Educational Video #5 – Franchise Disclosure Documents (FDDs)

My latest video is on “Understanding a Franchise Disclosure Document (FDD).”

What’s a Franchise Disclose Document? Learn more here, in just over three minutes.

View this video on YouTube. Find my YouTube channel with this and other important franchise-related videos here.

Kim Marinoff presents “Understanding a Franchise Disclosure Document (FDD),” including key areas to pay attention to.

Franchising in the U.S. is governed by FTC, or Federal Trade Commission.

The Federal Trade Commission oversees franchising in the U.S.
The FTC governs franchising and dictates the contents of the FDD (this website/business is not affiliated with the FTC)

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.”

Here’s a link to the FTC’s page “A Consumer’s Guide to Buying a Franchise,” with detailed information on the franchise disclosure document.

They also have a useful PDF version here.

The complete franchise disclosure document includes these sections:

Franchisor’s Background (FDD Item 1)
Business Background (FDD Item 2)
Litigation History (FDD Item 3)
Bankruptcy (FDD Item 4)
Initial and Ongoing Costs (FDD Items 5-7)
Supplier, Territory and Customer Restrictions (FDD Items 8 and 12)
Franchisor’s Advertising and Training (FDD Item 11)
Renewal, Termination, Transfer and Dispute Resolution (FDD Item 17)
Financial Performance Representations (FDD Item 19)
Franchisee and Franchise System Information (FDD Item 20)
Financial Statements (FDD Item 21)

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Educational Video #4 – Levels of Entry into Franchising

Levels of Entry into Franchising

What are your options when deciding to enter franchising?

 

Examine different levels of franchise opportunities
Kim Marinoff discusses the different levels of entry in 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.

Find this video to Kim Marinoff’s YouTube channel here.

Single-Unit Ownership

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.

Multi-Unit Ownership

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.

The Complete Educational Video Series

Find Kim Marinoff’s complete series of educational videos here on this website.

Or visit Kim’s YouTube channel.

Learn More About Franchising

Find additional useful material here on this site, including:

Franchising Resources

Franchising Resources

 

Kim Marinoff’s Services

Services

 

About Kim Marinoff

About Kim Marinoff

 

All About Franchising Blog

More information on the world of franchising on the A2B Franchising Blog.

 

Contact Kim Marinoff

Contact Kim Marinoff at A2B Franchise Consulting

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Educational Video #3 – Questions to Ask a Existing Franchisees

What should you ask an existing franchisee?

This is Part 3 of my 11-part series of educational videos to teach you all about the franchise industry, and about working with a franchise consultant.

In just under four minutes, learn about the questions you mush ask existing franchisees when you are vetting a franchise opportunity.

Franchise education video 3 of 11, “Questions to Ask Existing Franchisees,” by Kim Marinoff.

Talking to existing franchisees is a critical step in the process of evaluating a franchise opportunity. I’ve honed my list of questions over the years, and they include some that you may not have thought of.

It’s important to understand the background of any franchisee you speak to. What was their background? What led them to this experience? What skills did they have, and how do their skills and experience compare to yours? Can the franchise training program help you fill in any gaps? Why did they chose this opportunity? Why did they pass on others?

Ensure you know about the training and support available to you. What is the biggest mistake they made and how can you learn from and avoid that?

How do you market your business? What are the biggest obstacles to success? What are their sales? What are expenses? What was ramp-up time? When did the business first break even? Did they hire a manager? Would you do this over again? Why or why not?Talking to existing franchisees is a critical step in the process of evaluating a franchise opportunity. I’ve honed my list of questions over the years, and they include some that you may not have thought of.

It’s important to understand the background of any franchisee you speak to. What was their background? What led them to this experience? What skills did they have, and how do their skills and experience compare to yours? Can the franchise training program help you fill in any gaps? Why did they chose this opportunity? Why did they pass on others?

Ensure you know about the training and support available to you. What is the biggest mistake they made and how can you learn from and avoid that?

How do you market your business? What are the biggest obstacles to success? What are their sales? What are expenses? What was ramp-up time? When did the business first break even? Did they hire a manager? Would you do this over again? Why or why not?

Get my complete list of Validation Questions to Ask Franchise Owners” at this link, as a PDF.

If you have questions, please comment here, or send them to me via email at kim <at> a2bfranchiseconsulting.com.

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 eight 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.

Thank you!

Smiles,

Kim Marinoff

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Educational Video #2 – Questions to Ask a Franchisor

Here are the important questions you must ask when evaluating a franchise.

Franchise education video 2 of 11, Questions to Ask a Franchisor, by Kim Marinoff.

This is Part 2, “Questions to Ask a Franchisor,” of my 11-video series on franchising. This series is designed to help you learn more about the franchise industry, and about every phase of working with a franchise consultant to select a franchise.

In three minutes, I lay out the questions you must ask a franchisor. This is a comprehensive list of questions I’ve developed over the years. I have made them available here on my website on my resources page.

Gather all the information you can and ask all the questions you can about corporate communciations, support, training, operations, marketing, the financial model, red flags in the franchise agreement, and the competition. How do they differentiate themselves? What territory are they selling? Is it exclusive? How is it defined?

What is the corporate culture? Competitive? Collaborative? Controlling? Creative?

What sort of capital do you need to have to open and operate?

I hope you enjoy the video and find my “Questions to Ask the Franchisor” resource useful. It will open or download as a Microsoft Word document.

Does it raise any questions for you? Send them to me (kim <at> a2bfranchiseconsulting.com) or comment here. I look forward to hearing from you.

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 nine 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.

Thank you!

Smiles,

Kim Marinoff

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Educational Video #1 – The Role of the Franchise Consultant

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.

Franchise education video 1 of 11, The Role of a Franchise Consultant, by Kim Marinoff.

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.

If you have questions, please comment here, or send them to me via email at kim <at> a2bfranchiseconsulting.com.

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.

Thank you!

Smiles,

Kim Marinoff

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