Entrepreneurship 1: Lecture 11 Acquiring a Franchise

1. Entrepreneurship 1: Lecture 11Acquiring a Franchise Avimanyu (Avi) Datta, Ph.D.

2. Definitions • Franchising • A marketing system revolving around a two-party agreement, whereby the franchisee conducts business according to the terms specified by the franchisor • Franchisee • An entrepreneur whose power is limited by a contractual agreement with a franchisor • Franchisor • The party in the franchise contract that specifies the methods to be followed and the terms to be met by the other party

3. Buying someone else’s formula of success • Most Franchisors have already tired their business idea in the marketplace to see whether they could create and maintain customers for a profit. • The franchisor have developed a formula for improving the franchisees’ chances of being successful. • Failure rate of people who buy franchise is lower than start-ups. • Since they are in operation for 2-3 years the franchisor has flattened the learning curve. • Hit the ground running! • Frees the franchisee of initiative for re-inventing the wheels.

4. The benefits of buying a franchise • Probability of success • Proven line of business • Pre-qualification of franchisee • Overall lower failure rates • Training • Franchisor-provided • Financial assistance • Loans & loan guarantees • Operating benefits • Location feasibility study • Marketing assistance • Quick start-up time

5. The benefits of buying a franchise • Cooperative Advertisement Arrangements • Franchisor subsidizes a portion of franchisee’ advertising • Franchisors provide franchise with prepared artwork for advertising. • Grand Opening • Sometimes Franchisor send specialist to help franchise with the grand opening. • Helps out during the first week or two. • Circuit Riders • Members from Franchisor who visit the franchise periodically to assist in management • News Letters, Conferences , Franchise hotline

6. The Drawbacks of Franchise • Franchise costs • Initial franchise fee: Can be hefty at times • Investment costs • Royalty payments: At times it exceeds the profit. • Advertising costs • Restrictions on business operations • Products sold • Hours of operation • Restrictions on expansion/growth • Franchisor only source of supplies • Loss of independence • Lack of franchisor support • Termination/renewal clauses

7. An Attractive Franchise Opportunity Includes: • Registered trademarks • Successful prototype stores with a track record of profitability and a positive reputation • A business that can be systematized so that it can be easily replicated. • A product or service that can be successful in many different geographic regions.

8. An Attractive Franchise Opportunity Includes: • An operations manual that specifies all the functions of the business and their associated policies • A training and support system • Site selection criteria and architectural standards • A detailed prospectus that spells out the franchisee’s rights, responsibilities, and risks.

9. Franchise Disclosure Requirements • Rule 436 of the Federal Trade Commission • Uniform Franchise Offering Circular (UFOC) • A document accepted by the Federal Trade Commission as satisfying its franchise disclosure requirements • Litigation and bankruptcy history • Investment requirements • Conditions that would affect renewal, termination, or sale of the franchise • http://www.ftc.gov/bcp

10. Before Buying a Franchise ASK QUESTIONS

11. Questions to Ask Before Buying a Franchise • Does the franchisor have an excellent reputation in the industry? • Is the franchisor in partnership or any other legal relationship with another franchisor? If so, how will the franchisee be protected should that relationship fail? • Is the franchisee required to do anything that appears questionable from a legal or ethical perspective? • Under what circumstances can the franchisee or franchisor terminate the franchise agreement and what are the consequences to either party? • Will the franchisor grant an exclusive territory? Is that area subject to reduction or modification? If so, under what conditions?

12. Questions to Ask Before Buying a Franchise - 2 • Will the franchisor reveal the certified financial figures for one of its franchises and can those figures be verified with the franchisee? • Will the franchisor provide a management training program, an employee training program, public relations and advertising support, or credit? • Does the franchisor assist in finding a suitable location? • What is the financial health of the franchisor? Can financial statements be verified?

13. Questions to Ask Before Buying a Franchise - 3 • What is the track record of the franchise? • Has the franchisor conducted an in-depth investigation of the franchisee to assure that he or she has the necessary skills and financial requirements to operate the business successfully? • How much capital will be required to start and operate the business to a positive cash flow? Does the initial fee include an opening inventory of products and supplies? What do royalties pay for and how are they calculated?

14. How Risky is the Franchise? • Are the number of franchise units growing/staying constant/or declining? • Has there been an increase in litigation between franchisor and franchisees during the last couple of years? • Scrutinize the last three years’ audited financial statements as part of the FDD. • Strong capital reserves, cash flows, and good profits? • Are accounts receivables increasing? • Are the same-store sales figures increasing, holding steady, or declining? • What is the attitude of the existing franchisees? Call them and ask… • How do you feel about the business? • How have the past couple of years been? • Knowing what you know now, would you do it again?

15. Where to Find out about Franchises • www.franchise1.com • www.franchising.com • www.en.wikipedia.org/wiki/franchising • www.entrepreneur.com/franchiseopportunities/index.html • www.franchiseinfosite.com Getty Images

16. The Top 20Franchises for 2010 • Subway Submarine sandwiches & salads $84,300 - $258,300 • McDonalds Hamburgers, chicken, salads $1,057,200 - $1,885,000 • 7-Eleven, IncConvenience stores $40,500 - $775,300 • Hampton Inn/Suites Hotels $3,716,000 - $13,148,800 • Supercuts Hair Salons $112,600 - $243,200 • H & R Block Tax preparation & filing $34,438 - $110,033 • Duncan Donuts Coffee, doughnuts, etc $537,750 - $1,765,300 • Jani-King Commercial cleaning $13,200 - $93,200 • ServproDisaster restoration & cleaning $127,300 - $174,700 • AmPm Mini Market Gas/Store $1,835,823 - $7,615,065 • Jan-Pro Commercial cleaning $3,300 - $54,300 • Kumon Math Supplemental education $36,538 - $145,250 • Stratus Building Commercial cleaning $3,450 - $57,750 • Miracle-Ear Hearing instruments $122,500 - $570,000 • Pizza Hut IncPizza, pasta, wings $302,000 - $2,100,000 • Hardee’s Burgers, chicken, biscuits $1,182,000 - $1,583,500 • Denny’s IncFull-service restaurant $1,200,000 - $2,600,000 • Jazzercise IncDance/fitness classes $2,980 - $38,400 • Matco Tools Mechanics Tools & Equip $79,926 - $188,556 • UPS Store Postal/Business Services $150,980 - $337,950 Source: Entrepreneur.com, “2010 Franchise 500 Rankings”

17. Top 12 Low-Cost Franchises - 2010 • Vanguard Cleaning Commercial cleaning $8,125 - $38,100 • ServiceMaster Clean Disaster cleaning $20,926 - $132,623 • Bonus Building Care Commercial cleaning $9,000 - $15,000 • Merry Maids Residential cleaning $24,750 - $59,450 • Anago Cleaning Systems Commercial cleaning $8,543 - $55,306 • H & R Block Tax preparation and electronic filing $34,438 - $110,033 • Jani-King Commercial cleaning $13,200 - $93,200 • Jan-Pro Intl Commercial cleaning $3,300 - $54,300 • Kumon Math Centers • Supplemental education $32,958 - $131,070 • Stratus Building Solutions Commercial cleaning $3,450 - $57,750 • Jazzercise IncDance fitness classes $2,980 - $38,400 • Instant Tax Service Retail tax preparation$39,000 - $89,000 Source: Entrepreneur.com “Top Low-Cost Franchises in 2010”

18. The Top 20 New Franchises for 2010 • Stratus Building Solutions Cleaning $3,450 - $57,750 • Senior Helpers In-home care for seniors $69,800 - $96,300 • Mr. SandlessWood floor refinishing $28,000 - $56,000 • HealthSourceNutrition & weight loss $52,950 - $249,795 • Oreck Home CntrVacuums, etc $84,600 - $221,000 • Guard-A-Kid Kids ID & safety products $19,900 - $20,900 • Fresh Coat Interior painting $38,800 - $63,800 • Murphy Bus & Fin Bsns brokerage/real estate $61,600 - $128,700 • Oxi-Fresh Carpet cleaning $33,495 - $55,950 • Senior’s Choice Nonmedical home care $54,000 - $72,000 • Mister Sparky Residential electrical $24,420 - $490,740 • FocalPoint Business consulting $75,550 - $121,950 • Synergy HomeCare Nonmed home care $53,300 - 115,300 • Z-Coil Pain relief footwear $88,150 - $160,800 • ClixStudio & on-location photography $38,500 - $373,040 • Stroller Strides Stroller fitness program $4,009 - $17,889 • Speedpro USA Large format imaging $202,200 - $230,100 • Superior Wash Onsite mobile fleet washing $59,820 – 108,405 • Ripicci’s Italian Ice Italian Ice $35,140 - $150,500 • Soccer Shots Soccer programs for children 3-8 $13,935 - $18,550 Source: Entrepreneur.com, “Top New Franchises 2010”