OWN A FRANCHISE OR START A BUSINESS

1. OWN A FRANCHISE OR START A BUSINESS Evaluate franchise ownership Recognize the advantages and disadvantages of starting a new business More than 909,000 franchises are operating in the United States and growing.

2. Franchise Ownership • Purchasing a franchise is another route by which you can become an entrepreneur. • A franchise is a legal agreement that gives an individual the right to market a company’s products or services in a particular area. • A franchisee is the person who purchases a franchise agreement. • A franchisor is the person or company that offers a franchise for purchase.

3. Operating Costs of a Franchise • The initial franchise fee is the fee the franchise owner pays in return for the right to run the franchise. • Startup costs are the costs associated with beginning a business. • A royalty fee is a weekly or monthly payment made by the owner of the franchise to the seller of the franchise. • Advertising fees are paid to support television, magazine, or other advertising of the franchise as a whole.

4. Business Math Connection Franchise operators often charge franchisees a percentage of sales as a royalty fee. If your sales totaled $6,000 in a month and the royalty is 10 percent a month, how much royalty fee would you pay? To calculate the royalty fee, multiply the sales by the royalty rate. Sales x Royalty rate = Royalty fee $6,000 x 0.10 = $600.00

5. Advantages of Owning a Franchise • An entrepreneur is provided with an established product or service. • Franchisors offer management, technical, and other assistance. • Equipment and supplies can be less expensive. • A guarantee of consistency attracts customers.

6. Disadvantages of Owning a Franchise • Franchises can be expensive and cut down on profits. • Owners of franchises have less freedom to make decisions than other entrepreneurs. • Franchisees are dependent on the performance of other franchises in the chain. • The franchisor can terminate the franchise agreement.

7. Evaluate a Franchise 1. What is the projected demand for the franchised product or service in the area in which I want to locate? Will I be guaranteed an exclusive territory for the duration of the franchise term, or can the franchisor sell additional franchises in the territory? 2. What are the costs and royalty fees associated with the franchise? 3. How profitable have other franchises in the area been? What do other franchisees think of the franchisor?

8. Evaluate a Franchise 4. How long has the franchisor been in business? How profitable is the franchisor? 5. What services does the franchisor provide? Will the franchisor help me with marketing, merchandising, and site selection? 6. Are the benefits provided by the franchisor worth the loss of independence and the cost of purchasing the franchise? 7. What happens if I want to cancel the franchise agreement?

9. Starting Your Own Business—Advantages • Complete independence • Satisfaction from starting a business • Challenge of creating something new • Feeling of triumph when business succeeds

10. Starting Your Own Business—Disadvantages • Risk of failure • Uncertainty about demand for product or service • Responsibility for all decisions

11. Advantages of Buying an Existing Business • The existing business already has customers, suppliers, and procedures. • The seller of a business may train a new owner. • There are prior records of revenues, expenses, and profits. • Financial arrangements can be easier.

12. Disadvantages of Buying an Existing Business • Many business are for sale because they are not making a profit. • Serious problems may be inherited. • Capital is required.

13. Steps in Purchasing a Business • Write specific objectives about the kind of business you want to buy, and identify businesses for sale that meet your objectives. • Meet with business sellers or brokers to investigate specific opportunities. • Visit during business hours to observe the company in action.

14. Steps in Purchasing a Business (Cont) • Ask the owner to provide you with a complete financial accounting of operations for at least the past three years. • Ask for important information in written form. • Determine how you would finance the business. • Get expert help to determine a price to offer for the business.

15. Advantages of a Family Business • Enjoy the pride and sense of mission that comes with being part of a family enterprise. • Enjoy the fact that their businesses remain in the family. • Like knowing that their efforts are benefiting others whom they care about.

16. Disadvantages of a Family Business • Senior management positions are often held by family members, regardless of their ability. • Sometimes means that poor business decisions are made. • Difficult to retain good employees who are not members of the family.

17. Disadvantages of a Family Business (cont) • Family politics often enter into business decision making. • Distinction between family life and private life is blurred in family-owned businesses. • Business problems end up affecting family life. • Family business must be prepared to make compromises.

18. Questions to consider • When you purchase an existing business, why is it important to know the owner’s reason for selling? • What steps would you take when purchasing an existing business? • What kind of information should you request before purchasing a business? • Your family owns a successful business that distributes clothing from around the world to local retailers. Both your parents work full time in the business. The y have offered you a position in the company after you graduate from college. Will you accept their offer? Why or Why not?

19. Operating Costs of a Franchise Purchase a Franchise – you will have to pay an initial franchise fee, startup costs, royalty fees, and advertising fees. You may also be asked to pay for nationwide advertising of the franchise.