“Individuals pursuing a franchise opportunity have about 3,000 franchises to choose from, however, by having a plan you’ll be able to narrow your choices down to the best franchise for you. There are numerous resources available that provide advice on how to select and evaluate a franchise. Resources include the Internet, International Franchise Association, the FTC and The American Association of Franchisees and Dealers. However, the best approach is to match your financial resources, business skills, work experience and personal profile to the franchise opportunity that most closely fits these characteristics.”
Very much in line with the coaching and consulting I provide to my clients, the author looks for a personality fit, interest fit, skills / experience fit, a financial match, a fit with the time needed / expected, and a match with personal goals. Other keys include how hands-on you wish to be, and how objective you are when it comes to your own strengths and weaknesses. Finally, what is your contingency plan, depending on how things go.
Want to know more? Check out my franchising resources page – or, better yet, contact me for an initial call or meeting as a first step toward evaluating whether franchising is right for you.
This is a three-minute video, the sixth in Kim Marinoff’s Franchise Red Flags series of 11 educational videos on the franchise industry. Its title is “Passive/Semi-Passive Ownership in Franchising.”
Here, Kim shares her franchise consulting expertise to inform you about key factors in passive franchise ownership, or semi-passive franchise ownership opportunities.
Passive franchise ownership or franchises that allow semi-passive owner roles can be of interest to a couple of types of people. In some cases, someone that is employed and is interested in and working to get something built on the side can find this is a good fit. One goal is for them to then transition from that job to operate the franchise, which by then will be producing revenue. After making that transition, the owner can then put effort into scaling the business, investing in and operating other units, etc.
In some cases, someone who is retired and wants a project on the side to produce revenue and give themselves something to work on might find a passive or semi-passive ownership situation appealing.
There are some key things to know and consider when you are researching passive franchise ownership or a semi-passive opportunity:
Some franchises allow passive franchise ownership and some do not. Some franchises have designed their ownership programs or have learned through experience that they need owners fully engaged to be successful. Others have figured out that their units can be successfully operated by a passive or semi-passive owner.
Franchises that allow passive franchise ownership must have strong training and support programs in place. You will need to find and hire a manager. You want to ensure that your manager can and does lean on the franchise company for support and guidance, and not on you, the franchise owner. You must make sure those tools and support systems are in place to help your manager.
You must be properly capitalized, like with all franchise opportunities, and, frankly, any business venture.
You must make a good choice when hiring a manager, and take steps to keep that manager in place. You don’t want turnover. If you are not directly involved in the business on a day-to-day basis, and the manager quits, that can be a huge problem. One way that Kim has approached this in the past with her passive franchise ownership is to create a sweat-equity partnership with the manager. For example, you can give them 4% ownership each year over five years with a contract that says they are fully vested at the end of that fifth year. That way, your manager benefits from and shares in the profits and the equity being built each year, and is rewarded at the end of that five-year effort with a 20% ownership stake in the franchise. That’s one way to reduce the chance of your manager leaving, by giving him or her a stake in the business and a true sense and role in ownership of the franchise.
Make no mistake. You must understand that no one else is going to run the business like you would if you were there working every day. If you can find the right manager, and effectively delegate the day-to-day operation of the franchise to a trusted candidate, passive franchise ownership can work for you, and there are some great opportunities out there.
Every franchisor must give every prospect a franchise disclosure document, which mirrors the franchise agreement and provides detailed information on many different areas of the franchise, its costs, and how it operates. The FDD has 23 templated sections, and each franchisor populates those templates with their own information.
A completed FDD can be as long as 200 or even 300 pages. At the end, you should find the actual franchise agreement. It’s important, as a prospective franchisee, that you understand the entire franchise disclosure document in its entirety.
Some particularly important sections of the FDD include:
Item 6: Which lists all ongoing costs/expenses to operate a franchise. That can include royalties, advertising costs, software, and more.
Item 7: Details all of the expected costs to get a franchise location open. It provides a range, with a low and high end, itemized.
Item 12: Here, the franchisor shares how it defines territory. That territory should be exclusive. They should also share details on how they define territories (for example, by populations), and what demographics they have considered in each territory to make that territory not just viable but valuable.
Item 19: You will find financial information here, including the franchisor’s earnings claims. What kind of performance numbers are existing units reporting, what they are producing, and how are they doing that. Some FDDs don’t populate this section. That might be because the franchise is a startup, or they want you to be in touch directly with franchisees, and getting numbers from them.
Item 20: This section gives details on franchise outlets that have opened, terminated, and ceased ops. You will find information here on every franchisee, along with their contact information.
The FTC Advises:
“Before you invest in any franchise, get a copy of the franchisor’s Franchise Disclosure Document (FDD). Under the Franchise Rule enforced by the FTC, you must receive the document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. You have the right to ask for — and get — a copy of the FDD once the franchisor has received your application and agreed to consider it. Indeed, you may want to get a copy of the franchisor’s FDD before you spend any money to investigate the franchise offering. The franchisor may give you a copy of its FDD on paper, via email, through a web page or on a disc. The cover of the FDD must provide information about the available formats. Make sure you have a copy of the FDD in a format that is convenient for you, and keep a copy for reference.
Read each of the 23 numbered “Items” in the franchise disclosure document. Don’t be shy about asking for explanations, clarifications and answers to your questions before you invest.”
What does a franchise consultant do? Let me explain.
This is Part 1 of an 11-part series of educational videos I’ve created to help you learn more about the franchise industry, and about every phase of working with a franchise consultant to select a franchise.
It’s short – only 2:33 – and I hope you’ll find it informative.
What do I do? I offer a free consulting service to those considering investing in a franchise of their own. I get to know you, then look for opportunities that might be a good fit for you. Once we have a short list, I’m your advocate, helping you to thoroughly vet any given opportunity. I’m compensated from a franchise’s franchise fee. When I match you to an opportunity, they pay me a commission from that franchise fee.
Learn more about me and my services, find valuable resources about franchising on this website, and check back here on my All About Franchising blog as I introduce the other 10 videos in my educational series.
I’ll also be posting news here about my clients, news from the franchise world, address other industry topics, and I always welcome your comments and questions.