Now You're Cooking What are the ingredients for franchise success? Our secret recipe for satisfying your entrepreneurial appetite.
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Choosing from among the thousands of franchise opportunitiesavailable to investors is not unlike walking into a large grocerystore. There's lots to buy, but you can spend every dime youhave and still not go home with what you need to make dinner.Selecting the right franchise requires that you have a detailedshopping list and a clear idea of the end product. It's best tostart with a recipe for the dish you're making and a list ofthe ingredients you'll need, and work from there. Try doing itthe other way around--walking into the store with no idea what youneed--and what happens? You forget a key ingredient. Thesoufflé falls flat, the lasagna goes limp, or the cakecraters.
It takes hard work, thought and planning to find the rightinvestment. And while the ingredients may change from person toperson, the process for finding the right franchise investment isessentially the same for everyone.
A Picture Is Worth a Thousand Words
It starts with your dream. Where do you want to go with thisventure? In five years, where do you want to be? If you were makinga fancy meal featuring coq au vin, you'd start with the picturein a cookbook illustrating the succulent sautéed chickenglistening in a red wine sauce. This is where you want to end up.This is why you're going to the grocery store in the firstplace. This is your goal.
All successful business ventures start with a personal vision, afundamental plan, a goal or an objective. Selecting the rightfranchise should start with some sort of personal plan andgoal-setting exercise. Know where you want to go in your business.Know the general type of work you prefer. Know what really firesyou up and gets you excited about business.
The Shopping List
Next, make a list of your assets, personal strengths, resourcesand limitations. What money do you have in the bank? Is your creditreport in good shape? Do you think you'll qualify to borrow theinvestment capital you'll need? Do you have friends or familymembers who are in a position to invest in a promising businessventure?
Expect to have these resources tested during your search for theright franchise. Prepare a current financial statement, and obtainreferences from your bank and your major creditors, like a landlordor a credit union.
If you go into the investment without your list, you could endup forgetting a crucial part of the preparation.
Never Shop When You're Hungry
If you shop when you're hungry, you end up buying food youdon't need and probably shouldn't eat. In franchising, youmust be prepared to resist making impulsive decisions. The field offranchising is populated with some of the most talented salespeoplein business. They offer lots of sizzle, and they're carefulstudents of the psyche of the hungry prospective entrepreneur.Before you know it, they've got you excited about the unlimitedpotential of their opportunity, they're urging you to get in onthe ground floor, and they're telling you the territory isgoing fast and you must decide now. Your job in this process is toseparate the sizzle from the steak and stick to your list.
Read the Labels
You have an advantage over most other investors. As aprospective franchisee, you'll receive a detailed, extensivereport about the franchisor, the franchise being offered and thefranchise system. This document is known as the Uniform FranchiseOffering Circular, or UFOC.
The UFOC is one of the most detailed ingredient labelsyou'll ever come across. Like food packaging labels, theUFOC's format is established by federal law, and it'sdesigned to deliver key information about the franchise investment.You'll find 23 items of information, all of which are importantto your investment decision. If there's one piece of advice youshouldn't ignore, this is it: Read this document carefully.Sure, it may read like an insurance policy in places, but it'sa treasure trove of details for alert investors. The good news: AllUFOC documents must be written in plain English. No Latin phrases.No "hereinafters" or "whereinbefores." Norun-on sentences only a lawyer could love.
Pay special attention to key UFOC sections that describe thefranchise program. Some sections give you information about thefranchisor, its financial standing and litigation background; someoutline the franchise investment itself; and others fill you in onthe network of existing franchise owners. Taking all three areasinto consideration is crucial when making your investmentdecision.
1. The franchisor. Items 1, 2, 3 and 4 tell you whothe franchisor is, how long it's been in business, its keyexecutives' experience, its litigation or arbitration history,and whether there are any bankruptcies in its background. The keyinformation here is the litigation background. If the company isinvolved in numerous lawsuits with its franchisees, find outwhy.
You also want to know about the financial stability of thefranchisor. Item 21 requires a franchisor to attach threeyears of audited financial statements to the UFOC. This gives you agreat snapshot of the franchisor's recent financial history.You want to know if this company is going to be around for the longhaul; after all, your franchise agreement can run 20 years orlonger. Its value as an investment is greatly diminished if thefranchisor is on shaky financial ground.
The same can be said about the principal trademark licensed toyou. Confirm in Item 13 whether the mark is federallyregistered with the U.S. Patent and Trademark Office and whetherthe franchisor will stand behind you if the mark is ever challengedby a third party. If the mark isn't federally registered or ifyou're not entirely comfortable with the legal obligations inthe event of a challenge, talk to your attorney (an importantadvisor in this process) and know the legal risks going into thesituation.
2. The franchise investment. Items 5 and 6 lay outthe fees you must pay the franchisor. Usually, franchisees pay asubstantial initial fee plus ongoing royalties expressed as apercentage of the business's gross sales. Initial feestypically range from $10,000 to $30,000, royalties from 3 to 6percent. Look for other fees as well, such as a marketing oradvertising fee, which adds approximately 1 to 2 percent to themonthly royalty payment. Item 6 lists other incidental fees, suchas transfer fees, renewal fees, audit expenses and additionaltraining fees.
Item 7 is very important in a successful franchise recipe. Itpresents, in chart form, the franchisor's best estimate of thetotal expenses involved in opening a franchise. Equipment costs areestimated, as are real estate and build-out cost ranges. Use thisitem to compare the real costs of the program to your budget. Ifyou find a total investment range of $150,000 to $375,000,you'll know roughly how much you'll have to spend or raiseif you want to get one of these franchise recipes off the stove andonto the table.
Other disclosure sections tell you about the restrictions placedon your product supply sources (Item 8), your obligationsunder the franchise agreement (Item 9), any franchisorfinancing programs available to franchisees (Item 10), and thefranchisor's contractual obligations to provide services,training and assistance (Item 11).
If your first question is "How much money can I make withthis franchise?" you'll find an answer (if the franchisorchooses to offer it) in Item 19. Most franchisors don'tprovide performance data. They leave it to would-be franchisees tomake their own projections and assumptions about the potential ofthe business.
Anyone seriously considering buying a franchise should interviewas many existing owners in the system as possible. You'll finda list of owners in Item 20. Ask them how their units perform andwhether they're satisfied with the training program and theirbusiness's performance. Not only will this information providean invaluable reality check, but it will also help you with yourbusiness planning and financial projections.
3. The network. Turn to the charts and lists shownin Item 20 for a systemwide snapshot of the franchise program. Thecharts are designed to reveal a three-year summary of thegrowth--or contraction--of the national franchise system and thefranchisor's expansion plans during the coming 12 months.
Generally, two lists are attached to Item 20. The first is alist of existing owners, organized by state. The law requiresmerely that the franchisor list at least 100 franchisees in yourstate and adjacent states. Also attached to Item 20 is a listof the names, addresses and telephone numbers of franchisees whohave left the system for any reason in the past year. Talk to theseformer franchise owners to find out why they left and whether itwas related to shortcomings in the program.
Talk to Professional Chefs
If you're serious about being in business, you'll need agood accountant and an experienced attorney on your team. Youraccountant will perform an essential function: helping you reviewthe financial statements presented in the UFOC and using the costprojections in Item 7 to help you create your own projectionsand break-even analysis. Where serious dollars are concerned, youcan't afford to miscalculate the capital needs and potentialreturn on investment of your new business.
Your attorney will advise you on the franchise agreement, yourlease and any ancillary contracts. These are perhaps the mostcomplicated legal obligations you'll encounter as anentrepreneur. The franchise agreement often runs more than 50 pagesin length and is not required to be presented in plain English.After all, this contract conveys trademark rights and complexknow-how, appoints the right to operate a franchise unit, detailsthe conditions of renewal, specifies fees to be charged, promisesservices, imposes the obligations to comply with the franchisesystem, addresses the right of transfer, and tackles thealways-difficult topics of termination conditions andpost-termination obligations. And that's before it gets to the"boilerplate" provisions of indemnification, disputeresolution and independent contractor status. Stretch these topicsto apply over a five-, 10- or 20-year relationship that's boundto change during that time, and you start to get an idea of theagreement's complexity.
This is no time for a do-it-yourself, cursory review. Neither isit time to consult your niece or nephew who happens to be afirst-year law student. Find a good attorney with solid experiencein advising small businesses who is comfortable reviewing afranchise offering.
Follow the Recipe
The recipe analogy is apt for franchising because manyfranchisors insist that franchisees follow their recipe for successwithout deviation. Make sure you like the business of the franchiseand that you're prepared to follow the franchisor'sapproach to management. Many systems leave no leeway for individualvariations on the core elements of the franchise program, so owninga franchise is not for everyone.
This may not be the time to adhere to the old saying, "Ifyou can't stand the heat, get out of the kitchen."It's certainly going to get hot in this kitchen, but it'sall part of a great small-business investment. Get used to it.Savor it. If you're organized, relentlessly follow the recipeand choose wisely among the available franchises, you'lldeliver a seven-course meal of extraordinary franchise success.
Ready, Set, Cook!
Once you've chosen a franchise, you'll be your ownmaster chef. Then it's time to make a success of the recipe andbring your own energy, joy and hard work to the mix.
- Watch your pennies. Franchise specialists will tell youthat most franchises, like most small-business operations, run onnarrow profit margins. Success lies in your willingness to immerseyourself in the control of the expense side of the business.
- It's people, people, people. Location is important,but if you're running a retail franchise, your biggestchallenge may be finding people to fill the working crew. Economicprosperity and low unemployment mean everyone is looking for solidemployees. It's an economic season of high turnover. Offercompetitive wages and strong benefits.
- Sweat the small stuff. The real magic of retailmarketing takes place at the counter, the point of sale. Smallthings like eye contact, a cheerful greeting, a smile, and a subtlesales spin that promotes specials and larger orders can nudge thenarrow margins into clear profitability. The best franchiseprograms insist on attention to detail at the front counter. Thesolution: ongoing training of counter or sales crew.
- Connect with the customer. Outreach programs are the hottopics among franchisees these days. Direct-mail promotions bring'em into the store: coupons, punch cards, discount specials,and even programs allowing the counter staff to learn and rememberthe names of regular customers are drawing new attention fromfranchisees in an increasingly crowded and competitivemarketplace.
All The Fixings
Part of the task of finding the right franchise for yourinterests involves investigating resources to help with your searchand evaluation. Check out the following government and privateresources:
- The Federal Trade Commission (FTC) has regulatedfranchise sales since 1979. Its Franchise Rule requires franchisorsto deliver a comprehensive disclosure document to all prospectivefranchisees at the earlier of 1) the first face-to-face meeting forthe purpose of discussing a franchise sale or 2) at least 10business days before you pay money or sign a binding contract forthe purchase of the franchise. Franchisors are not required to filecopies of their disclosure documents with the FTC, but you can getgeneral advice and guidance by phone from the FTC's ConsumerResponse Center at (202) 326-3128, on the Internet at http://www.ftc.gov or by writing to theFederal Trade Commission, Washington, DC 20580.
- Your state. If you live in one of the 13"registration states," you can feast on disclosuredocuments as part of the public record. Contact the agency inparentheses in these states: California (Department ofCorporations), Hawaii (Department of Commerce and ConsumerAffairs), Illinois (Office of the Attorney General), Indiana(Secretary of State, Securities Division), Maryland (Office of theAttorney General), Minnesota (Department of Commerce),New York (Department of Law), North Dakota (Office of theSecurities Commissioner), Rhode Island (Division of Securities),South Dakota (Division of Securities), Virginia (CorporationCommission, Division of Securities and Retail Franchising),Washington (Department of Financial Institutions, SecuritiesDivision) and Wisconsin (Commissioner of Securities). If youdon't live in one of these states, contact your state'sconsumer protection agency for general investment information.