1. Entrepreneurship 1: Lecture 11 Acquiring 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

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
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16. The Top 20 Franchises for 2010
Subway Submarine sandwiches & salads $84,300 - $258,300
McDonalds Hamburgers, chicken, salads $1,057,200 - $1,885,000
7-Eleven, Inc Convenience 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
Servpro Disaster 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 Inc Pizza, pasta, wings $302,000 - $2,100,000
Hardee’s Burgers, chicken, biscuits $1,182,000 - $1,583,500
Denny’s Inc Full-service restaurant $1,200,000 - $2,600,000
Jazzercise Inc Dance/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
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 Inc Dance 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”
Vanguard Cleaning Commercial cleaning $8, $38,100
ServiceMaster Clean Disaster cleaning $20, $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

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. Sandless Wood floor refinishing $28,000 - $56,000
HealthSource Nutrition & weight loss $52,950 - $249,795
Oreck Home Cntr Vacuums, 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
Z-Coil Pain relief footwear $88,150 - $160,800
Clix Studio & 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”