The nature of social media tends to provoke people into making grand pronouncements, so it is not surprising that some commenters took the position that they would advise any franchise prospect to avoid a franchise system without an FPR. Like all grand pronouncements, there is an element of truth in that thought, but it is a simplification of reality that deserves to be carefully examined.
As a starting point, it is fairly well-accepted that a prospective franchisee should want to see as much data about their likelihood of success as possible. And, franchisors that have a good story to tell will improve their sales process (and, potentially, the quality of franchise prospects) by providing that data. But, what if the franchisor is new or — for some reason — does not have sufficient data to produce a meaningful FPR? Should the prospect stay away? Should the franchisor come up with dubious numbers?
As far as prospective franchisees go, the answer has to be “it depends.” An FPR is only one piece (undoubtedly an extremely important piece) of the data that a prospect should include in their due diligence. They should still be contacting existing franchisees to glean whatever they can about their experiences — financial and otherwise. They should still be trying to determine whether the location of their potential business will be a good fit for the business. They should still be evaluating the local market. They should still be evaluating whether the operational skill set needed to succeed in the business is a match for them. The list goes on. Without an FPR to work with, getting comfortable with your due diligence is harder, but not impossible.
For franchisors, the answer is a little easier. Under no circumstances should a franchisor dress up dubious data as an FPR. That is a recipe for disaster for both the franchisee and the franchisor. A harder question is whether there is some form of limited FPR that might be useful to prospects. For example, if reliable revenue data is not available, but the amount of an average sale is, is that a useful metric? Is it misleading? Is there any circumstance where a projection (as opposed to historical data) would make sense? Any franchisor in this situation has to be careful. It is probably better to omit a claim if it has a reasonable chance of misleading a prospect. But, if they can come up with something that is useful and not misleading — but still falls short of telling the full story — it probably makes sense to do that.
In the end, due diligence requires diligence — not a blind reliance on grand pronouncements.
]]>Please join Mr. Maslyn to help support this terrific cause. The event starts at 10 a.m. and will be hosted by Amanda Crow, a local PostNet franchisee, at 175 West Ocean View Ave., Norfolk, VA 23503.
See you there!
]]>1. Am I happy with everything in the Franchise Agreement? Because the FDD is going to need to be updated in any event, the annual FDD updating process is a great opportunity to take a closer look at how well the current franchise agreement works for the franchisor and to address issues that it has discovered through its experience over the last year. Making those changes during the annual FDD update will avoid the need to amend the FDD – and franchise registrations — mid-year.
2. Do I have a Financial Performance Representation? The first question that nearly every franchise prospect asks is: “How much can I make?” Unbelievably, most franchisors do not use a financial performance representation in Item 19 of their FDD, so they cannot answer this question. For start-up systems, they may not have the data to support a financial performance representation initially, but they may develop enough data over time. Each year, it is a good idea to evaluate whether the franchisor can provide a financial performance representation so that its salespeople can engage in discussions with prospects about the financial details of the franchised business.
3. The early bird gets the worm. If a franchisor files franchise registration applications in any franchise registration states, filing as early as possible is a very good idea. The large majority of franchisors have December 31 fiscal year ends, so the large majority of franchise filings (new and renewal) that state franchise examiners see arrive between the middle of March and late April. This flood of filings creates a backlog. And, although the examiners do their best to move through the franchise filings as fast as possible, if your franchise application arrives in late April, you will be at the back of the queue.
4. Is this a good time to expand our geographic focus? If your franchise system has opted to focus its expansion on a few states, you probably haven’t bothered to submit franchise registration applications to all of the states that might require it. If that’s the case for you, now is a good time to re-evaluate whether your focus should expand to include additional states. If those states are registration states, it is probably most cost-effective to submit those franchise registrations as soon as the annual FDD update is complete.
5. Know your budget. Legal fees can have a life of their own if not planned for properly. Hourly rates can spiral out of control if, for example, a state examiner issues a number of comments to your FDD. Maslyn Law PLC offers our clients flat fee arrangements for FDD updates and for state franchise registrations (on a state-by-state, à la carte basis) to provide our clients with certainty that their legal fees will be what they agreed on. Contact us at 804-639-5501 or pmaslyn@maslynlaw.com if you would like a fee proposal for your company.
]]>The article suggests that entrepreneurship through franchising is allowing some young adults to create their own opportunities in a poor job market. Some young adults feel franchising provides them the support of a reputable brand name and business model, while still allowing them to contribute their own insight and expertise to the company.
The article stresses that young entrepreneurs interested in franchising should do their homework. The article explains, to get started, it is imperative to keep a number of points in mind. For example, find a franchise that is closely related to your interests and allows you to use your technical expertise. Be sure to do your homework on the product/service/industry, and know them well. To make the transition smooth, working with a franchise lawyer on how to legally set your business up will ensure you alleviate any missteps down the road.
Read the Business News Daily article to see what other young professionals are doing in the franchise world.
]]>There are two kinds of costs that every new franchisor must address – up-front costs (call them “sunk costs,” if you like) and operational costs. “Up-front costs” generally include the costs related to setting up an entity to be ready to sell franchises. “Operational costs” generally include costs related to selling, opening and supporting franchises.
“Up-front costs” often include legal fees and franchise consulting fees. Both of these fees can be substantial – and depending on which professionals you retain, can easily amount to $100,000 all by themselves. But, they don’t have to. Many entrepreneurs are confident enough in their own marketing, sales, or business planning experience (to use a few examples) that they do not feel the need to hire a consultant for help with these aspects of starting a franchise company. And, if they are, the costs to hire a consultant for other aspects of the franchise roll-out – like advice on (a) establishing an appropriate multi-unit development structure, (b) site selection criteria, (c) planning for supply chain growth and management, and (d) developing an operations manual – can be reduced. In some cases, entrepreneurs decide not to hire a consultant at all. But, make no mistake, good franchise consultants are worth the money – if you can afford it.
The legal expenses involved in setting up a franchise system can vary widely depending on how complicated the franchise structure will be and in which states the company intends to sell franchises. Franchising is wonderfully flexible. It is possible to create a practically unlimited number of quirks and wrinkles in the relationships between the franchisor and franchisee. But, generally, the more numerous those quirks and wrinkles are, the more complicated – and expensive — the drafting process will be. For the purpose of illustration: a basic franchise structure involves a single franchisor and a single franchisee for the operation of a single unit of the business; one type of complicated structure involves a franchisor who grants to a master franchisee the right to offer, sell and provide support to franchisees in a particular area. The more people and locations involved in the structure of a franchise relationship, the more expensive the legal fees will be. Most start-up franchisors – even those with in-house counsel — don’t have the legal expertise in franchising to confidently tackle these issues on their own, so these costs are harder to manage. But, it is fair to say that, in the United States, it will probably cost at least $15,000 to prepare the legal documentation needed to start selling franchises. For complicated franchise systems, the costs could easily be $40,000 … or more.
Of course, your need for cash doesn’t end once you have a document you can use to sell franchises. You need to have cash available to cover your “operational costs.” Just to get a franchisee up and running, you may have out-of-pocket expenses for marketing, site evaluation and planning, and training services, among other things. Then, once the franchisee is operational, you will have other expenses related to supporting that franchisee. In an ideal word, the pre-opening “operational costs” would be more than off-set by the initial franchise fee paid by each franchisee and the post-opening “operational costs” would be more than covered by the ongoing fees (royalty, ad fund, software, etc.) paid by each franchisee. But, usually, there are economies of scale in providing these services to franchisees and the franchisor’s break-even point may not be reached until the franchisor has 5 or 10 or 20 units open and operating. So, the franchisor’s cash requirements can vary dramatically depending on extent of the services provided to the franchisees.
In the end, any new start-up franchisor will need substantial cash reserves. How much they will need depends tremendously on the people they hire and the services they provide to franchisees. Does it always cost at least $100,000 to start a franchise system? No. It can be done more cheaply than that – maybe even a lot more cheaply. But, as with all things related to money … usually, more is better.
]]>This is one of many explanations for why lending is tight right now. Check out the article, and see what you think as a franchisor or franchisee doing business in today’s economy.
]]>The Franchise Industry Accounts for:
Successful Types of Franchises:
While the Economic Census Franchise Report is the first report of its kind from the government, there have been other similar reports published by organizations in the public sector. Like the government’s report, the latest International Franchise Association’s Economic Impact Study provides data gathered in 2007. It, too, demonstrates the significant role franchising plays in the American economy.
Highlights from the Latest IFA Economic Impact Study:
Together, the U.S. government’s first Economic Census Franchise Report and the IFA’s Economic Impact Study demonstrate the valuable support that franchising provides American small businesses and workers.
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