessment about which parts of the contract may or may not be advantageous for you as the franchisee. It is important to note, however, that the franchisor's main goal in the contract is to protect the value and integrity of the franchise as a whole, as well it should be.
If the entire franchise fails, none of the franchisees will have anything left. For this reason, most franchisors don't negotiate their franchise contracts, and it may even be unrealistic to expect franchisors to go out of their way to accommodate franchisees.
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If you find clauses in the contract that are non-negotiable for you, you can ask questions of your potential franchisor to find out why those clauses were included and whether the franchisor would consider taking them out of the contract, but chances are the franchisor will not negotiate on anything of any importance. If you feel the contract is unfavorable and would prevent you from getting a good return on your investment, your best bet is probably to pursue a different franchise with more favorable terms.
There are good reasons why franchisors don't typically negotiate contracts. Most franchises have been in existence for years and have developed successful business models. They usually know what works far better than their franchisees do, and so they insist on setting up the contract in a way that they know will work out well for both themselves and the franchisees. In addition, franchisors have other franchisees that they have worked with previous to the current location.
If they negotiate with you, how will their existing franchisees react? Negotiating might open up a door for existing franchisees to demand the same deal you got, or to become unsatisfied with their own contracts. Franchisors would naturally want to avoid this, which explains the policy of not negotiating on contracts. It is actually a sign of strength on the franchisor's part not to negotiate with potential franchisees, as Entrepreneur points out.
It shows confidence in the success of their previous contracts and in their system of franchising. You should ask if negotiation is possible, but if the franchisor seems willing to negotiate any major points of the contract, it could very well be a red flag that there is some flaw in their business model. You may want to proceed with caution.
There are some minor negotiations that may be possible with some franchise contracts. In these small areas, you may be able to get more favorable terms, but it won't really affect the main operating of the franchise. Newer, less established franchises are usually more likely to be willing to negotiate than well-established ones. Sometimes you can get additional support when you first open the franchise. Sometimes the franchisor's personnel will agree to be there during the grand opening to provide guidance and training, and some franchisors may even contribute to the costs of advertising and marketing for the brand new location.
Some franchisors are reluctant to allow you to pay your franchise fee in installments, while others offer in-house financing. It doesn't hurt to ask for installment terms if they aren't offered, though. Defaults could cause you to lose the franchise if not corrected under the terms of most contracts, so getting an extension can help prevent this from happening. It is important to franchisors that their locations operate according to their standards, though, so corrections should be made as soon as possible.
Most contracts include the signing of a personal guarantee, even if you form a corporation to own and operate your franchise location. Some franchisors may be willing to waive this guarantee or limit your liability if you can show that the corporation will be able to cover the loss should the franchise fail.
You may be able to get a modification of the franchisor's right to buy back your franchise if you try to sell before your contract expires. If you want to attempt negotiation of even minor points in your franchise contract, you should have a lawyer negotiate for you. Lawyers are trained to handle legal matters and also have more credibility than you do alone. Furthermore, negotiations can quickly become more complicated than your experience can handle, so it's to your advantage to have a legal expert handling them for you.
Once you've gone down your initial checklist, it's a good idea to set a specific deadline to come up with some particular franchisors that are potential good matches for you. How to evaluate a franchise business plan.
17 Things You Must Know Regarding Franchise Contracts
Do Your Due Diligence Congratulations. You've finally found a short list of franchisors that have made the cut. Unfortunately, your grand opening is still a long way off. Under the Franchise Rule, the FTC requires that you receive the document 14 days prior to signing any contract with the franchisor. What are the ongoing royalty fees? Are there any other fees? Some franchisees have to pay an additional marketing or advertising fee. Franchises have a number of controls to ensure uniformity, such as restrictions on goods and services you sell, suppliers, how you operate hours, employee uniforms, signs, bookkeeping and accounting procedures , sales area limited to a specific territory and rights to termination and resale, and renewal.
How long has the franchisor been in business, what is the experience of the management team? Is there any history of bankruptcy? Some franchisors will include this earnings claim as item 19 in the FDD, which shows the average franchisee's revenue and profitability, according to Siebert. What type of initial training will I receive?
What type of marketing and advertising support will I receive? What type of other support will I receive? For example, will I receive an ordering system or point of sale system? Will the support and training be ongoing, with monthly visits? If you have any questions, be sure to ask your franchisor.
It's always a good idea to meet with the franchisor in person to get a sense of their management style and to make sure you're comfortable with it. Ask them what the day to day life of a franchisee at their business is like, or what types of traits or skill sets they have found to most likely lead to success. In addition to the actual FDD, be sure to evaluate the franchisor's business plan to really understand the concept and what drives customers in the door. The business plan should include a clear marketing strategy and detailed financial projections.
Don't be afraid to do some research on your own. You should look into what kind of competition there is for the business, as well as the failure rates, and any other special requirements. Falvey discovered that other air conditioning and heating duct cleaners tended to do poor work, so the market was ripe for a company that would do high-quality, professional work. He also discovered, however, that he needed to get special licenses in the state of New York to do the work.
Perhaps the single most important part of your due diligence will be talking to other franchisees. You can actually find their names and contact information in the FDD. Ask at least 10 to 15 of them about the training, the ongoing support, what types of returns they have made on their investments, and how much they were able to resell for. In theory, a franchise has blazed the trail already and created a track record of success that you can check ahead of time. How to choose the right franchise location.
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