Unique Look at Multi-Unit Franchisees: Empire Builders

I recommend prospective franchisees take a look at Empire Builders which is a series of videos highlighting successful multi-unit franchisees. 

Most of the prospective franchisees that come to see me are seeking to purchase a single franchise. Many of them dream of becoming a multi-unit owners but usually lack the capital (at least initially) to make that a reality. It's interesting to hear from multi-unit owners who have been able to harness the power of the franchising model and achieve great success. It is easier said than done.

There are some great videos in the series covering topics such as: 

 

 

Is a Franchise a Safe Investment?

Potential franchisees should read this article from Robert Purvin on Franchising Myth One: Franchises are Safe Investments. In the article, Purvin discusses how franchises and independent businesses fail at roughly the same rate (something discussed at length in several of my blog posts).

It's critical that prospective franchisees understand that buying a franchise will not automatically increase your chances of success. I hear time and time again from people about how franchises have a "system" and "they will help me with marketing and getting customers". It's not always the case. 

Purvin gives some good advice to help avoid mistakes when deciding whether to buy a franchise operation:

When you and your franchise attorney are reviewing the Franchise Disclosure Document, don’t limit your investigation to the closure rates. Look at the profitability of each location, especially those that serve in markets similar to yours. Do your due diligence and speak with current and past franchisees. Ask them direct questions about their profitability. It is especially critical to talk to past franchise owners and to ask them why they left the franchise. If you get any sense that the franchisees had trouble making a profit, then think very carefully before moving ahead.

Most importantly, insist that your prospective franchisor provide you with sufficient data to evaluate the profitability of the business. Limit your search to franchisors that make financial performance representations (formerly called ‘earnings claims'). There are many franchise opportunities available that are able to authentically boast high rates of success and profitability. These tend to be the top tier franchisors that require the highest investments and strictly limit their franchisee pool. As you go down the rungs of the franchising ladder to less well-known brands, new franchisors, and those with very low rates of entry, the risks typically grow.

Understanding that buying a franchise, just like starting any business, carries significant risk is the first step. You could lose your money. I see it happen to franchisees frequently. Be sure to approach buying a franchise just like it was your very own. Because in the end it will be up to you, not the system, to make it successful.
 

 

Lesson # 5 From Hard Luck Franchisees: Restrictions on the Products and Services Sold

 The Classic Battle

A group of franchisees file a lawsuit contending the franchisor forces them to buy products and/or services at inflated prices while setting retail prices so low the franchisees cannot profit. The lawsuit also alleges that the franchisor omits or misrepresents key facts about its business operations when selling the franchise.

The franchisor, of course, denies the allegations and intends to vigorously defend the lawsuit.

The Issue

Many franchise agreements contain restrictions on the products and suppliers the franchisee may use. While this may seem reasonable in the beginning, (after all, you're buying a proven system, right?) many franchisees discover later they can get cheaper products and find better suppliers than they can using the franchisor's system.  The franchisees begin to question why they are paying for higher priced products along with paying royalties which eat into profits even more. When this happens franchisees tend to get upset and file lawsuits like the one described above.

If the franchisee agreement you are considering contains restrictions on products and suppliers be sure to consider those provisions very carefully. Be prepared to ask the tough questions of the franchisor when it comes to products and suppliers. Also, don't take for granted just because you are going with a franchise that you are getting the benefit of the franchisor's "bargaining power."

Above all, make sure to talk with as many current franchisees as possible regarding the products and services of the franchise and conduct your due diligence.

Don't Keep Your Corporate Name a Secret

Gavin Craig in his new Twin Cities Business Litigation Blog has an excellent post on the importance of making sure the world knows you have a corporate entity.  Craig is convinced that many small business owners (especially contractors) do not know how to properly operate a corporation or LLC. Craig says,

When a person incorporates their business, it takes more than just filing a form with the Secretary of State. When a business is incorporated, it can't be a secret to those that do business with the new corporation. In other words, the new corporation needs to disclose the fact that the business (the party that is contracting with others) is incorporated on its letterhead, business cards, invoices and checks.

Craig is right on with his warning on this issue.  Whether you live in Minnesota, Iowa or Timbuktu, you must make sure you disclose the fact you have a corporate entity on your letterhead, business cards, invoices, checks and especially CONTRACTS. 

This is a particularly important message for franchisees.  Many franchisees operate under franchise trade name but fail to disclose in contracts, letterhead, business cards, etc. the name of their actual corporate entity.  One franchisee I know was personally sued for the damages related to an advertising contract because he had not disclosed to the other side that he actually operated with an LLC rather than as a sole proprietorship.  He had signed the contract using only the trade name of the franchise.  The other side said at trial that it didn't know the franchisee had an LLC.  So ultimately the judge sided with the advertising company.  It was an expensive lesson that could have been easily avoided. 

 

Working in a Franchise Before Buying Doesn't Make You a Chicken!

Nothing like a good article on franchising to bring me out of a blogging hiatus that I anticipated would last at least another week.  But thanks to the Small Business Trends site and franchise consultant Joel Libava, my rest is over.

The Franchise King posted on a Central Ohio restaurant franchise called Roosters that seeks experienced franchise operators rather than newbies that might not understand the industry.  Like Joel, I agree it's a good concept for a franchisor to target franchisees that have experience in the industry.  Experienced operators are much more likely to be successful.  We agree on that.  We actually couldn't agree more on that.

However, Joel doesn't carry that logic forward when it comes to working in a franchise before buying one.  Joel says he is often asked this common question:

“Joel, are there any franchise companies out there that will let me work with a local franchisee, to see if I like the business?” 

And being the laid back guy he is (now don't get me wrong, Joel is a well-intentioned guy who wrote a book on Franchise Research Steps), Joel responds with an emphatic "No!"  He doesn't recommend it because the franchisee won't get the full story.  After all, they don't have any "skin in the game, so how could they possibly understand what the franchise business owner is going through?  He more or less says that if you aren't willing to go "all in" from the outset perhaps you should take it as a sign that you shouldn't go into business for yourself.  (Unfortunately too few people will heed this advice in my experience and take it as a personal challenge to go forward).

So it's my view working in a franchise business BEFORE buying doesn't make you a chicken!  In fact, it may be the best due diligence any prospective franchisee could do.  It's the same reason why so many successful business owners were once employees of the business they ended up buying.  It's the same reason a successful franchise owner I know worked in retail for a year before buying a retail franchise.  She wanted the experience.  No, she NEEDED the experience before investing much of her life savings.    

Now, it's true that some prospective franchisees might not benefit from the experience.  Some prospective franchisees have no business ever owning a franchise or any other kind of business.  But to say all prospective franchisees shouldn't avail themselves of the opportunity to work in a franchise system seems a bit bold in my opinion.  As a franchisee and reader of this blog pointed out:

The most difficult information to obtain and verify is franchisee profitability.  The profitability of the franchisor and the franchisees is not always related.  Sometimes those selling franchises make money while the franchisees do not.  And it is not always due to lack of due diligence on the part of the franchisee.  It may be because of inaccurate information supplied by the seller or franchise support that was promised but never delivered.

Risk is inherent in any business venture.  You are taking a chance and a leap of faith.  But actually working in a franchise business before you buy may allow you to find out whether you want to stake your life savings on the opportunity.  Taking a chance with maximum information is not random chance but a calculated risk - and that could make all the difference.

photo on flickr by ™bluhousworker and original photo by TedSher

 

Majority of Franchisors Just Get You Into Business

All Business has a decent article describing the ten key provisions of a franchise agreement.  However, I do take issue with the comment in Section 1 that "most franchisors offer ongoing support including administrative and technical support."

As I discussed in my last post on franchising, it is my experience that "most" franchisors DO NOT offer much in the way of ongoing support including administrative and technical support.  I believe this is a major item that separates the good franchisors from the bad ones.  And trust me, the MAJORITY of franchisors I have seen are downright awful in this category.

The majority of franchisors are good at only one thing - getting you into business.  After that, you're on your own and you'll be left to wonder why you are paying all those franchise royalties.  Perhaps harsh words for the industry overall but the truth hurts.  If you are buying a franchise make sure to do your due diligence and find those franchisors with a system for ongoing support.  Otherwise, why buy a franchise?

 

What will the Franchisor Do for You?

While discussing a franchise case recently an attorney working with me observed that the franchisor really didn't agree to do anything for the franchisee in its franchise agreement.

Unfortunately most franchisees are under the mistaken belief that franchisors will provide all kinds of support.  When it doesn't happen and the business relationship has fallen apart, the franchisee is surprised to learn that the franchisor isn't contractually obligated to do much of anything.  Which generally means that if a lawsuit occurs the franchisee may have very little recourse.

The solution:  Franchisees should discuss specifically with the franchisor exactly what the franchisor is going to do to support the franchisee during the term of the agreement.  If the franchisor makes promises that are not contained in the franchise agreement, ask for those promises in writing.  If the franchisor won't put those promises in writing be ready to walk.   And never, I mean NEVER, believe the franchisor that tells you they won't hold you to the terms of their written agreement.  You can be assured that the franchisor's lawyer in any lawsuit will never acknowledge that such a statement was ever made and most franchise agreements are written so that any such statement could not be used as evidence anyway.

Ulitimately there is no validity to the claim that franchise operations are less likely to fail than non-franchise operations.  A franchisor that just gets you into business doesn't offer you much.  Always do your homework, ask the tough questions and demand answers.

SBA and FranNet Team Up to Offer Online Training for Franchising

The Small Business Administration (SBA) and FranNet have teamed up to offer an online training course for those interested in franchising.

The free online course on franchise basics provides three key sections that examine more than 10 essential areas relating to franchising, including Whether Franchising Right for You and How to Choose the Right Franchise. The course also covers franchising options, strategies for growth, and pitfalls to avoid. Course participants will be able to better understand franchising and decide if it is the best small business option for them.

For more information please be sure to contact Joe Cooney who is the FranNet consultant for the Iowa / Nebraska region.  I have found Joe to be a very helpful resource.

Iowa Franchisors Picking Up Steam?

Iowa has never been the hot bed for franchisors but it seems as though some Iowa franchisors are really picking up steam.  According to the Des Moines Register this morning Chocolaterie Stam stores have expanded to Ames, Chapel Hill N.C., and Wauwatosa, Wisconsin.  Upcoming stores including Minneapolis and Steamboat Springs (that would be my personal favorite) and also is contemplating stores in Kansas City or West Des Moines.

Another expanding local franchise is Maid-Rite.  It is my understanding Maid-Rite is growing rapidly with plans to head into Florida and Texas and with the new store design it's easy to see why.  This definitely is not your father's Maid-Rite.

But if you are considering these franchises be sure to conduct your due diligence and consider the fundamentals for franchisees in your negotiations.  Don't fall in love with the deal.  (I know it's tough with chocolate but control yourself). 

Franchising in the Iowa Small Business Zone

Doug Mitchell interviews Steve Reese who is the owner of Fitness Together franchise in Clive, Iowa in his first podcast of the Iowa Small Business Zone.  Listen and you will find that Steve is an enthusiastic proponent of franchising.   I was also impressed with Steve's impression of the potential benefits of blogging from someone who is new to the medium.  He views it as a way to improve communication with existing clients first and foremost. 

Steve's key in choosing a franchise?  Make sure the franchise has a proven track record.

Doug is a natural in the interview process.  I look forward to more podcasts in the Iowa Small Business Zone.

Should You Hire a Franchise Broker?

I ran across this informative article on whether you should hire a franchise broker to purchase a franchise via the Indiana Civil & Business Lawyer Blog

The article discusses how the Internet has changed the way people find a franchise.  With all the information available on the Internet it has produced "information overload" for prospective franchisees.  The Internet has paved the way for trusted intermediaries to sort through the morass.

The controversy is whether franchise brokers are trusted intermediaries.  As mentioned in the article it is important to remember that the franchise broker is not necessarily independent.  The brokers are paid a fee typically only if the sale is successful and brokers themselves usually do not represent all franchise opportunities.  Varying fees among franchises may encourage a broker to steer a prospective franchisee to one opportunity over another.

Other the other hand, I have had the good fortune to work with franchise brokers like Joe Cooney who are professionals and attempt to give objective information to prospective franchisees.  Professional franchise brokers will encourage you to conduct appropriate due diligence.  Professional franchise brokers will put your interests above their own.  Their long-term livelihood depends on that.  Not the one time sale. 

But nonetheless do your homework just like you would for any professional whether it be a business lawyer, accountant, real estate agent, financial representative, business broker, etc. 

Looking for a Franchise? Be Sure to "Pick" the Right Resources

As regular readers of this blog know, I am engaged in a never ending search for blogs that present franchise opportunities in a fair and objective manner.  All too often franchise related sites are merely promotional pieces. 

FranchisePick is a site worth checking out.  Yes, there are some promotional pieces on the site.  But franchise marketing veteran, Sean Kelly, has done an excellent job of presenting worthwhile information on several franchises.   

For example, recent posts on 30 minute workout franchises are hard hitting and full of information.  The experiences shared on the site are invaluable for anyone who is interested in making an investment in a franchise.  Sean likes to have fun, including making fun of my name, but he is on a serious mission to expose unethical practices in the franchise industry and encourage best practices.

Sean has a number of other sites covering the franchise industry including FRANBEST, Franchisor Marketing, and Franchisee Marketing.  He is also the President of IdeaFarm which specializes in helping franchise companies achieve growth through brand development and innovative marketing techniques.

Thanks to Sean for reaching out to me and exposing me to his sites.

 

Is Licensing a Viable Option Rather Than Franchising?

Congratulations to What's For Dinner - Des Moines and its owners, Dawn Angus and Kristen Severs for their feature article in the Des Moines Business Record.  The success of their meal assembly business has brought multiple inquiries from would be entrepreneurs who are wondering whether they offer franchises opportunities for their business.  The thought of expanding beyond the single store operation had intrigued the owners but the investment of time and money is substantial.  A franchise also opens you up to FTC and state regulations which require disclosure statements such as an offering circular.

The article discusses how Dawn and Kristen were presented an opportunity to offer a license of their recipes, Web site and logo.  In these particular circumstances we were able to craft an agreement which provided them the opportunity to expand their reach beyond the single location but without all the hassles and expense of a franchise. 

So is licensing a viable option for businesses looking to expand rather than franchising in all circumstances?  Absolutely not.  Whether or not licensing is right for you is completely dependent upon the facts and circumstances of your own individual situation.  (See Don't Let Your Distribution or Licensing Agreement Become an Inadvertent Franchise).

Iowa has very specific laws on franchising and other business opportunity promotions.  In order to license your business product here in Iowa you must fall within the exceptions to the franchise and business opportunity promotions.  Particularly if you are offering a business system or marketing plan to a new business it may be difficult to fall within the exceptions to these important regulations. 

In order to determine if licensing is right for you be sure to consult a business and/or franchise lawyer before acting. 

  

 

 

Information for Franchisees

In the never ending search for objective franchise information  I discovered Blue MauMau.  The site is a franchisee community designed to share insight, comments and stories about buying and running a franchise.

A few of recent blog entries worth reading are:

If you are considering a franchise it is important to research and conduct due diligence about the franchise system.  The notion that franchised businesses cannot fail is false.  Not everyone is cut out for owning their own business and not everyone is cut out for franchising.  Here are two suggestions if you are considering a franchise:

  1. Talk with as many franchisees as possible in your due diligence.  Ask probing questions to get an accurate picture of the franchise and the prospects for success.  You will learn both from the positive and negative comments. 
  2. Consider working in the franchise system for six months to a year before purchasing the franchise.  There is no substitute for working in the system before purchasing the franchise.  Don't think you can afford to do this?  Perhaps you should consider whether you can afford NOT to do this.