Monday, October 20th, 2008
If you are contemplating buying your own franchise, you are sure to have myriad questions running around in your mind begging for answers. To ease your mind and to give you control during the decision-making process, we’ve prepared a checklist of 20 questions that you have to get the answers to before making the big leap:
1. How long has the company been in existence before it started franchising? Was it specifically set up to franchise?
2. What is the company’s financial position? You should check accounts for at least the last three years. Can you get trade or bank references?
3. Can the franchiser show you any figures of net profits of one or more of its existing franchisees, and can you personally check the figures with the franchisees themselves?
4. What are the criteria to be selected as a franchisee?
5. As a franchisee, what are your obligations? Are there any operational restrictions on pricing or use of suppliers?
6. What is the nature and extent of the rights that will be granted to you?
7. How many franchised units are currently in operation? Are there also company-owned units in operation?
8. Does the agreement have a termination clause; if yes, what will it cost you? Can you sell your franchise?
9. Does the franchiser have a reputation for honesty and fair dealing among its franchisees?
10. What kind of assistance will the franchiser provide? Will it involve management and employee training programs, advertising campaigns, credit and merchandising ideas?
11. Does your state have a law regulating the sale of franchises, and has the franchiser complied with that law?
12. How much equity capital will you need upfront to purchase the franchise and operate it until the profits start rolling in? Will there be sufficient profit left once you have paid all your expenses?
13. What are the initial and ongoing fees? Are there any other hidden costs?
14. Will you get the exclusive rights to the territory for the length of the franchise period, or can the franchiser sell a second franchise in your territory? If the answer to this question is ‘yes’, what is your protection against the second franchising company?
15. Have any franchised units failed during the last 12 months? What were the reasons?
16. Is the franchiser a member of the FASA? Have they ever been refused membership?
17. In the event of a dispute between the franchiser and the franchisee, how will it be dealt with?
18. What is the procedure for terminating the agreement and what are the consequences of doing so?
19. How is the communication between the franchiser and franchisees? Is it possible to talk freely to existing franchisees?
20. What are the franchiser’s long-term plans for the future of the business?
Though business surveys show that fewer than 20% of all franchised businesses fail compared to the 60-80% failure rate for all new businesses started in the U.S. each year, it is necessary that you investigate a franchise opportunity thoroughly. The above checklist will serve as the starting point of your franchising journey. If you can get the answers to each of these questions, and those answers satisfy you, then you’re probably on the way to becoming a proud franchise owner. But be sure to have your attorney study the franchise contract and discuss it completely with you.
Tags: Business, Contract, Directories, Due diligence, franchise, franchising, Opportunities, U.S
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Wednesday, October 15th, 2008
Let us first understand what is meant by due diligence - the Merriam-Webster Online dictionary explains “Due Diligence” as “the care that a reasonable person exercises under the circumstances to avoid harm to other persons or their property.”
Through due diligence, a prospective buyer of a franchise gathers detailed information about the business potential and profitability, financing requirements, operational risks and other factors that must be discovered and analyzed before proceeding with the deal. In turn, due diligence also enables the seller or franchisor to evaluate the terms of the sale, the creditworthiness of the buyer, tax consequences etc.
Following are the 5 most important things you will need to do as a prospective buyer before you take the final step of signing up.
1. Understand your market: Once you have made up your mind on what type of franchise you want and can afford, investigate the demand for that particular product or service in your area. Just because the idea might have worked out perfectly for someone located elsewhere, does not mean it will work in the place where you want to open your franchise. Some issues you need to consider include the level of competition in your target market and whether the concept has only seasonal marketability.
2. Compare opportunities: Even if your heart is set on one franchise brand, it never hurts to look at other opportunities to make sure you are signing on with the best option that matches your skills and interests. Attend a franchise trade show and/or use a franchise consultant who will enter your criteria into a database and then present companies that match your parameters. There are also numerous websites that allow you to see a snapshot of several concepts at once.
3. Scrutinize the offering: Do not sign any contract or make any payment until you have had the opportunity to investigate the franchisor’s offering. The FTC requires all franchisors to disclose important information about the franchise system including their past earnings, franchise agreement terminations, number of operational outlets etc. You might do well to take the help of a franchise attorney and review the UFOC and franchise agreement, as well as have an accountant review the franchisor’s earnings claims.
4. Find out what training and support the franchisor provides: Before taking on a franchise, make sure that the franchisor provides intensive training on how to run the business and also offers some kind of ongoing support. This is very important because without it you will have no way of making a success of that business.
5. Talk to existing franchisees: The most important step you can take before signing the final contract is talk to other franchisees. They can give you honest feedback and validate what the franchisor tells you. Ask them about their experiences, and if they have any advice for you. Their input could be very valuable indeed.
Conducting due diligence is an important information gathering process that will enable you as a prospective purchaser to assess the strengths and weaknesses of the target business, rectify and renegotiate any new terms of agreement, minimize post purchase “surprises” and determine whether or not to proceed with the deal. Make sure you do it well.
Tags: Business, Contract, Directories, Due diligence, franchise, franchising, Opportunities, UFOC
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Tuesday, October 7th, 2008
There are 4 parts to a UFOC:
* Cover Page
* Table of Contents
* Items 1-23
* Exhibits
The format for each of these sections is very specific and covers the following:
The Cover Page Cover Page identifies the franchise business, including the name under which the franchisee would operate and what type of business it is. It also includes the amounts of the initial franchise fee. In addition, any additional risk factors are included on the cover in all capital letters. Risk factors that may be included mostly pertain to which state is governing the franchise agreement and where any litigation is permitted to be filed and heard.
The Table of Contents Table of Contents contains the 23 specific items listed below, as well as the exhibits, in a standard format.
Items 1-23 Item 1: The Franchisor, Its predecessors, and Affiliates This section gives you a background on the Franchisor, including anyone he / she has purchased the franchise from, and any affiliates, meaning anyone else who has a controlling interest in the franchise. Do your research on these representatives, including a credit check if possible. You’re quite possibly investing your life savings with these people and knowing any other businesses in which they have been involved and how well they manage financial aspects is important.
Item 2: Business Experience This section gives you a background on the officers and directors of the franchise for the past five years. Similar to the information you will review on the Franchisor itself, you want to carefully review the expertise these people bring to the table. These are the people you will be working with and who will contribute greatly to the success of your franchise. You should get to know them as well as you can.
Item 3: Litigation Any history of litigation, including cases terminated by settlement, must be disclosed in this section. Any Franchisor who is under some kind of restrictive injunction is one to stay away from. Additionally, if a franchisor or any officer has a criminal history or any pending litigation that may affect his or her ability to maintain a franchise opportunity then this is not a worthwhile risk.
Item 4: The Bankruptcy bankruptcy disclosure requires that they tell you up front about any bankruptcy in the last 10 years concerning, “the franchisor, its affiliate, its predecessor, officers, or general partner.” Entrepreneurs often have several failures before they are successful. Learning from failed business is not the experience you want to have, which is why you are considering a franchise. This does not always mean that having a bankruptcy in the disclosure is a sure prediction of a bankruptcy in the future, but you want to review the circumstances of the bankruptcy carefully, including the amount of time that you have that lapse since bankruptcy. You typically do not want to give your money to someone with a proven track record of not being able to manage it.
Item 5: Initial Franchise Fee The initial franchise fee is the fee you pay to purchase the right to operate as a franchise. This does not include all of the other fees that may be required to get started or continue operation. The important thing to know about the initial franchise fee is exactly what you are getting for those dollars. Knowing how they came up with that number is important. A large initial franchise fee does not Equate to a larger or earning a better investment. Consider this fee in addition to the Other Fees (Item 6) and Initial Investment (Item 7) before concluding what it will actually cost to open a franchise.
Item 6: Other Fees Other fees include any other monies you will be required to pay to the franchisor, including royalties, advertising fees, service fees, training fees, or any other ongoing or one-time fees that you as a franchisee will be expected to pay directly to the franchisor.
Item 7: Initial Investment This is the key item in terms of figuring out what is will cost you to get a franchise up and running. This section is laid out as a table, and includes the estimated costs for training, equipment, opening, inventory and other costs associated with starting your franchise. For each item in the list, you are given the amount, the method of payment, when it is due and to whom the payment is to be made. Review this information carefully. Speak with other franchisees and see if the estimated costs were realistic. Expect that you will need more for unexpected expenses. Remember that most businesses are not profitable for at least a year, so include the amount of money it would take you and your family to survive for a year without income.
Item 8: Restrictions on Sources of Products and Services If the franchisor requires you to purchase or lease from designated sources, investigate further. Sometimes the purchase restrictions are because the franchise has negotiated a lower price for certain goods in return for guaranteed orders. However, sometimes the cost of the supplies is not competitive and the franchisor makes a bit of money from the procurement of supplies. This makes the franchise more expensive to run, even if the startup costs look attractive. If the costs are reasonable, the restrictions are not a big issue. Again, talk to existing franchisees to see if they feel these restrictions are reasonable and whether or not they are satisfied they are receiving their money’s worth.
Item 9: Franchisee’s Obligations Your obligations as a franchisee can be laid out in various agreements, including but not limited to the franchise agreement. This section explains what your obligations are and exactly where in the legal documentation you can find the information governing your obligations. This is an important section for you to review carefully, as they define your contractual obligations and these obligations if you breech your franchise can be terminated. Talk to current franchisees and see whether meeting these obligations has presented any difficulty. If the obligations seem unreasonable, move on.
Item 10: Financing Sometimes the financing required to start up a franchise comes from the franchisor him / herself. As with any financial contract, review the conditions and be sure that they are competitive and make sense. Have an accountant or banking representative review the terms and give an opinion. Having a credit check would, again, be handy here.
Item 11: Franchisor’s Obligations Just as the UFOC Laysan out your obligations as a franchisee, the franchisor of the obligations must be clearly disclosed in this section. You are putting your financial future into the hands of the franchise that you purchase, at least in part. Be sure you understand exactly what you are getting for what you are paying. You may want to approach this section in a different manner than the others … perhaps backward. Rather than reading what they will provide, begin by making a list of what you think you will need to be successful. Determine what kind of training you will need and see whether they provide it, when it will be offered, what kind of training it is, and whether or not it meets your needs. What kind of ongoing support documentation or do they include? Also determine what you would need after you have opened the franchise and see whether those items are included in their list of obligations. If they are missing things that you think you will need to be successful, ask to have those things added to the franchise agreement. Verbal promises from salespeople are not sufficient - promised items should be added to this section.
Item 12: Territory Opening a franchise just to see another franchise open up a half mile down the road would be enough to make anyone crazy. Politics section of the UFOC is designed to lay out exactly what rights you have to any territory. Having the right to an “exclusive area” cuts down on the competition, at least from within your own franchise. Unfortunately, not all franchisees are alike. Some will take full advantage of their area and develop the market to its fullest. Others will assume that the lack of competition in their immediate area means they have a right to the business and therefore do not work quite as hard to develop that area. There are many other situations in which an exclusive area causes issues for a franchisor, and most will not grant them. Some will grant an exclusive area only for a specified amount of time or only as long as a certain level of achievement is reached by the franchisee. Understanding what options the franchise offers is very important.
Item 13: Trademarks This section disclosed any trademarks, service mark, service name or logotype used in the franchise business and whether or not that trademark or service mark are registered with the U.S. Patent Office. Using a trademark symbol (™) is not the same thing as having a registered trademark. The registered trademark (®) means a certificate of registration has been granted to the franchisor. A trademark registered in the Supplemental Register does not have the same legal rights and there should be a statement in the Trademarks section disclosing this information.
Item 14: Patents, Copyrights, and Proprietary Information This section is important to you only if patents are important to the franchise. If so, get a copy of the patent from the U.S. Patent Office and review the status of the patent. Be familiar with any copyrighted or proprietary information outlined in the UFOC, as the franchisor has a right to prohibit or modify anything use of patent, copyright, or proprietary information disclosed in the UFOC.
Item 15: Obligation to Participate in and the Actual Operation of the Franchise Business This section outlines any requirements for the franchisee to personally be involved in the operation of the franchise. If the franchise does not require the franchisee to run the business him or herself, then there must be a statement outlining whether or not a manager running the day-to-day operations of the franchise in place of the owner must complete the franchisor’s training program and / or own an equity share of the business, and any limitations placed on the manager (such as being approved by the franchise).
Item 16: Restrictions on What the Franchisee May Sell restrictions on what you may sell will affect those franchisees who want to operate an expandable business while they own the franchise. This section is also important if you are limited to selling goods or services that will not make you enough return.
Item 17: Renewal, Termination, Transfer, and Dispute Resolution This section is one of the most important in the entire document, and is presented in a table format for easy browsing. The best contract is one stating that as long as you do not breech your contract you can renew your franchise agreement, forever. Contracts that place a limit on your possibility to renew solely at the discretion of the franchisor are bad. Also pay close attention to extensive repairs or decoration that will be required as a condition of renewal. The amount of money expected to be spent should be reasonable and there should be some kind of formula so that all costs are not incurred in the same year. Additionally, the refurbishment should keep you competitive industry.
There are many types of transfers. Transferring among business entities, such as from a sole proprietorship into a corporation, should definitely be allowed. A good agreement will also allow your franchise to be transferred to your heirs. If this is not allowed and you’re still interested in purchasing the franchise, try to make some provision for the repurchase of your franchise by the franchisor.
This section also outlines the causes for termination of the franchise agreement, states whether the franchise can be sold and who has the right of first refusal (your own blood relatives should not, ideally, come after the franchisor on first rights), and delineates your right to arbitration. Essentially, the more rights you have to control the renewal and transfer of your franchise, the more rights you have for the continuation of your business and the better the agreement. Make sure your attorney reviews these franchise rights as well as your rights to litigation (or requirement to use arbitration). Any additional risks for litigation will also be on the cover page, remember.
Item 18: Public Figures This section requires the disclosure of any public figures using the franchise as a spokesperson, how much they were paid, and how much control they have in the business (if any). Find out how this arrangement relates to you, whether you can use that figure in personal appearances or advertising, how much it would cost and how frequently you would be allowed to do so.
Item 19: Earnings Claims It is very tricky for a franchisor to project, estimate, or in any way forecast financial salts. There are so many variables in play for an individual franchise that it would be mostly guesswork and optimism to project for a prospective franchisee how much money they will make with their business. Any claims made by the franchisor to this effect must be substantiated, so rarely will you see any earning claims included in a UFOC. The best way to get an idea of what to expect for earnings is to talk to existing franchisees. Find out how long they’ve been in business, when the business turned profitable, and what their average profits have been. Remember that each business is unique and that each franchisee does not run a business equally well. Speak to several franchisees to get a cleared picture of a range that you might be able to expect.
Item 20: List of Outlets All of the existing franchise locations, along with the franchisee’s contact information, is listed in this section. This is the pot of gold, right here. Contacting franchisees with questions about their relationship to the franchisor, their ability to meet their contractual obligations, their overall earnings, and how realistic the start-up projections are is the best bit of research and review you can possibly do before purchasing your franchise. Prepare your questions and schedule time with franche in advance, this one is important.
Item 21: Financial Statements This section points you to the exhibits containing one of the Audited financial statements of the franchisor for the last three years. Take these statements to a qualified accountant for review. The financial status of the franchisor is a track record, showing you not only the ability of the franchisor to run the business, but also the likelihood of success or failure.
Item 22: Contracts All contracts or agreements with franchisee will need to sign must be attached to the UFOC. This includes the Franchise Agreement, purchase agreements, lease agreements, and others.
Item 23: Receipt This document is a receipt of acknowledgment of the UFOC. This has to be provided as the last page of the document for the franchisee to acknowledge that they have received it. This is important because not only legally monies can be exchanged until 10 days after the receipt of the UFOC (the “cooling off” period provided for by law).
Exhibits Any documents that have been identified in the UFOC for the franchise to review or sign must be included as an Exhibit. The exhibits will include copies of such things as the financial statements, Franchise Agreement, leases, or Loan Agreements.
Tags: Business, Contract, Directories, Due diligence, franchise, franchising, Opportunities, UFOC
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