“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.
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 are your options when deciding to enter franchising?
When you’re looking to get into the franchise industry, you have some options to consider. There are three franchise levels to consider: single-unit ownership, multiple-unit ownership, and regional development or master franchisee.
The first franchise level is owning a single unit. Owning a single franchise unit is typically the way people think about franchising. Most, especially those new to franchising go this route. It simply means owning the rights to a single unit of a given franchise.
The second franchise level is owning multiple franchise units. For someone who is well capitalized, multi-unit ownership may be worth considering. If you are enthusiastic about a concept, and want to grow and scale a business, it may be for you. If you commit up front to multiple units, you usually get discounts on franchise fees. For example, the first unit may be $40,000; the second, $30,000; and the third, $10,000.
These discounts can be significant. You are not required to open all the units at once time. This can be a way to secure a territory. Then it is protected for you, and no one else can come in while you’re getting your first business set up and running.
Master Franchisee/Regional Development
The third franchise level is to be a master franchisee or regional development partner. The next level up is master franchisee or regional development. For certain people, entering into a master franchise agreement is a particularly interesting level. It means that you partner with the master franchisor. As a result, you may be in a relationship that makes you a 50-50 partner, or 40-60 or 60-40.
This role is twofold. First, you develop the market, or sell franchises. Then, once those franchises are up and running, you support them. That assistance can look like the role of mentor, to make sure their initial and ongoing success. You guide them, helping them with build out, getting up and going, their grand opening, and beyond. As they find their customer base, you ensure they are following the system provided by the franchisor.
Compensation reflects these two roles a master franchisee has. For each franchise sold, you receive a share of the franchise fee. So, for a $40,000 average franchise fee, you receive $20,000. It’s wise to avoid looking at that as a revenue source. It’s better to consider that for use on advertising/marketing/promotion funds you use to develop your market.
Once a franchise agreement has been sold – or you’ve sold any number of them – and you’ve helped the units get up and running, there are royalties. Like the franchise fees, you share in the royalty paid by each unit in your market. Those royalties are typically a percentage of sales, so the ideal situation is to sell into a high-volume market.
An average royalty paid to the master franchisor is 8%. So, for a unit with $1 million in sales, you get 4 percent, or $40,000 annually. The more you help a unit grow individually and a group of units grow collectively, the better they do, and the better you do. For 30 units, as an example, you can expect a residual income stream of $1.2 million a year during the term of the franchise agreement. A franchise agreement can range anywhere from five years to 20 years, depending on the franchise.
This can also be an opportunity to develop equity. The royalty stream comes in by contract, so other investors may be interested in buying your market from you. The typical sale discussion in this case starts at a multiple of five to nine times what your annual royalties total, depending on the market and how much longer the franchise agreement will be in place. I know a gentleman in Houston who receives $2 million a year, and that’s “mailbox money” – it’s coming to him under contract. He just needs to keep supporting the market he’s developed.
The downside here is that there’s a slower ramp up than if you are developing a single franchise unit or multiple units. It takes time to sell each franchise, as much as three to four months for a prospect to properly vet your opportunity. Then it can take four months and even up to a year to find a location, build out the unit, open, and build sales and get revenue flowing.
You’re also looking at a startup franchise or an emerging brand, rather than established brands. Most established brands likely don’t have territory available. Massage Envy, for example, sold out its entire inventory of master franchisee territories around country in about 14 months after it was founded.
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.
I’m Kim Marinoff, and my business is A2B Franchise Consulting.
Check back here regularly. I will be creating and posting content about all aspects of the franchise world.
I’ll be introducing and posting links my 11 educational videos on franchising here in the coming weeks, and also embedding them on the Videos page here on my site, and on my YouTube channel.
I’ll also be looking to answer any questions you may have about the world of franchising, how to become a franchisee, what’s the best franchise for you, and more. Please send me your questions, and join the discussion by commenting on any post you may find here that is of interest.