Franchise Bible

How to Buy a Franchise or Franchise Your Own Business

Rick Grossmann, Michael J. Katz

• Publisher: Entrepreneur Press
• Year: 2017
• ISBN:
  9781613083550
• Topic: Business
• Subtopic: Franchises
• Index: Business

The Insider's Guide to Buying a Franchise or Franchising Your Business

In this easy-to-read guide, franchise expert Rick Grossmann and franchise attorney Michael J. Katz impart decades-worth of insight and advice on what it takes to make your franchise operation successful. Grossmann and Katz share expert tutorials, tricks of the trade, and access to sample franchise documents, checklists, and questionnaires designed to get you organized, support you through the process and get your new franchise off the ground. If you're thinking of buying a franchise, you'll learn how to:

• Determine if running a franchse is right for you
• Navigate franchise disclosure documents and agreements
• Identify the signs of a good franchise opportunity If you're thinking of franchising your existing business, you'll learn how to:
• Pick the best method for expanding your business
• Understand the keys to establishing a successful franchise system
• Evaluate potential franchisees and grow your franchise Whether you want to buy a franchise or franchise your own business you'll learn what to expect, how to move forward, and how to avoid costly mistakes--making Franchise Bible required reading.

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PART I

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Buying and Operating a Franchise

(Becoming a Franchise Owner)

CHAPTER 1

The Basics of Franchising and the Changing Landscape of Franchise Marketing and Recruiting

Franchising has been around in some form at least since the 1800s. Though this business expansion and sales technique did not yet have the legal name or structure it does today, some companies in the United States were allowing others the right to use their names and logos to sell products and services in more remote parts of the country. In exchange, the owner of the new business would buy all of the equipment from the original company—of course—but they would also share a portion of the profit made from each sale.

Over the decades, this arrangement took on the formal name of franchising and also gathered both legitimate practitioners and fraudsters who used franchising to bilk the general public. As a result of the perceived widespread abuse, California passed groundbreaking legislation that for the first time regulated the franchise industry. Soon after California, the federal government passed its own regulations and charged the Federal Trade Commission (FTC) with the task of overseeing the burgeoning industry. In 1979, the FTC issued what in the industry became known as the Rule. Following on the heels of these two laws, several other states passed laws of their own to control franchising. These became known as the registration states because they require the franchisor to conform its offering to meet state law and in most cases demands that the franchisor register the offering before any sales efforts can start. We talk more about the registration states in later chapters.

In 2007, after over 12 years of work, the Rule was revised, and today we have the so-called Revised Rule. Though it kept many of the features of the original, it brought the law up-to-date in many important ways that we explore in this book.

What Franchising Is Today

Franchising, in modern business language, is a method of marketing through which successful franchisors (business owners) expand the retail distribution of their goods or services by contracting with franchisees (independent third parties). Franchisees agree to operate the retail sales or service outlets featuring the franchisor’s original trademarked goods or services and agree to implement the franchisor’s marketing methods at the franchisee’s capital costs. In exchange for this opportunity, the franchisee agrees to pay an initial fee and ongoing royalties to the franchisor.

The FTC offers a more succinct legal definition of a “franchise.” It states that a franchise is:

. . . any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:

1. The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;

2. The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and

3. As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.

The Revised Rule makes it clear that a business relationship between parties will be a franchise only if it meets all three elements. This is true in non-registration states as well as most of the registration states. Most of the registration states have adopted a similar definition, while others define a franchise using more expansive language.

Why Choose Franchising?

Very few people have the natural ability or expertise to be efficient at all aspects of running a successful business. That is where the franchisor’s experience comes into play.

Franchise organizations offer a structure for launching, operating, and growing a business. Indeed, the successful franchisor will deliver the entire framework around which the business is built. Franchisors usually create comprehensive operations manuals and training programs for their franchise owners that cover marketing, operations, accounting, technology, and other areas that are specific to the particular business model. These efficiencies are designed to enable franchise owners to earn more and spend less time and effort than otherwise would be required to open and operate a similar business on their own.

COLLABORATION

The franchise organization model offers the franchisee the ability to grow under a common brand and share in the benefits of a larger group of business owners. Though each business is independently owned and managed, all franchisees share in the collaborative benefits of the organization through the support and oversight of the franchisor including:

• Group advertising resources not typically available to small independent business owners

• Owning your own business and making day-to-day decisions yourself, guided by the experience of a successful business enterprise

• The ability to sell products and services to markets that company-owned outlets have difficulty serving because of higher operational costs and lower motivation of employees in company-owned outlets

• The benefit of recognized and proven service marks, trademarks, proprietary information, patents, and/or designs

• Training from successful business operators

• A lower risk of failure and/or loss of investments than if you were to start your own business from scratch

• Being a part of a uniform operation, which means all franchises will share the same interior and exterior physical appearance, the same product, the same service and product quality, and overall customer brand awareness

• Operational support from the franchisor, both before and after launching your business venture, in areas such as financing, accounting, employee training, and operational procedures

• An opportunity to enhance your management abilities within an established business model that you could not experience in most employment situations

From the franchisor’s perspective, this collaboration:

• Offers the franchisor a method of rapid expansion

• Spreads the brand messaging and awareness over a large network of franchise owners

• Taps in to the franchise owner community’s “pride of ownership”

• Allows the franchise owner community to grow due to a duplicable system and support

• Features increased buying power for goods and services due to higher volume with suppliers

• Enables new products and services to be developed in the field with more testing and input

• Provides a steady cash flow to the franchisor to facilitate overall growth of the system

• Can fund the brand recognition effort to grow nationally and globally

FRANCHISING OFFERS A BETTER CHANCE TO SUCCEED

The U.S. Department of Commerce and other authors of statistics concerning franchising have shown that the revenue from franchise establishments accounts for over one-third of all U.S. retail sales.

According to studies on the economic impact of franchises, franchise businesses produce over 3 percent of nonfarm private output in the United States, and when the total contribution of franchise businesses was considered (which includes the goods and services used or purchased by franchise businesses and their employees), franchise businesses account for approximately 9 percent of nonfarm private output in the United States.

Government research over the years has indicated that the success rate for franchise-owned endeavors is significantly better than the rate for non-franchise-owned small businesses. In short, the good news is that franchising makes up a significant part of the national economy and presents a statistically better chance for success than other business options. Of course, there are no guarantees, and not every franchise is a surefire way to multiply your savings and provide you with an enjoyable occupation.

THE FREEDOM FACTOR

Most individuals seek three common elements when choosing a franchised business:

• Flexibility

• Money

• Status

These three elements are important for a variety of reasons and seem to be common denominators when people seek a new business as a career path. Flexibility has always been a hot button for entrepreneurs who exchange the stability of a “real job” for the freedom that comes with being their own boss. Money, or income, is always a factor, but surprisingly is seldom the most important. We know many people who have left huge salaries behind because they were miserable, to pursue the American Dream and launch a business. Status is an all-encompassing category that includes not only titles and position, but more importantly, the feeling of purpose one has and being a part of something significant.

Owning a franchise can provide you with all three of these elements if you operate the business successfully and manage your time and resources properly.

HAPPY FRANCHISE OWNERS MAKE MORE MONEY

It has been said that if you love what you do, you can’t help but succeed. There is a lot of tr...