IFA's Vision

IFA: The preeminent voice and acknowledged leader for franchising worldwide.

IFA's Code of Ethics          

PREFACE:

The International Franchise Association Code of Ethics is intended to establish a framework for the implementation of best practices in the franchise relationships of IFA members. The Code represents the ideals to which all IFA members agree to subscribe in their franchise relationships. The Code is one component of the IFA’s self-regulation program, which also includes the IFA Ombudsman and revisions to the IFA bylaws that will streamline the enforcement mechanism for the Code. The Code is not intended to anticipate the solution to every challenge that may arise in a franchise relationship, but rather to provide a set of core values that are the basis for the resolution of the challenges that may arise in franchise relationships. Also the Code is not intended to establish standards to be applied by third parties, such as the courts, but to create a framework under which IFA and its members will govern themselves. The IFA’s members believe that adherence to the values expressed in the IFA Code will result in healthy, productive, and mutually beneficial franchise relationships. The Code, like franchising, is dynamic and may be revised to reflect the most current developments in structuring and maintaining franchise relationships.

TRUST, TRUTH, AND HONESTY:

Foundations of Franchising

Every franchise relationship is founded on the mutual commitment of both parties to fulfill their obligations under the franchise agreement. Each party will fulfill its obligations, will act consistently with the interests of the brand, and will not act so as to harm the brand and system. This willing interdependence between franchisors and franchisees, and the trust and honesty upon which it is founded, has made franchising a worldwide success as a strategy for business growth.

Honesty embodies openness, candor, and truthfulness. Franchisees and franchisors commit to sharing ideas and information and to facing challenges in clear and direct terms. IFA members will be sincere in word, act, and character — reputable and without deception.

The public image and reputation of the franchise system is one of its most valuable and enduring assets. A positive image and reputation will create value for franchisors and franchisees, attract investment in existing and new outlets from franchisees and from new franchise operators, help capture additional market share, and enhance consumer loyalty and satisfaction. This can only be achieved with trust, truth, and honesty between franchisors and franchisees.

MUTUAL RESPECT AND REWARD:

Winning together, as a team

The success of franchise systems depends upon both franchisors and franchisees attaining their goals. The IFA’s members believe that franchisors cannot be successful unless their franchisees are also successful, and conversely, that franchisees will not succeed unless their franchisor is also successful. IFA members believe that a franchise system should be committed to help its franchisees succeed, and that such efforts are likely to create value for the system and attract new investment in the system.

IFA’s members are committed to showing respect and consideration for each other and to those with whom they do business. Mutual respect includes recognizing and honoring extraordinary achievement and exemplary commitment to the system. IFA members believe that franchisors and franchisees share the responsibility for improving their franchise system in a manner that rewards both franchisors and franchisees.

OPEN AND FREQUENT COMMUNICATION:

Successful franchise systems thrive on it

IFA’s members believe that franchising is a unique form of business relationship. Nowhere else in the world does there exist a business relationship that embodies such a significant degree of mutual interdependence. IFA members believe that to be successful, this unique relationship requires continual and effective communication between franchisees and franchisors.

IFA’s members recognize that misunderstanding and loss of trust and consensus on the direction of a franchise system can develop when franchisors and franchisees fail to communicate effectively. Effective communication requires openness, candor, and trust and is an integral component of a successful franchise system. Effective communication is an essential predicate for consensus and collaboration, the resolution of differences, progress, and innovation.

To foster franchising as a unique and enormously successful relationship, IFA’s members commit to establishing and maintaining programs that promote effective communication within franchise systems. These programs should be widely publicized within systems, available to all members of the franchise system, and should facilitate frequent dialogue within franchise systems. IFA members are encouraged to also utilize the IFA Ombudsman to assist in enhancing communication and collaboration about issues affecting the franchise system.

OBEY THE LAW:

A responsibility to preserve the promise of franchising

IFA’s members enthusiastically support full compliance with, and vigorous enforcement of, all applicable federal and state franchise regulations. This commitment is fundamental to enhancing and safeguarding the business environment for franchising. IFA’s members believe that the information provided during the presale disclosure process is the cornerstone of a positive business climate for franchising, and is the basis for successful and mutually beneficial franchise relationships.

CONFLICT RESOLUTION:

IFA’s members are realistic about franchise relationships, and recognize that from time to time disputes will arise in those relationships. IFA’s members are committed to the amicable and prompt resolution of these disputes. IFA members believe that franchise systems should establish a method for internal dispute resolution and should publicize and encourage use of such dispute resolution mechanisms. For these reasons, the IFA has created the IFA Ombudsman program, an independent third-party who can assist franchisors and franchisees by facilitating dialogue to avoid disputes and to work together to resolve disputes. The IFA also strongly recommends the use of the Franchise Mediation Program (FMP) when a more structured mediation service is needed to help resolve differences.

Support of IFA and the Member Code of Ethics

Franchisees and franchisors have a responsibility to voice their concerns and offer suggestions on how the Code and the International Franchise Association can best meet the needs of its members. Franchisors and franchisees commit to supporting and promoting the initiatives of the IFA and advocating adherence to the letter and spirit of the Member Code of Ethics. Members who feel that another member has violated the Code in their U.S. operations may file a formal written complaint with the President of the IFA.

For more information contact the IFA at (202) 628-8000.

First let’s take a look at why such a fund can be an advantage. When a franchisor pools funds from all of the franchisees in the system, it can hire a top public relations or advertising company to create a marketing campaign that will benefit the entire system. It also has a much greater ability to do expensive advertising, such as television. This large scale advertising helps to build the brand, which in turn helps the individual franchisee build value in their business.

Without a marketing fund, each individual owner would be on his own, doing advertising on a much smaller and less-noticeable scale. Your franchise will be seen in a more positive light if your marketing is done by experienced professionals than if you print off flyers designed by you or someone else inexperienced in the integrated brand building efforts of the franchisor.

A franchisee contributes to the mandatory marketing fund in usually one of two ways, either by a fixed amount or a percentage of the gross sales of the unit. For some reason, many franchisees believe that contributing to a marketing fund makes them instant marketing geniuses and they like to second guess every decision. During your evaluation process, knowing what to look for can help you decide if this franchisor is doing a good job with their allocation of marketing funds.

Consider the most frequent causes for friction in the franchisor-franchisee relationship.

• Problem: When the cost of the production of marketing materials is so great there isn’t enough money left to actually get the materials to the consumer. There should be a reasonable balance between these two sides of the same coin. Great commercials lose effectiveness if the franchisor can’t afford to air them frequently and in all markets. Poorly designed advertisements aired everywhere and all the time do more harm than good to the brand.

If the franchisor you are evaluating strikes a good balance between creating memorable and classy advertisements and keeping the brand top-of-mind, your advertising contribution is well-spent.

• Problem: When the amount of money spent to promote the brand is greater than the amount of money spent to attract customers. This is again a matter of balancing two key aspects of marketing. Just as it is important to build a brand, it isn’t enough. You may know the Krispy Kreme name but unless marketing makes you want to pop those donuts into your mouth, the individual franchisee is getting little benefit from his marketing contribution. Thus, a balance is essential between brand building and call-to-action marketing.

If you are evaluating a franchise that seems to put all of its eggs in the brand marketing basket, you can assume you will be unhappy down the road. Without a proper balance between brand building and customer attraction, you’re just getting half of the equation necessary to build your business through efficient use of your marketing contribution.

The best way to find out how a franchisor spends its mandatory marketing fund is to ask existing franchisees and then compile their opinions. If a majority of these franchisees are unhappy about the way their marketing contributions are spent, you can assume you will also be unhappy.

If you find that most franchisees you contact are pleased with the franchisor’s management of their marketing dollars, there’s a strong chance that this company has been able to strike the magic balance between brand building, customer attraction, production costs and distribution costs.

When you know your mandatory marketing contribution is being used to help you grow your business, it makes the mandatory part of the mandatory marketing program much easier to embrace.

Lori Kiser-Block is President of FranChoice, a national network of franchise consultants that provide free guidance and advice to qualified individuals in the United States searching for franchise opportunities that match their personal interests and financial qualifications.

However, your expectations for a return on a franchise investment should be vastly different. In a franchise investment you are investing a fair amount of your time and management talent in addition to your capital. You should be able to achieve a good return on both investments.
The second assumption people often make is that the less money you invest for a franchise the less money you will earn, and the higher your investment amount in a franchise opportunity the higher your return. Actually, there is often little correlation between the total investment and the amount of money you can make in the business. Returns in franchising vary all over the board, depending on the concept, the industry, the market and the operator.

A common element for boosting ROI is to use leverage to increase the return. Typically, leverage relates to using financial capital to secure loans, to invest more, and to earn more (thus increasing the return on the capital or investments) providing that your debt service is less than the increase in income. If everything aligns properly, using leverage in this manner can be quite successful; but franchising can be even better!

The real opportunity for using leverage in franchising relates not to your investment in the financial side of franchising, it relates to the investment you’re making of your time and talent. Finding a high quality franchise system that provides an opportunity to invest your personal assets of time and talents is the key to unlocking this definition of leverage. The franchisor develops a system or method of operation that employs the franchisee’s personal assets in a manner that drives the income from the business to levels that are not available from an investment of capital alone. These are the systems where a very successful operator can generate returns greater than of the total initial franchise investment within a short period of time. Doing so highlights just how effective leverage can be!

If the return isn’t going to exceed what you would anticipate for a passive investment, why would you invest in that franchise? You’d be better off maintaining your current situation and making passive investments elsewhere.

But let’s go back to the challenge of finding a franchise that meets your ROI expectations. Keep in mind that higher cost does not mean higher returns. What you will want to do is find the ones with great management leverage opportunities to maximize the return on your personal assets of time and talents. These are often franchises with total investments of less than $200,000 and in some cases less than $50,000.

A critical step in your investigation of a franchise is to determine the average earnings of a typical unit during the first three years of operation. You can sometimes find this information by reviewing the franchise company’s UFDD and focusing on Item 7, which details the investment required, and Item 19, which is called, “Financial Performance Representations.” Item 19, however, is optional and not all franchisors list this information. If this information is available for those companies you are researching, you should be able to project the average three- to five-year returns on investment.

Often the most accurate information about unit performance comes from franchisees actually operating locations or territories so this is another source of financial information. The UFDD lists current and former franchisees along with their contact information. You will want to call a number of these franchisees and have a list of questions ready, including financial performance and operating costs. Your thorough research should leave you completely confident that you know both the high and low end of the range. Remember that your location or territory may only make a return in the average range so be sure it is a number that will make you happy.
With so many great franchise opportunities available, your due diligence and understanding of how to best leverage your personal assets of time and talents, along with your financial assets, will allow you to find a franchise that meets your ROI requirements in a relatively short period of time.

Lori Kiser-Block is President of FranChoice, a national network of franchise consultants that provide free guidance and advice to qualified individuals in the United States searching for franchise opportunities that match their personal interests and financial qualifications.

• A franchisor generally collects an “up front” fee from the buyer but also collects on-going royalties in exchange for a proven business model. In a business opportunity, the buyer pays for the system or training, but does not have a further obligation, unless his contract specifies he buy inventory from the seller.

• A franchisor, in order to protect the brand and ensure consistency of the product, requires strict adherence to specific guidelines. In a business opportunity, the buyer may learn a specific program but is not required to follow the system.

The Federal Trade Commission regulates franchising at the federal level.

In order for a business to be labeled a franchise, three elements must be in place:

1. Franchisor allows the buyer to use the franchisor’s trademarks

2. Franchisor collects a fee (at least $500) from the buyer within the first six months of operation

3. Franchisor exercises “significant control” over the buyer’s operation on an ongoing basis

If a business meets the above criteria, it is considered a franchise by the FTC and is required by law to follow federal guidelines. The most critical FTC guideline requires franchisors to provide buyers proper disclosure information prior to finalizing the sale. Before a potential buyer can purchase a franchise, he must receive specific disclosure information about the franchisor, called a Franchise Disclosure Document (FDD). The FDD is a valuable document that will assist a buyer in completing the due diligence (the process of investigation into the details of a potential investment and the verification of material facts) before purchasing the franchise. In many cases, individual states have additional guidelines a franchisor must meet to sell locations in that state.

In a franchise opportunity, the franchisor has a vested interest in the success of the buyer (franchisee) because it receives ongoing royalty payments. Therefore, the franchisor is usually committed to building the brand by adding locations, monitoring individual performance based on a proven system and assisting the franchisees to increase their revenues. This relationship lasts the duration of the franchise agreement.

Business Opportunity

In a business opportunity, the seller makes his money by delivering the business system, training, equipment, or service method to the buyer. In some cases, the seller may also make residual income for the ongoing sale of products or services, but for the most part, the relationship is over once the purchase is final. While a business opportunity is not federally regulated, some states will encourage a general form of disclosure prior to purchase, but most do not require it. If a business opportunity does offer a disclosure document, it may provide only general information. The lack of regulation can speed up the purchase process, but it also leaves the buyer responsible for a thorough investigation of the business. Since there is no ongoing royalty payment, there is no vested interest by the seller to ensure that the buyer succeeds in the business. Although many business opportunities provide system training, they may not require or monitor performance. Sellers generally don’t invest in local marketing or operational support, but buyers are given complete freedom to run the business.

Income expectations for a business opportunity may be lower than for a franchise opportunity, but they are also a lower investment than most franchises. A business opportunity may not require costly leasehold improvements or large working capital reserves, making it an option for many people whom may not have the capital available to purchase a franchise. For many buyers, a business opportunity provides the flexibility to start out as a supplemental income or home-based business, but has the potential to support their lifestyle and meet their financial goals.

Which opportunity is best for the buyer?

The answer, obviously, is that it depends on the buyer. An entrepreneurial individual may find the confines of a franchise opportunity limiting and thrive in a business opportunity where he makes all the decisions. Another buyer may find the brand recognition, ongoing assistance, and company-wide marketing programs associated with a franchise just the safety net he needs to feel confident when starting a new career.
 

A Franchise Opportunity Provides:

• FDD disclosure information
• Brand recognition
• Marketing expertise
• Intensive training program
• Site selection management
• On-going support
• Security of proven processes

A Business Opportunity Provides:

• No ongoing royalties
• Usually lower investment
• Company supplied advertising
• Intensive training program
• Site selection assistance
• Freedom to make choices
• Proven system of operation

Every franchise company has a standard franchise agreement which states what the franchisor expects from you and what is allowed. The better and stronger the company, the longer the agreement and the less likely they will be to negotiate the terms of the agreement. This is only fair. Why should a better negotiator get a better "deal" on their franchise than someone else?
There are also legal issues involved when a franchise company makes some agreement terms negotiable to only some franchisees. A franchise company must comply with laws requiring them to disclose any special deals or terms they have negotiated, which protects potential franchisees. Also having many different agreements can be cumbersome to administer.

Assuming you’ve chosen to join a strong and successful franchise, you need not be afraid of the franchise agreement. Consider the purpose of a contract as it applies to franchising:

1. Describes the costs associated with being awarded a franchise 
2. Explains the issues regarding physical property, such as the location, building, equipment and supplies 
3. Defines the operating practices which protect the entire franchise system 
4. Identifies your protected territory

Suppose you’ve purchased a “Mighty Cold Ice Cream” franchise. The franchisor’s agreement says you will buy the equipment and ice cream ingredients from them at a discounted price. Your business is protected because you have the discounted price in a contract. The brand is protected because it means no franchisee can sell another, perhaps inferior, product under the Mighty Cold name.

As you can see, this is the major benefit of franchising. The quality of the product is standard from franchise site to franchise site. Susan in Sacramento uses the same recipe and ingredients as in Bernie in Boston. Serving sizes are the same and everything from pricing to advertising is similar. A Mighty Cold fan knows that wherever he travels, eating a dish of vanilla swirl will give him the same enjoyable experience.

In addition to protecting the quality and standards of the brand, a good franchise agreement will define the rules of the relationship. The Mighty Cold agreement may prevent Susan from selling her Aunt Lena’s krumkake in her ice cream parlor and assure that Bernie doesn’t provide advertising space on his parlor walls for the local micro brewery. The rules of the relationship are carefully constructed to make sure each franchisee has an equal opportunity for success, and that the brand name of the franchise is protected.

In the same manner, having a protected territory spelled out guarantees you that your Mighty Cold parlor won’t be competing with another Mighty Cold on the next street. The size of your territory, however, is one item that can occasionally be negotiated in a contract. So, if that is a concern for you, be sure to ask.

Here’s an example of other items you can expect to be covered in a franchise agreement:

• What exactly is covered in the initial franchise fee 
• Whether the franchise fee includes an initial inventory of products and supplies 
• If the franchisor will provide continuing inventory 
• The degree of control the franchisor will exert over franchise identity and product quality 
• If continued training and assistance will be provided by the franchisor 
• Whether advertising will be local or national and if the cost will be shared 
• How royalties are calculated and paid 
• What will be the bookkeeping, accounting and reporting requirements

Remember, just because a franchise agreement is valuable to you doesn’t mean you should sign it without question. Go over each and every provision carefully and be sure you understand why each item has been included and how it will affect you. A good franchisor will spend whatever time necessary helping you to become comfortable with the contract.
Finally, don’t let the complexity of a franchise agreement steal the excitement you have over becoming a business owner. This is a thrilling time and a good franchise agreement is just your assurance of getting a fair and equal chance at success. By protecting the franchise brand name and good will, the franchise

Lori Kiser-Block is President of FranChoice, a national network of franchise consultants that provide free guidance and advice to qualified individuals in the United States searching for franchise opportunities that match their personal interests and financial qualifications.

If you’ve always thought of a franchise as something you “buy” rather than something that is “awarded,” you may be surprised at the thoroughness in which you’ll be investigated during the Discovery Day process. However, franchisors have some very good reasons for being selective about the people they let into their system and understanding their reasons will help you prepare for the Discovery Day process.

First of all, when you become a franchisee, you represent the business. Everything you do will reflect on both the corporation and also on the other franchisees. Because customers have learned that a product or service will be consistent from one unit of a franchise to the next, they will generalize that all units are bad if they have an unpleasant experience at one. Therefore, when deciding whether someone will be awarded a franchise, the franchisor must determine if the candidate has the ability and skills necessary to follow the system and to present the business in a professional and positive manner.

A good franchise company will not randomly award a bunch of franchises hoping that some of them will be successful. A business that closes tells the public that something about the concept isn’t working. Also, and of extreme importance to a franchisor, by law they must list all failed franchises in their Franchise Disclosure Document. A franchisor with a list of failed units will be less able to attract new franchisee candidates to the business.

Finally, in most cases the franchisor makes money on royalties based on a percentage of the franchisees’ revenue. Therefore, the more successful the franchisees, the more successful the franchisor.

Of course, it’s not all about them. The franchisor needs to convince you they know what they are doing and will be able to support and help you every step of the way. By the time you get to your Discovery Day, you’ll have done a good deal of investigation into the business and talked to a number of current franchisees. If you have any outstanding questions, this is the time to ask them. You’ll have the opportunity to meet with various teams so you’ll have a more in-depth understanding of each aspect of the business, from operations to marketing support. Your day will usually include casual time at meals to get to know the corporate staff as well as some structured presentations and meetings.

If everything falls nicely into place, you may want to sign a contract and hand over a check at the conclusion of the meeting. What you don’t want to happen is to be thinking, “Yes, yes, yes,” while the decision makers are looking at you saying, “No, no, no.”

Here are some suggestions to make the most of your Discovery Day meeting:

• Dress to impress. Although you may consider this meeting as an opportunity for the franchisor to “sell” you on the attributes of their business, you are also there to sell yourself. Your attire should reflect this and you will want to look professional. In this day of business casual attire, you may not need to wear a suit and tie (or the female equivalent) to the interview but you will want to look polished. In other words, shorts and flip-flops are a no-no.
• Be likable. A franchise is like a family and the franchisees of a system form a valuable peer group. A franchisor takes this into account when awarding franchises. Be personable, professional, enthusiastic and outgoing. Maintain eye contact when speaking and ask questions that show your interest. Be a good listener. Remember that not everyone is interested in every idea that pops into your head; however, everyone is interested in having you listen to their ideas.
  
  Dale Carnegie, who wrote How to Win Friends and Influence People (which was first published back in 1936!), suggested using the following six methods to come across as likeable:

- Become genuinely interested in other people
- Smile
- People like the sound of their own name
- Be a good listener
- Talk in terms of the other person’s interest
- Make the other person feel important and do it sincerely

• Have industry knowledge. One of the main advantages of franchising is that you don’t need direct industry experience because when you are awarded a franchise you most often will receive comprehensive training from the franchisor on running your business. Having industry knowledge, however, will show that you’ve done your homework and you understand the franchisor’s customer base and competition.
• Show you can follow a system. Franchisors are NOT looking for someone who will reinvent the business. If you are trying to improve the concept you are not working on your own business. This is a red flag. Don’t tell the franchisor that you plan to deviate from their tried and proven system. Do tell them they you are impressed with how thoroughly they’ve documented each and every step and that you plan to follow the system to the letter.
  
  If you can’t do this sincerely, franchising really isn’t for you. If you want to take risks, think outside the box, make up the rules as you go along and be a true entrepreneur, you won’t be happy as a franchisee.
• Demonstrate your business savvy. Be prepared to discuss your past business experiences, particularly as they will relate to running your franchise. Some important areas to elaborate on include managing people, customer service, and sales and marketing. Success you’ve achieved in corporate America is a good indication of the results you can see as a franchisee. Franchisors will be particularly interested in both what you have achieved in life and your expectations for your new business.
• Prove you are financially qualified. No good franchisor wants you to borrow so much money for a business that you’ll never be able to pay it back. Franchisors are focused on success – success of each franchisee and success of the system. They have resources to help them determine the amount of money a new franchisee needs to open and run their business until a break-even point. You will want to do your financial investigations prior to your franchisor meeting so that you can demonstrate how you will obtain financing.
• Fit in.  This is sort of like “be likable” but not exactly. You can be a nice person but still not fit in to a particular group. We’ve all said about someone, “He’s a nice guy but I don’t think he’d fit in with our company.” Because this is an intangible quality, I’ve put it last on the list but that doesn’t mean it is of less importance than the other items.

When interviewing you want your interviewer to feel you have the same values as she does and that your style and personality will mesh with those with whom you will work. You can often find out about the corporate culture from their sales literature, their web site or from phone conversations you’ve had with the office staff and the current franchisees. You might hear phrases like, “We’re a very family-oriented business,” or “Everyone here is into extreme sports. We’re going to hang glide on Saturday.”

By forming an opinion of the culture before your face-to-face meeting, you can decide if you will be comfortable in a long-term relationship with these people and also come up with ideas to show that you are someone they’d want on their team. As I always say, if you don’t like wearing chaps and spurs, don’t buy a Cowboy Clyde franchise.

Buying a franchise is not like buying a house or a car. The franchisor will closely evaluate you for personality, experience, compatibility, financial stability and business acumen. If you don’t measure up, they won’t risk their business on you. Also, it’s not uncommon in franchising to have two potential franchisees look at buying the same territory.  After all the work you’ve done towards finding a franchise to invest in, don’t let the opportunity slip through your hands because of inadequate preparation for your Discover Day. With the right attitude and some basic research, you can make sure your Discovery Day meeting ends with a handshake and a “Welcome to the company!”

So are you ready to franchise your business? Here are a few tips:

Be sure your business is “franchisable.” Before you start to franchise, be sure that your business is, in fact, franchisable. First, your business first needs to be salable as a franchise. Ask yourself: Have I received legitimate inquiries? Is the business model unique? Do I have a point of difference? The business must also be replicable. That means it cannot rely too highly on your personal involvement. Finally, and most important, it needs to offer a potential financial return that will allow a franchisee to generate an adequate return even after paying the franchisor a royalty. If you are not comfortable in addressing these questions, speak to a franchise consultant about whether your business has what it takes.

Develop a strategy. Franchise success, like success in any business, does not happen by accident. Your goals and your resources will dictate the strategy you should employ and the structure of the franchise offering. Key questions to address will include how to position the opportunity versus franchise competitors, type of franchises offered (start-up, area development, etc.), services provided to franchisees, staffing to provide those services, fees, royalties, and other revenue sources. If these decisions are made without adequate forethought, the franchise may be doomed from the beginning.

Take control. Large scale franchise success is all about delivering a consistent consumer experience. In order to do that, you need to be sure that your systems are in place. That generally means comprehensive operations manuals, training programs, and perhaps even training videos. But be careful. The contents of these materials can help shield you from liability – or, if poorly crafted, can create liability.

Get Legal. In order to franchise, you need to develop the appropriate legal documents. In the United States , you will need to develop your franchise agreement and Uniform Franchise Offering Circular, and, depending on where you will be selling franchises, you may need to register your franchise offering with state agencies. Don’t take shortcuts here. Hire an attorney who specializes exclusively in franchising.

Sell it. In order to be a franchisor, you must, of course, sell franchises. And franchise sales starts with lead generation. At a minimum, a new franchisor should budget between $5,000 and $7,000 per franchise sale on media alone. You will also need first class marketing materials such as brochures, videos, website, etc. to support your franchise sales efforts. While selling franchises certainly involves a sales effort, one of the most important rules in franchising is to be selective in the franchise sales process. If you are not confident that a prospect will succeed, take a pass.

Make them succeed. In franchising, nothing succeeds like success. If your franchisees are wildly successful, you will find that your franchises practically sell themselves. But if your franchisees fail, no amount of marketing and sales effort will rescue your system. So be sure that you do everything in your power to make your franchisees successful.

This article originally appeared in Entrepreneur magazine.

To learn more about F.C. Dadson, Inc., click here. You can reach their national sales consultants at (800)728-0338 or visit them on the web at: www.fcdadson.com.

• the franchisor’s business experience 
• any lawsuits pending against them (many may be from dissatisfied franchisees)
• what you get for your money (licenses, system elements, any training and other obligations of the franchisor)
• what you are allowed to sell and buy under the system
• the franchise fee
• other fees
• advertising fund and other joint expense contributions you would have to make
• the territory you will get, intellectual property status (trademarks, copyrights, patents) the franchisor claims to have
• earnings the franchisor says outlets may obtain (many don’t provide this). Note: income projections your franchisor may provide are based on the efforts of others, not what you will be able to do in the location you have chosen. 
• contracts you’d have to sign
• public figures who endorse the system
• cancellation and renewal rights you’d have (if any, beyond the “good cause” requirement for cancellation built into the statute)
• financials of the franchisor

A franchisor like McDonalds brings in investors to join the company in buying retail corners, and then makes most of its money by the terms of the retail gross lease (share of gross receipts per square foot) it gets from you. Others may help you get sites, but leave negotiation of details to you: 

• Can you afford the terms?
• What part can or must you play in obtaining your site?
• How much will you need for the design and build-out of your site prior to opening day?
• Local building and operations permits, zoning, and other business regulations may also be relevant to a site’s viability.

• exclusive franchises and refusals to deal as violations of antitrust laws against restraint of trade
• territorial confinement and customer restrictions as antitrust or “contract of adhesion” or other unfair business practices violations
• resale price control and price management as antitrust violations, and
• control of product purchases and sales as required to protect other franchisees from bad practices by other outlets, or as excessive and unreasonable attempts to drive a franchisee out of business prohibited by unfair trade practices laws, or as insufficient, with consequent loss of trademark protection for the franchisor, etc...

With U.S. gas prices at well over three and a half dollars a gallon and a projection that they may reach over $4 by summer, the concern over that expensive daily commute is growing.

Here is an interesting  solution -- become your own boss and run a business from home.

Walking 20 steps from your bedroom to home office in your pajamas can be a big improvement over negotiating 20 miles of potholes and gridlock in your gas-guzzling mini van. Concerned about not having a  great idea for your own businesses? Perhaps a little anxious that you do not have the time and/or money it would take to make that business profitable? There is an alternative. 

For all master franchise opportunities on Bison, click here
 

Let’s consider three scenarios:

Scenario One
You have been laid off from a 20-year career in banking. Even before the layoff, you realized you had reached the ceiling on your salary and possibilities for advancement in your career had diminished. Your company has given you a cash settlement and you are keen to take charge of your life, become your own boss and learn some new skills along the way. You want a good income and are willing to put in whatever hours necessary to jump start the new career but your overall goal is to eventually work reasonable hours and have more time for yourself and your family.

If your history is similar, you are probably an excellent candidate for franchise ownership. This path will allow you to benefit from a proven system of operations and a training program that will quickly get you up and running. As you have no previous business ownership experience, the ongoing support you will receive from a franchisor will be vital to your success. Many franchise opportunities offer a turnkey package that will include almost everything you need to start your business. In addition, most franchisors require no previous experience in their industry so you can be open to a variety of types of businesses and won’t need to stick to the one industry you know.

Franchisees can take advantage of lower cost materials due to group buying power. They also learn from each other and usually form a peer support system. Because you won’t be occupied with every minute detail of owning a business as you begin down the path of franchising, you will be able to concentrate on growing your business.

One disadvantage to franchise ownership is that you must follow a franchisor’s rules. In other words, you are in charge as long as you follow and adhere to all of the elements of the franchise system. This is necessary so that the franchisor can offer consistency across the brand – and let’s face it, they’ve done the research and tested the procedures so their way is usually the right way. This is also a benefit to the consumer who can expect comparable quality products or services no matter which franchisee he patronizes, anywhere across the country or around the world.

The other perceived disadvantage is that a franchisee must pay royalties and sometimes a marketing fee to the franchisor. Royalty payments are compensation for everything the franchisor provides, including access to the brand, the operating system and related items. The franchisor uses the marketing fee to provide national advertising to build the brand and drive market penetration at a greater level than a franchisee could do on his own. Also, national marketing funds enable franchisees to benefit from professionally produced marketing materials and realize efficiencies from commingled funds.

Scenario Two
As a truly entrepreneurial individual, you are brimming with ideas for new products or businesses and love to “tinker” with things until they are just as you want them. You are strongly attracted to the idea of being your own boss and don’t like the idea of answering to others. You have the drive to follow through on your plans and have a background in a variety of disciplines, including sales, marketing, accounting and management, so you are not looking for outside support. You have plenty of money to spend on researching and developing your product/service so a predictable timeframe for break even isn’t a concern.

If you are like this type of person, one who likes blazing his own trails, franchise ownership is not for you. Instead you will be more comfortable setting up your own business using your own ideas. This is the most risky way to become your own boss because you will not have the proven operations system, nationwide brand and marketing, and the ongoing support of a franchise company. You may also have more difficulty obtaining business loans and the time from inception to when you start turning a profit will be hard to predict. On the plus side, you will owe no royalties and can run you business just as you please.

Historically this is the model least likely to succeed on average so it is recommended only for truly exceptional individuals who have the desire and stamina to start their own business based on their own unique idea or approach.

Scenario Three
A varied work history has given you some great skills which you wish to put to use running your own business. You are not concerned about the type of business you buy but want to have freedom to run it your way. You would be okay with a certain degree of risk but also recognize the advantages of an established system of operations. Marketing assistance and training, however, may be under developed or nonexistent. Although you don’t have a lot of cash to invest, your spouse works so you will have income for the time it takes your business to begin making money.

If you’re the type of person who will never stop and ask directions, a business opportunity may be the right type of business for you. This is a business you buy outright and have the freedom to run your own way. The benefit of a business opportunity is that they generally provide you with a successful business model and possibly some training, and marketing assistance. The initial investment is usually lower than for a franchise and there are no ongoing royalty payments.

A downside to business opportunities is that the seller isn’t invested in your success or failure because he makes all of his money up front. Therefore, you won’t have extensive ongoing training, assistance, a national marketing program, research and development, etc. The risk factor is probably greater than for owning a franchise but could be less than starting your own business.

Franchising is a Better Way
For a majority of people, franchising has proven to be a viable way to become a business owner. For the most part it offers the lowest risks and the highest level of support. Because a franchisor doesn’t succeed until the franchisees do, you’ll find a team of dedicated professionals willing and able to help you every step of the way, from site selection to employee hiring to grand opening. They will keep in touch with you from the very beginning to years down the road and have web sites, toll free numbers and dedicated staff to make sure all your questions are answered quickly.

The cost of this continued support is usually in the form of royalty payments based on earnings but most franchisees feel the benefits are worth the expense. Research and development is possible because of feedback from those in the field and this cooperative involvement is a hallmark of a well-run franchise business.

The final benefit of franchising is that you buy a package – product or service, brand name and trademarks, marketing and advertising, operations manuals and proven systems – along with thorough training in every aspect of the business.  You can totally change careers without years of schooling or apprenticeship or research. One day you can have a “job” as accountant or police officer and a few months later have a “career” as the successful owner of a business, which may be an auto detailer or a pet spa or a home improvement franchise.

And that’s why franchising succeeds – because it works, for the franchisor, for the franchisee and for the consumer.

One way you may be able to jump-start your new venture is to buy an existing franchise unit. But before you sign on the dotted line, go through this checklist to evaluate an existing franchise operation:

• First, evaluate the franchisor before you evaluate the existing business.
  o Examine the UFDD (Uniform Franchise Disclosure Document)
  o Talk to the corporate staff
  o Perform your due diligence by calling existing franchisees
• Once you are satisfied with the standards of the franchisor, talk to the owner of the unit you are considering and ask the following questions:
  o What is the current owner’s motivation for selling?
  o Is the unit successful?
  o What has the financial performance of the franchise been over the past year or two?
  o Does the current location have key employees? If so, how likely are they to stay with the business when you have assumed management?
• When you are satisfied with answers on how the business has been run, move on to questions about the physical location, such as:
  o What is the status of the current lease?
  o Will any of the equipment need replacing in the near future?
  o Have there or will there be changes to the demographics in the neighborhood of the store that will adversely impinge on your ability to run a profitable business?
  o Does the city plan to make any changes to the roads or areas around the business that could impede your customers from reaching you?

Why You Need to Ask These Questions:

Franchisor
Just because you are looking at buying an existing franchise business, don’t forget that you will ultimately be a franchisee of the franchisor. As mentioned in the checklist, your process should begin just as if you were buying a new franchise, with steps such as evaluating the UFDD, talking with many existing franchisees in the system, and learning about the training and support provided by the franchisor. If you don’t “click” with the corporate staff or if the culture of the current franchisees does not seem to fit, it would probably be best to pass on this opportunity.

Motivation
There are many reasons why a successful business person may wish to sell a thriving business, such as illness, retirement or simply the desire to do something else. Your challenge as a potential buyer is to find out if the motivation the seller says he has matches what’s really happening. The last thing you want is to be stuck with a business that is on a downward slide, either because of mismanagement or because the business doesn’t fit the neighborhood.

A business owner is not likely to tell you that he’s been losing money because he can’t keep employees or lacks customer service skills. That would be like a home seller saying that the house is great except the neighbors are noisy and the roof leaks. But in any case, the disadvantage of buying a business with a bad reputation outweighs any perceived advantages. You will need to dig deep to find out the real reason the current franchisee wants out from under this business.

Performance
If you are buying an existing business, the price you pay should be based on how well the business is performing. You would expect to pay well for a business earning money and should pay a lower price for a unit that is not. Therefore, determining how the business is doing is very, very critical to your decision to buy and to the price you will offer to the seller.

The seller should provide you with balance sheets, income statements, tax returns and other financial statements. You will want to check these figures with the franchisor to compare how these figures match up with other franchisees that have been in business a similar amount of time. You may also want an accountant experienced with this type of business to look over the figures as you want the most accurate picture of the performance history possible.

Employees
One of the advantages of buying an existing business is that you may inherit skilled, well-trained employees. Get a good understanding of the current employees and delve into their relationship with the current owner as well as any contracts, salary-disputes, or lawsuits that may be in effect.

Real estate / lease / inventory
If the business has a lease, find out if the landlord will transfer the lease to you and how long the lease runs. If you are buying the current equipment and inventory, be sure to get a list of each item, its condition, the purchase price, whether the equipment was purchased or leased, and how each item was valued for the sale. Since there’s no fixed price for buying an existing franchise, you will want as much information as possible to determine what price you are willing to pay.

Miscellaneous
There are other things that may impact not only the value of the business as it stands today but the ability of the business to be profitable down the road. One example is that the road in front of the business may be due for some lengthy construction projects, preventing customers from reaching your door easily. Customers can be like water and will run down the shortest path. If it takes an effort to get to your business, they may avoid you and go somewhere else.

As another example, let’s assume the franchise you are interested in buying is a trendy martini bar. This territory may have been drawn because it had a high number of young couples who would have the time and income to patronize the establishment. But what happens when the neighborhood changes and becomes full of families with young children? Neighborhoods change just as people change and the demographics of an area, both now and projected into the future, can spell the success or failure of a business.

Buying an existing franchise may be a shortcut but whether it turns into a shortcut for success or the road to disaster depends on how thoroughly you research every aspect of the franchise company and of the existing business. Rely on experts to help you – like a small business banker, a business accountant and a franchise attorney – whenever information seems fuzzy or you just need more help understanding what you are looking at.

Remember that buying an existing business is a negotiation process and that you are under no obligation to accept the seller’s price. Your place of power is that you can always buy a new franchise and start from scratch, often for the same or less money. So don’t be tempted to accept the offer unless you have done enough research to determine if the price is fair and that the business stands a very good chance of success with you as the new, proud owner.