Roger C.

Rule

The Complete Franchise Business Plan

What's the big difference between a traditional start-up business plan and a start-up franchise plan? Essentially, the latter must combine components of both the franchisee and the franchisor. A franchise business plan, in effect, merges elements of both companies. If you're crafting such a plan, be sure to cover the following eight basic sections, or chapters. Read carefully, as some are slightly different from those found in traditional plans.

Abstract. The abstract in your franchise business plan is briefer than an executive summary. It serves as a prologue. Business summary. This summary retrieves the omitted subjects of a conventional executive summary and combines them with elements of the traditional company description. Nothing is left out, just rearranged. Franchise overview. The overview replaces the usual industry analysis. The market. Treatments of the market and the competition combine to form the market section. Marketing plan. Marketing and sales strategies are conventionally included together in the marketing plan. Management qualifications. Essentially the same as in traditional business plans, this section describes your management staff and your operational framework. Financial pro formas. Also a traditional section, it groups together your financial projections for the first year and for a longer range of three or five years. Exhibits. This final section is where you put supporting documents needed to evaluate your business plan - either to support information in other sections or to provide auxiliary information not covered. If you have lots of exhibits, consider inserting some in the sections where they apply.

A final thought: If the goal of your franchise business plan is to secure financing, include a specific chapter that doubles as a loan request or as an investment offering proposal. Copyright 1998 Roger C. Rule. Adapted from the author's book No Money Down Financing for Franchising (Central Point, Ore.: The Oasis Press/PSI-Research)

10 Common Mistakes of Prospective Franchisees

1. Not reading, understanding or asking questions about the disclosure document. These documents are typically long, sometimes 80 pages, but it is very important that you read and understand each item, 1 through 23, of the Uniform Franchise Offering Circular (UFOC). As you read the document, keep notes on those areas that are confusing and unclear. While you may want your attorney's opinion, give the franchisor the benefit of the doubt and first ask its representatives to explain their understanding. Then check the remainder of your concerns with your attorney. Check the document's date. If it is current, you may want to request a previous document for comparison. One of the most common problems between new franchisees and the franchisor is a misunderstanding as to responsibilities. Among other things, this can cause problems in meeting the schedule for Grand Opening dates. Read the disclosure document and the franchise agreement carefully as to your responsibilities. Also pay attention to the stated obligations of the franchisor, especially item eleven of the UFOC. Do not assume the franchisor is responsible for details of a particular support service. If it is not spelled out, get it in writing. List all of your concerns, and clarify which duties, obligations and responsibilities belong to whom. 2. Not understanding or having an inaccurate or incomplete interpretation of the franchise agreement and other legal documents to be signed. You and your attorney should carefully review the franchise agreement, the lease or real estate agreements, and any other contracts. First, make a list of questions to go over with your attorney, then present your concerns to the franchisor. Get the franchisor's clarifications in writing. There may be very little that you can change in these standardized agreements, but things can be added. There is no reason the franchisor cannot give you additional documentation to clarify something in the agreement that is confusing to you or your attorney. 3. Not seeking sound legal advice. Locate and retain an attorney, preferably one experienced in franchising. 4. Not verifying oral representations of the franchisor. You can avoid this mistake if you take the proper precautions. You may want to tape-record all your meetings with the franchisor. If you ask permission to do so, it is generally admissible in court if the need arises later. It also lets the company representatives know that you are tracking their words. You can do this politely, but if you prefer, take compendious notes of all your meetings. Later, review and summarize the details of your discussion, noting any items requiring clarification. Send a registered letter to the franchisor and a copy to the representatives memorializing your notes with a request for their response to any items you want clarified. Do not leave anything unresolved.
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Due diligence also includes verification. If there have been any oral representations, of which you are uncertain, try to verify these with previous and current franchisees as well as through additional meetings with the franchisor. As stated in item 2 above, get anything orally promised in writing if it differs from other literature and the disclosure document. 5. Not contacting enough current franchisees. The section of the disclosure information on "Past, Current and Future Franchisees" is a valuable starting point for locating franchisees. It is imperative to discuss any concerns you may have with existing franchisees. If the franchisor gives you a tour that includes two or three franchisees, get back to them later and ask any questions that could have been confrontational or embarrassing if asked in front of the franchisor. Another important factor here is to find out whether the franchisor has introduced you to specific franchisees compensated for their help to solicit new franchisees. Ask them directly, then follow up with letter stating their answers to your questions. It is surprising how an inaccurate response might change once it is in writing. Other than the franchisees introduced to you by the franchisor, to get a true picture, you can survey others listed in the disclosure document not versed in soliciting prospective franchisees. Find out from them if the franchisor has a reputation for honesty and fair dealing. It is of paramount importance to contact existing franchisees of the franchisor to verify their experience of the accuracy of previous disclosure documents. Also, ask their opinions of the accuracy and completeness of the current one. Further, you can solicit their help in verifying any other information not provided in the disclosure document. When interviewing other franchisees, try to cover a large cross section of franchisees. Seek answers from those that:

Are in different locations, Have one franchise, Have multiple franchises, Have been in business a long time, Are still new, Are successful, and Are not doing so well.

For the latter, try to determine the reasons. Specifically, ask the franchisees if they feel that the franchisor exercises too much control, or not enough. Is the franchisor always willing to help? Has the franchisor held up its end of the obligations regarding ongoing support assistance and training? Information from franchisees about their first year in business and their experience with the franchisor can be extremely enlightening. Under the FTC requirement, while the offering circular
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must disclose a list of existing franchisees, this record does not have to be complete. If you find the list provided to you is incomplete, ask the franchisor for a complete registry. 6. Not confirming the reasons for failed franchises. Locate some franchise outlets that are closed, sold, or have changed ownership to company-owned, and find out the reasons for their change of status. Contact the original owners and get their stories. If no two are alike, you may want to pay them less heed. If, on the other hand, there is a common story, the underlying problem may be something you want to avoid. Nevertheless, for fairness, get the franchisor's version. 7. Not having enough working capital. Make sure you have enough capital to cover every cost associated with the business including all pre-opening costs, enough set aside for your family budget, and enough operating cash for the business to make it through the break-even point. 8. Not recognizing the need for financing, not knowing how to make a proper loan request and not developing a true and accurate financial statement. If business accounting is not your forte, solicit the help of a good accountant. 9. Not meeting the franchisor's key management personnel at their headquarters and the field representative assigned to your territory. Quite often, the sales representative will do such a good job in building your confidence that you may not bother with trying to meet the other important personnel or traveling to the headquarters before signing the franchise agreement. Do not make this mistake. Meet the other franchisor personnel and verify the information provided by the sales representative. After the franchisor defines your territory, also meet the field representative or district supervisor that will be working with you. It is important that your personalities are sufficiently harmonious to be able to work effectively together. Although you may not be able to determine this at first, you can find out the field representative's length of time on the job, training, and other experience levels. If you foresee problems, it is better to address them and try to work them out before you sign the agreement. 10. Not analyzing your market in advance. While the franchisor may help with site selection, it is still your responsibility to decide for yourself whether a particular location is desirable and promising. It is important to confirm the market for your product or service in this area. If competition exists, there are several things to consider. Do the competitors have any weaknesses that you will be able to avoid in your business to capture more market? Are the competitors so strong that their market saturation may be hard for you to penetrate? If a local competitor dominates the market, entering it may turn into a competitive struggle that will increase your working capital requirement. Also, evaluate your franchisor's marketing strategy; find out the amount of advertising and promotional dollars intended to help. Although helpful, it is not a good idea to rely totally on your franchisor for your market research. It is to your advantage to do your own market analysis and to develop your own marketing plan.
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If your findings support a strong market for a "virgin" area, you may want your agreement to include a right of first refusal to buy additional franchised outlets in the subject territory before the franchisor considers other prospective franchisees. If you consider this, you will be under a timetable to expand according to the franchisor's goal. If you can not meet the stated expansion goal, you will forfeit the area. If you are looking into a franchised area controlled by a subfranchisor, research the subfranchisor with the same determination and persistence you used evaluating the franchisor--maybe even more. Copyright 1999 Robert C. Rule

Questions and Answers for First Time Franchise Buyers

What you need to know when buying your first franchise business
Author: Jason Rager Organization: Franchise Analyzer About the Author: Jason Rager is the author of: The Franchise Insider's Guide, the most comprehensive franchise resource available, and No Money Down Franchising, the only system developed to help you buy a franchise business for little or no money down. Mr. Rager has over seven years of franchising experience owning six different franchise brands in three industries. He is also Founder and President of Franchise Analyzer a software company that develops software solutions for the franchise industry. Free Franchising Webinar: Every Wednesday at 2pm EST, 11am PST Call: (218) 339-2409, enter your PIN: 7014389 and log on to the free webinar here.
Date Published: 11/07/2011 5

Today I want to answer some of the most common questions that people ask me about starting their first franchise business . Question: What is the typical process for buying a franchise? Answer: The first step in buying a franchise is having a phone conversation with a representative from the franchise. Believe it or not, every single person who has developed a successful career owning a network of multiple franchise businesses that spans across a region of the United States, took the initial step of speaking with the franchisor on the phone to learn more about a franchise opportunity and how it appeals to them on a personal and financial basis. Once you have become comfortable with the franchise system, its employees, and the opportunity, you will be invited to a discovery day or to speak with other franchisees. At this juncture, you will know whether the opportunity is right for you. I always recommend visiting the franchisor and meeting the franchise's management face-to-face; face time and relationships are always important in any business venture. Question: How much money will I make owning a franchise business? Answer: Many factors affect how much money you will make owning a franchise business. These factors include: location, size of your initial investment, industry, the direction of the overall economy, the amount of time and effort you put into your business, and much more. I have said it numerous times: the best way to find out how much money you will make is by calling other franchise business owners that have been in the system for many years. You can find a list of current franchise business owners by looking in the Franchise Disclosure Document(FDD) or you can just search on Google, make a phone call to the business and ask to speak directly with the owner. It's important to note that many franchises are unable to tell you how much money you will make because doing so may be breaking the law in their state or country, as a result they will often give you a list of franchisees to call. Question: What is the typical time period from when I sign the franchise agreement until I open my doors for business? Answer: The period of time from signing the franchise agreement to opening your business varies based upon many factors. I think the major factor that delays most franchisees from opening their franchise business is choosing a location and signing a lease, note that this applies only to retail franchise businesses. Financing is also another significant factor that can delay you from opening your franchise business but if you have decent credit and/or significant assets then you will receive your financing in about two weeks. Otherwise, the schedule outlined by the franchisor and displayed within the FDD is sufficient. Question: As a successful franchise business owner what do you think is the most beneficial part of owning a franchise business? Answer: The most beneficial part of owning a franchise business is having the freedom of owning your own business while not being in business by yourself. By becoming a member of a franchise, you are receiving the right to use one of the most powerful brands in your industry which ensures you guaranteed customers beginning from the day you open business. Additionally, you have access to a support network of like-minded franchise business owners who are all driving at one goal: maximizing their profitability. With this support network in
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place, you can avoid mistakes and share information to help you maximize your business's profitability. Question: How long will it take before my business is profitable? Answer: Many factors affect your profitability which can make it difficult to forecast. However, to build a realistic picture of when your business will become profitable I recommend calling about 10 franchise business owners of your desired brand and calculate the average of your responses. Note that the single most important driver of your business's profitability is the time and effort you dedicate towards making it succeed. For a retail business, your location will also be a significant determinant of your profitability. Be aware that businesses which require less startup capital and whose financial outcomes are based greatly on how hard and how many hours you work, generally will become profitable very quickly because your profits are driven mostly by your work ethic. Question: Should I take out a loan to start my franchise business ? Answer: I believe that using debt to purchase a home, a business, commercial real estate, stocks, bonds, and other assets is generally a good policy because it will drive your return on investment higher. However, with higher returns comes greater risk; so it's important not to go overboard when considering how much debt your business should have. Also, plan for negative outcomes in your business such as: unforeseen costs, lower than projected sales, and other scenarios when determining how much debt your business will have so that you can maintain profitability during difficult times - doing so often separates the winners from the losers in business ownership. Question: What options are available for selling my franchise business in the future? Answer: I always recommend having an exit strategy in place from day one. Keep in mind that one of the greatest benefits of owning a franchise business is your ability to sell it in the future or to pass it on to your heirs later down the road. Additionally, owning a franchise provides an additional option that typical small business owners don't have: you may be able to sell your business to the franchisor in the future. Therefore you should never hesitate to speak openly and honestly with the franchisor about your plans for growing your business and your succession plan in the event that something unfortunate happens to you and you are unable to manage the day-to-day business. Planning for such unforeseen events can help you avoid a complete disaster should such a situation arise. Question: How many hours per week will I work owning a franchise?,br>Answer: This varies greatly depending upon the level of investment, industry, and type of franchise you are buying in to. Generally, you will work a significant amount in the preliminary and startup phase of your business. Once policies, procedures, and general management has been ingrained in the staff and business, your daily work hours should diminish significantly and you may choose to open an additional location. I recommend speaking with individual franchise business owners and ask them how many hours per week they work and then average the results. This will give you a good idea of what you are getting yourself in to. I wish you a successful journey towards business ownership.

Buying a Franchise: A Consumer Guide [PDF]

Order Free Copies

When you buy a franchise, you often can sell goods and services that have instant name recognition, and get training and support that can help you succeed. But purchasing a franchise is like every other investment: theres no guarantee of success. The Federal Trade Commission, the nations consumer protection agency, has prepared this booklet to explain how to shop for a franchise opportunity, the obligations of a franchise owner, and questions to ask before you invest. I. The Benefits and Responsibilities of Franchise Ownership II. Advance Work: Before You Select a Franchise System III. Selecting a Franchise IV. Finding the Right Opportunity V. Investigating Before You Invest VI. Before You Sign the Franchise Agreement

I. The Benefits and Responsibilities of Franchise Ownership

A franchise enables you, the investor or franchisee, to operate a business. You pay a franchise fee and you get a format or system developed by the company (franchisor), the right to use the franchisors name for a limited time, and assistance. For example, the franchisor may provide you with help in finding a location for your outlet; initial training and an operating manual; and advice on management, marketing, or personnel. The franchisor may provide support through periodic newsletters, a toll-free telephone number, a website, or scheduled workshops or seminars. Buying a franchise may reduce your investment risk by enabling you to associate with an established company. But the franchise fee can be substantial. You also will have other costs: for
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example, you may be required to give up significant control over your business while you take on contractual obligations with the franchisor. Typically, franchise systems have several components.

Costs
In exchange for the right to use the franchisors name and assistance, you will pay some or all of the following fees.

Initial Franchise Fee and Other Expenses

Your initial franchise fee, which will range from several thousand dollars to several hundred thousand dollars, may be non-refundable. You may incur significant costs to rent, build, and equip an outlet and to buy initial inventory. You also may have to pay for operating licenses and insurance, and a grand opening fee to the franchisor to promote your new outlet.

Continuing Royalty Payments

You may have to pay the franchisor royalties based on a percentage of your weekly or monthly gross income. Often, you must pay royalties even if your outlet isnt earning significant income. As a rule, you have to pay royalties for the right to use the franchisors name. Even if the franchisor doesnt provide the services they promised, you still may have to pay royalties for the duration of your franchise agreement. Indeed, even if you voluntarily terminate your franchisee agreement early, you may owe royalties for the remainder of your agreement.

Advertising Fees
You also may have to pay into an advertising fund. Some portion of the advertising fees may be allocated to national advertising or to attract new franchise owners, rather than to promote your particular outlet.

Controls
To ensure uniformity, franchisors usually control how franchisees conduct business. These controls may significantly restrict your ability to exercise your own business judgment. Here are a few examples.

Site Approval
Many franchisors pre-approve sites for outlets, which, in turn, may increase the likelihood that your outlet will attract customers. At the same time, the franchisor may not approve the site youve selected.
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Design or Appearance Standards

Franchisors may impose design or appearance standards to ensure a uniform look among the various outlets. Some franchisors require periodic renovations or seasonal design changes; complying with these standards may increase your costs.

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Restrictions on Goods and Services You Sell

Franchisors may restrict the goods and services you sell. For example, if you own a restaurant franchise, you may not be able to make any changes to your menu. If you own an automobile transmission repair franchise, you may not be able to perform other types of automotive work, like brake or electrical system repairs.

Restrictions on Method of Operation

Franchisors may require that you operate in a particular way: they may dictate hours; preapprove signs, employee uniforms, and advertisements; or demand that you use certain accounting or bookkeeping procedures. In some cases, the franchisor may require that you sell goods or services at specific prices, restricting your ability to offer discounts, or that you buy supplies only from an approved supplier even if you can buy similar goods elsewhere for less.

Restrictions on Sales Area

A franchisor may limit your business to a specific territory.While territorial restrictions may ensure that you will not compete with other franchisees for the same customers, they also could hurt your ability to open additional outlets or to move to a more profitable location. In addition, a franchisor may limit your ability to have your own website, which could restrict your ability to have online customers. Moreover, the franchisor itself may have the right to offer goods or services in your sales area through its own website or through catalogs or telemarketing campaigns.

Terminations and renewal

You can lose the right to your franchise if you breach the franchise contract. Franchise contracts are for a limited time; your right to renew is not guaranteed.

Franchise Terminations
A franchisor can end your franchise agreement for a variety of reasons, including your failure to pay royalties or abide by performance standards and sales restrictions. If your franchise is terminated, you may lose your investment.

Renewals
Franchise agreements may run for as long as 20 years. At the end of the contract, the franchisor may decline to renew. Renewals are not automatic, and they may not have the original terms and conditions. Indeed, the franchisor may raise the royalty payments, impose new design standards and sales restrictions, or reduce your territory. Any of these changes may result in more competition from company-owned outlets or other franchisees.
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II. Advance Work: Before You Select a Franchise System

Before you invest in a particular franchise system, think about how much money you have to invest, your abilities, and your goals. Be brutally honest.

Your Investment

How much money do you have to invest? How much money can you afford to lose? Are you purchasing the franchise alone or with partners? Do you need financing? Wheres it coming from? Whats your credit rating? Credit score? Do you have savings or additional income to live on while you start your business?

Your Abilities

Does the franchise require technical experience or special training or education (for example, auto repair, home and office decorating, or tax preparation)? What special skill set can you bring to a business, and, specifically, to this business? What experience do you have as a business owner or manager?

Your Goals
Write down your reasons for buying a particular franchise:

Do you need a specific annual income? Are you interested in pursuing a particular field? Are you interested in retail sales or performing a service? How many hours can you work? How many are you willing to work? Do you intend to operate the business yourself or hire a manager? Will franchise ownership be your primary source of income or a supplement to your current income? Do you get bored easily? Are you in this for the long-term? Would you like to own several outlets?

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III. Selecting a Franchise

Purchasing a franchise is like any other investment: it comes with risk. When you think about a particular franchise, think about the demand for the products or services it offers, competitors that offer similar products or services, the franchisors background, and the level of support you will receive.

Demand
Is there a demand for the franchisors products or services in your community? Is it seasonal or ever- green? Could you be dealing with a fad? Does the product or service generate repeat business?

Competition
Whats the level of competitionnationally, regionally, and locally? How many franchised and company-owned outlets are in your area? Does the franchise sell products or services that are easily available online or through a catalog? How many competing companies sell similar products or services? Are they well-established or widely recognized by name in your community? Do they offer a similar product at a similar price?

Your Ability to Operate the Business

Sometimes, franchise systems fail. What will happen to your business if the franchisor closes up shop? Will you need the franchisors ongoing training, advertising, or other help to succeed? Will you have access to the same suppliers? Could you conduct the business alone if you have to cut costs or lay anyone off? Before you invest in a particular franchise system, think about how much money you have to invest, your abilities, and your goals. Be brutally honest.

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Name Recognition
Buying a franchise gives you the right to associate with the companys name or brand. The more widely recognized the name, the more likely it is to draw in customers. Consider:

name and brand recognition for the company and its product or service whether the company has a registered trademark how long the franchisor has been in business whether the companys reputation is for quality products or services whether consumers have filed complaints against the franchise with the Better Business Bureau or a local consumer protection agency

Training and Support Services

What training and continuing support does the franchisor provide? Does the franchisors training measure up to the training for workers in the particular industry? Can you compete with others who have more formal training? What backgrounds do the current franchise owners have? Is your education, experience, or training similar?

Franchisors Experience
Many franchisors operate well-established companies with years of experience both in selling goods or services and managing a franchise system. Some franchisors started by operating their own business. There is no guarantee, however, that a successful entrepreneur can successfully manage a franchise system. Find out:

how long the franchisor has managed a franchise system whether the franchisor has enough expertise to make you feel comfortable. If the franchisor has little experience managing a chain of franchises, take any promises about guidance, training, and other support with the proverbial grain of salt.

Growth
A growing franchise system increases the franchisors name and brand recognition and may enable you to attract customers. But growth alone doesnt ensure successful franchisees. Indeed, a company that grows too quickly may not be able to support its franchisees with the support services it promises them. Investigate the franchisors financial assets and resources; are they sufficient to support the franchisees?
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IV. Finding the Right Opportunity

There are many, many ways to find franchise opportunities. Some franchisors have websites with information about their franchises. Franchise expositions are another good source of information, as are franchise brokerscompanies or people that specialize in matching individuals with franchise companies. Its always a good idea to visit franchised outlets in your area and talk to the owners about their experience with particular franchisors.

Shopping at a Franchise Exposition

Attending a franchise exposition allows you to see and compare a variety of franchise possibilities under one roof. Before you attend, research the kind of franchise that may best suit your budget, experience, and goals. When you attend, visit several franchise exhibitors who deal with the type of industry that appeals to you. Ask questions.

How long has the franchisor been in business? How many franchised outlets exist? Where are they? What is the initial franchise fee? What additional start-up costs can you expect? Are there continuing royalty payments? How much? What do other franchisees pay? What management, technical, and other support does the franchisor offer? What controls does the franchisor impose?

Exhibitors may offer you incentives to attend a promotional meeting to discuss the franchise in greater detail. These meetings can be another source of information and another opportunity to raise questions. Be prepared to walk away from any franchise opportunityand promotionthat doesnt fit your needs.

Using a Franchise Broker

Franchise brokerswho also refer to themselves as business coaches,advisors,referral sources, or sales consultantshelp people who want to buy a franchise. They often advertise on the Internet and in business magazines that they will help you select among various franchise options.Typically, a broker reviews the amount of money you have to invest and then directs you to opportunities that match your interests and resources.A broker also may help you complete applications and the paperwork to consummate the sale. Remember that franchise brokers often work for franchisors, and get paid only if a sale is completed.

Limited Opportunities
Some franchise brokers may claim to be able to match you with the perfect opportunity because they represent a wide range of business sellers. That may be trueor not. In some
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instances, franchise brokers represent only a few franchisors, and, as a result, their suggestions may be limited.

Selection Standards
Some franchise brokers may claim that they will suggest only those franchises that meet certain standards. You may think this means that your financial risk is limited because the broker is weeding out the poor investments. In fact, some brokers represent any franchisor willing to pay them a commission for a sale. If you rely on a broker, be skeptical: you may be directed to a franchise that is failing or that doesnt have a track record.

Upselling
Some brokers earn a flat fee regardless of the price of the franchise they sell; others earn a commission pegged to the price of the franchise the broker sells. The more costly the franchise, the bigger the brokers commission. Some brokers may steer you toward a more costly franchise to beef up their own commission.

Unauthorized or Misleading Earnings Representations

To convince you to buy a particular franchise, a broker may make certain representations about income. Earnings claims may not be true, and sometimes, can be misleading even if literally true. For example, the figures may be based on earnings in an area where demand for the business goods or services is high. Or the earnings claimed may be based on outdated industry data. In some instances, earnings claims may be gross sales figures: when you factor in likely expenses, actual earnings can be far less. Because earnings representations may be misleading, many franchisors prohibit their sales representatives from making them. Before using a franchise broker, ask yourself:

whether you need the services of a franchise broker. Can you get enough information shopping online or reading trade magazines? whether the broker is paid by the franchisor. Are there any fees you must pay the broker? If so, how much you are willing to pay? whether the brokers commission depends on the price of the franchise. If it does, consider the fact that the broker may be leading you toward a higherpriced franchise. Ask about alternatives in the same field that may cost less. how many franchisors the broker represents. If its a small group, the potential match-ups may be limited. how the broker selects franchisors to represent. Are the selection criteria in writing? Ask to see them. How many franchisors has the broker turned down in the recent past?

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about potential earnings claims. Verify whether the franchisor has authorized the claims. Ask the franchisor for the written documentation that lays out the basis for the claims. Think about consulting an accountant to determine whether the claims are reasonable and if they are applicable to where and how you intend to operate your business.

You should receive the names and contact information for other buyers of the franchise current and former franchisees. Talk to them, rather than relying on information from the broker alone.

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Speak to them about their experience within the franchisor.

V. Investigating Before You Invest

The All-Important Disclosure Document

Before you invest in any franchise system, get a copy of the franchisors disclosure document. Under the Franchise Rule, which is enforced by the FTC, you must receive the document at least 14 days before you are asked to sign any contract or pay any money to the franchisor or an affiliate of the franchisor. You have the right to ask forand geta copy of the disclosure document once the franchisor has received your application and agreed to consider it. Indeed, you may want to get a copy of the franchisors disclosure document before incurring any expenses to investigate the franchise offering. The franchisor may give you a copy of its disclosure document on paper, via email, through a web page, or on a disc. The cover of the disclosure document should have information about its availability in other formats. Make sure you have a copy of the document in a format that is convenient for you, and keep a copy for reference. Read the entire disclosure document. Dont be shy about asking for explanations, clarifications, and answers to your questions before you invest. Among the key sections in a complete disclosure document are:

Franchisors Background
This section tells how long the franchisor has been in business, likely competition, and any special laws that pertain to the industry, like any license or permit requirements. This will help you understand the costs and risks you are likely to take on if you purchase and operate the franchise. Read the entire disclosure document. Dont be shy about asking for explanations, clarifications, and answers to your questions before you invest.

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Business Background
This section identifies the executives of the franchise system and describes their experience. Pay attention to their general business backgrounds, their experience in managing a franchise system, and how long theyve been with the company. Litigation History This section discusses prior litigationwhether the franchisor or any of its executive officers have been convicted of felonies involving fraud, violations of franchise law, or unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct. It also says whether the franchisor or any of its executives have been held liable for or settled civil actions involvingthe franchise relationship. A number of claims against the franchisor may indicate that it has not performed according to its agreements, or, at the very least, that franchisees have been dissatisfied with its performance. This section also should say whether the franchisor has sued any of its franchisees during the last year, a disclosure that may indicate common types of problems in the franchise system. For example, a franchisor may sue franchisees for failing to pay royalties, which could indicate that franchisees are unsuccessful, and therefore, unable or unwilling to make their royalty payments.

Bankruptcy
This section discloses whether the franchisor or any of its executives have been involved in a recent bankruptcy, information that can help you assess the franchisors financial stability and whether the company is capable of delivering the support services it promises.

Initial and Ongoing Costs

This section describes the costs involved in starting and operating a franchise, including deposits or franchise fees that may be non-refundable, and costs for initial inventory, signs, equipment, leases, or rentals. It also explains ongoing costs, like royalties and advertising fees. In addition, ask about:

continuing royalty payments advertising payments, both to local and national advertising funds grand opening or other initial business promotions business or operating licenses product or service supply costs real estate and leasehold improvements discretionary equipment, such as a computer system or a security system 19

training legal fees financial and accounting advice insurance the costs of compliance with local ordinances, such as zoning, waste removal, and fire and other safety codes health insurance employee salaries and benefits

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Starting your business may take several months. Estimate your operating expenses for the first year and your personal living expenses for up to two years. Compare your estimates with what other franchisees have paid and with competing franchise systems. You may be able to get a better deal with another franchisor.An accountant can help you evaluate this information.

Restrictions
This section tells whether the franchisor limits:

suppliers from whom you may purchase goods the goods or services you may offer for sale your customers where you can sell goods or services your use of the Internet to sell goods or services to customers in and out of your territory and the right of the franchisor (or other franchisees) to use the Internet to solicit customers or to sell in your territory

These kinds of restrictions may limit your ability to exercise your own business judgment in operating your outlet. That said, if the franchisor does not limit the territory where each franchisee can sell, the franchisor and other franchisees may compete with you for the same customers, either by establishing their own outlets, or by selling to customers in your area through the Internet, catalogs, telemarketing, and the like.

Terminations
This section spells out the conditions under which the franchisor may end your franchise and your obligations to the franchisor after termination. It also defines the conditions under which you can renew, sell, or assign your franchise to others.

Training
This section explains the franchisors training and assistance program. Check for information about:

who is eligible for training whether new employees are eligible for training and, if so, at what cost. Who pays? how long the training sessions take. How much time is spent on technical training, business management training, and marketing? who conducts the training and their qualifications whether the company offers ongoing training and at what cost 21

support staff available for trouble-shooting: Are they assigned to your area and how many franchisees they are responsible for? whether on-site individual assistance is available and at what cost

The training you need will depend on your business experience and your knowledge of the franchisors goods and services. If you have doubts about whether the training offered is sufficient to give you the tools you need to handle day-to-day business operations, consider another franchise opportunity.

Advertising
This section has information on advertising costs. Franchisees often are required to contribute a percentage of their income to an advertising fund. Find out:

what part of the advertising fund is devoted to administrative costs what other expenses are paid from the advertising fund whether franchisees have any control over how the advertising dollars are spent what advertising promotions the company has already engaged in and whats on the drawing board what percentage of the fund is spent on national advertising what percentage of the fund is spent on advertising in your area what percentage is devoted to selling more franchises whether all franchisees contribute equally to the advertising fund whether you need the franchisors consent to develop and buy your own advertising whether there are rebates or advertising contribution discounts if you do your own advertising whether the franchisor gets any commissions or rebates when it places advertisements, and who benefits from thoseyou or the franchisor

Current and Former Franchisees

This section has very important information about current and former franchisees. Many franchisees in your area may mean more competition for customers. The number of terminated, cancelled, or non-renewed franchises may indicate problems.

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Some companies may repurchase failed outlets and list them as company-owned outlets. Look for contact information for current franchisees and franchisees who have left the system within the last year; talking to them may be the most reliable way for you to verify the franchisors claims. Visit or phone as many of the current and former franchisees as possible to chat about their experiences, and the volume and type of business theyre doing. Note that some of them may have signed confidentiality agreements that prevent them from speaking with you. If thats the case, try contacting others on the list. If you buy an existing outlet that was reacquired by the franchisor, the franchisor must tell you who owned and operated the outlet for the last five years. Several owners in a short time may indicate that the location isnt profitable or that the franchisor hasnt supported that outlet as promised. Consider contacting several previous owners to learn more about their experience operating the particular outlet. You will want to learn:

how long the franchisee operated the franchise where the franchise was located whether they were able to open the outlet in a reasonable time their total investment, including any hidden or unexpected costs how long it took them to cover operating costs and earn a reasonable income whether they were satisfied with the cost, delivery, and quality of the goods or services they sold their backgrounds before becoming a franchisee If you have doubts about whether the training offered is sufficient to give you the tools you need to handle day-to-day business operations, consider another franchise opportunity.

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whether the franchisors training was adequate whether the franchisor provided ongoing help their satisfaction with the franchisors advertising program whether the franchisor fulfilled its contractual obligations whether the franchisee would invest in another outlet whether the franchisee would recommend the investment

Some franchisors may give you a separate reference list of franchisees to contact. To ensure that you get the full picture, you may want to contact at least some references listed in the disclosure document that are not on the separate list.

Associations of Franchisees Operating Similar Outlets

Theres no question that the disclosure document is critical reading for potential franchisees. Associations of franchisees who are operating similar outlets are another important source of information. Whether or not these associations are sponsored or endorsed by the franchisor, they can provide information about the state of the relationship between the franchisor and its franchisees. You may want to ask a franchisee association about:

its membership its history its goals its relationship with the franchisor any benefits in buying from one franchisor versus a competitor any problems franchisees are facing in the operation of their outlets

Earnings Information
You may want to know how much money you can make if you invest in a particular franchise system. Be careful. Earnings information can be misleading. Insist on written substantiation for any information you may receive that suggests your potential income or sales. Franchisors are not required to disclose information about potential income or sales, but if they do, the law requires that they have a reasonable basis for their claims and that they make the substantiation for their claims available to you. When you review any earnings claims, consider:

Sample Size

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Say a franchisor claims that franchisees in its system earned $50,000 last year. The claim may be deceptive if it doesnt represent the typical earnings of franchisees. The disclosure document should tell the sample size and the number and percentage of franchisees who reported earnings at the level claimed.

Average Incomes
A franchisor may claim that the franchisees in its system earn an average income of, say, $75,000 a year. Average figures tell very little about how individual franchisees perform. An average figure may make the overall franchise system look more successful than it is because just a few very successful franchisees can inflate the average.

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Gross Sales
5 Some franchisors provide figures for the gross sales revenues of their franchisees. These figures dont really tell about the franchiseesactual costs or profits. An outlet with a high gross sales revenue on paper may be losing money because of high overhead, rent, and other expenses.

Net Profits
Franchisors often do not have data on net profits oftheir franchisees. If you get net profit information, ask whether it includes information about company- owned outlets; they often have lower costs because they can buy equipment, inventory, and other items in larger quantities, or they may own, rather than lease, their property.

Geographic Relevance
Earnings may vary with geography. If its reported that a franchisee earned a particular income, ask about the franchisees location. The disclosure document should note geographic or other differences among the group of franchisees whose earnings are reported and your likely location.

Franchisees Backgrounds
Keep in mind that franchisees have different skill sets and educational backgrounds. The success of some franchisees doesnt guarantee success for all.

Reliance on Earnings Claims

Franchisors may ask you to sign a statement sometimes presented as a written interview or questionnairethat asks whether you received any earnings or financial performance representations during the course of buying a franchise. If you heard or got any earnings representations, report it fully during an interview or on a questionnaire or other statement. If you dont, you may be waiving any right to contest the earnings representations that were made to you and that you used to make your decision to buy.

Financial History
The disclosure document gives important information about the companys financial status, including audited financial statements. You can find explanatory information about the franchisors financial status in notes to the financial statements. Investing in a financially unstable franchisor is a significant risk; the company may go out of business or into bankruptcy after you have invested your money. Its a good idea to hire a lawyer or an accountant to review the franchisors financial statements, audit report, and notes. They can help you understand whether the franchisor:
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has steady growth has a growth plan makes most of its income from the sale of franchises or from continuing royalties devotes sufficient funds to support its franchise system

VI. Before You Sign the Franchise Agreement

The companys disclosures may change between the time you receive the disclosure document and the time you sign the franchise agreement. For example, the company may have updated its disclosures; it is required to do that at least annually after its fiscal year ends. You have the right to ask for a copy of any updated information before you sign the franchise agreement. An updated disclosure document may indicate the filing of new suits by or against the franchisor, changes in the franchisors management team, new financial data, and more current financial performance data, among other information.

Additional Sources of Information

Accountants and Lawyers
In addition to reading the companys disclosure documentincluding any updatesand speaking with current and former franchisees, consider talking to an accountant and a lawyer. An accountant can help you understand the companys financial statements, develop a business plan, assess any earnings projections and the assumptions theyre based on, and help you pick a franchise system that is best suited to your investment resources and your goals. A lawyer can help you understand your obligations under the franchise contract. These contracts usually are long and complex. A contract problem that arises after you have signed the contract may be very expensive to fixif it can be fixed at all. Choose a lawyer who is experienced in franchise matters, but rely on your own lawyer or accountant for a recommendation, rather than the franchisors recommendation.

Banks and Other Financial Institutions

These organizations can offer an unbiased view of the franchise opportunity you are considering. They should be able to get a Dun and Bradstreet report or similar financial profile of the franchisor.

Better Business Bureau

Check with the local Better Business Bureau (BBB) in the city where the franchisor has its headquarters. Ask whether there are complaints on file about the companys products, services, or personnel.
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Government
Several states regulate the sale of franchises. Check with the state office that regulates franchisingit may be the Office of the Attorney Generalfor more information about your rights as a franchise owner in your state. The Federal Trade Commission (FTC) enforces the Franchise Rule. The FTC publishes a number of business guidesfor example, Getting Business Credit , Dot Com Disclosures, Business Guide to the Mail and Telephone Order Merchandise Rule, and Complying with the Telemarketing Sales Rule that may be helpful to your business. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

February 2008

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