Our September, 2003 newsletter is entitled "Buying A Franchise." Our newsletters feature articles on various aspects of preparing a business plan and over time should lead you through the entire business planning process.  

New Product - "Do-It-Yourself Financial Projections"
Our latest product is a Do-It-Yourself Financial Projections template that leads you through basic questions about your business plan and allows you to prepare your own three year financial projections in Microsoft Excel.  For the month of August we are offering a special reduced price of $19.95 (US$). We will e-mail the template to you and will be available to answer any questions you may have while you prepare your template. For more details......

Buying A Franchise
Courtesy of Ralph Brown, Sequus Inc.

What Is Franchising?
Statistics Canada defines franchising as "A system of distribution in which one enterprise (the franchisor) grants to another (the franchisee) the right or privilege to merchandise a product or service."

The International Franchise Association defines it as "A continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organizing training, merchandising, and management in return for consideration from the franchisee."

There are two basic types of franchise arrangements:

• A product or trade name arrangement in which the franchisor sells the right to use a product or logo. Automobile dealers, gasoline service stations and soft drink bottlers are examples of this arrangement.
• A business arrangement in which the franchisor sells the right to operate an entire business. Examples of this type would be restaurants and real estate companies.

The franchisee, either an individual or company, may operate just one establishment or obtain the rights to entire areas, which could be part of a city, a state or province or even a whole country. By banding together under one franchise banner, a group of franchisees have an advantage over individual store owners or independent businesses. If one considers the size of a large country like Canada or the United States, with all its geographic diversity, franchising has made the process of developing a national corporate identity much easier. Unless blessed with large size, it is difficult for independent businesses to compete in the national economy.

Advantages of Franchising
The major advantage for the franchisee is being part of a larger system. Quality of goods and services not withstanding, it is the quality of the relationship between the franchisor and franchisee that is all important. It is a very unusual relationship that needs to be carefully developed and nurtured. It must be strong, mutually beneficial, and be able to adapt to changes in the marketplace.

Once the agreement is in place, the following advantages accrue to the franchisee:

• Assistance in obtaining financing and credit
• Help with site selection and building construction
• Training and ongoing support
• National advertising
• Promotions and public relations
• Centrally negotiated buying contracts, which usually result in much lower costs of inventory
• Oftentimes complete turn-key businesses and no concept development costs

Disadvantages of Franchising
Sometimes the relationship between the franchisor and franchisee does not work out. The fault is often with the franchisee who should not have become a part of the franchise system in the first place. Those who want independence and freedom will not realize these goals within a franchise system. If you have a need to be a true entrepreneur, then franchising may not be for you. The franchisor is likely to be very protective of the franchise system. Those who try to change it will face resistance and the rivalry between franchisor and franchisee will inevitably begin. If you have a need for independence, don't buy a franchise - plain and simple.

There are other disadvantages besides the loss of freedom or independence:

• Required adherence to all the standards set out by the franchisor
• Announced and unannounced head office visits and inspections by the franchisor
• Possible charges levied by the franchisor where shortcomings are identified
• Potential loss of the franchise where disagreements with the franchisor cannot be resolved and the franchise agreement is invoked
• Substantial joining fees and royalties, usually on gross sales

The often untold disadvantage is the fact there is no real elimination of business risk. Even if you look at the most successful franchise system, there are winners and losers within it. For every hugely successful franchisee, there is likely to be one who is struggling. There is nothing worse than being part of a successful franchise system when you are a marginal operator within it. And you are unlikely to be able to use legal means such as incorporation to protect yourself because most franchise agreements obligate you personally.

Types of Franchises
Some of the types of franchises available are:

• Automotive products and services
• Beauty salons
• Business services
• Car rentals
• Children's stores
• Clothing stores
• Computer services
• Cosmetics
• Drug stores
• Educational & training systems
• Fast food chains
• Food Retail/coffee/candy
• Hardware stores
• Health aids/services
• Home restoration
• Hotels/motels
• Lawn care/landscaping services
• Maid and janitorial services
• Pet stores & supplies
• Photography
• Printing
• Real estate
• Recreation & sports
• Retail
• Travel agencies
• Vending, and
• Video stores

While the opportunities are widespread and numerous, it should be noted that franchise systems often fail and there are no guarantees. Remember that a mature system offers greater support and stability. An early stage franchise system, on the other hand, offers more excitement and the opportunity to be more entrepreneurial. In an early stage system, there is more of an opportunity to participate in the development and growth, not only of your own business, but of the franchise system as a whole. It involves more risk, however, and you must consider your tolerance for risk.

The Franchise Agreement
Franchise agreements are written by lawyers at great expense to their franchisor clients. As one would expect, most franchise agreements are drafted in favour of franchisors. They are very demanding, overbearing and are designed to manage every important aspect of the business relationship. From your own point of view, examine the ramifications of the clauses in a typical franchise agreement:

What To Look For When Buying a Franchise
When you buy a franchise, always look for one that is well managed and properly capitalized. A strong track record will at least give you some assurance that it is likely to continue this way in the future. Reputable franchisors will be willing to meet with a prospective franchisee and to provide information on the important issues face to face. There may be a cost involved in carrying the investigation to this stage, but it is a step that both parties should insist upon. From your own point of view, consider the following:

Factor	Points to Consider
Is it right for you?	Do you mind giving up a large measure of independence? Are you comfortable with risk? Does owning a franchise measure up to your personal goals?
Assessing the franchisor	What is the franchisor’s history? What public profile does the franchisor have? What kind of corporate culture exists? Is the franchisor financially sound? Who advertises and who pays for what? You or the franchisor?
Product or service	Have you completely researched the product or service, i.e., acceptance, sales growth, competition, superior quality, public profile, etc.? How realistic is the marketing plan?
Location	Have you looked at location from all angles, i.e., good traffic area, close to target customers, highly visible and attractive, etc.? What zoning changes may be planned? Are you familiar with all aspects of the lease?
The franchise agreement	Are you comfortable with the clauses and considerations set out in the previous section?

Above all, develop a comprehensive business plan for the project before you enter into serious negotiations. Be aware that it usually costs money to investigate a franchise opportunity. Before they are willing to provide you with information about their franchise system, many franchisors require a refundable deposit and require you to visit their head office very early in the process.

_________________________________________________________

We will be e-mailing regular newsletters and business planning tips to those who have subscribed to our mailing list.

If you would like to be on our mailing list please send an e-mail to rutledge@mts.net with "Subscribe" in the subject line.