Franchise Blog

The following is a guest post by Scott Kern, with Franchise Law Source.

Credit is tight. Prospective franchisees are finding it difficult to secure loans. Even the Small Business Administration Section 7 Guaranteed Loan is hard to come by in this environment. Despite the government’s guarantee of the largest part of the loan lenders are still holding back on financing franchise start ups.

First, are franchises being sold? And second, what are prospective franchisees doing to solve this financing problem?

The answer to the first question is yes, franchises are being sold. The number of prospective franchisees looking to work for themselves is only growing in these difficult times. Some people need to find a new way to make a living out of necessity. Thousands have been laid off. Others simply look at the way companies treat people and realize they need to take responsibility for their own destiny. Yes, franchise deals are still taking place.

The answer to the second question is that franchise buyers are finding alternative sources of finances. Bank loans are not the only way to finance a franchise business. People are borrowing more from within their own circle of influence. Your friends, family and business associates – maybe even a former employer – are surprisingly able and willing lenders. In fact, private loans can often be secured on better terms than you could get from a bank. Second, prospective franchisees are taking on partners. A limited liability company structure gives you the opportunity to bring in multiple partners, some of whom may be actively involved and some of whom may be silent investors.

Another significant change that I am seeing is that very qualified prospective franchisees are opting for lower capital investment franchises. A prospective franchisee with $300,000 to invest a year ago might have borrowed another $300,000 and opened a restaurant requiring an initial investment of $450,000-500,000, keeping a reserve for working capital and contingencies. Today that same prospective franchisee is looking at a mobile maintenance franchise with an initial investment of only, say, $200,000.

This trend of qualified franchisees taking interest in smaller franchise offerings is a boon to the franchisor that has kept its initial investment costs down.

Yes, franchises are being sold today. These deals just require more creative planning and financing than they once did.

We represent buyers in the due diligence investigation of franchise investment opportunities and review and negotiation of the franchise disclosure document and the franchise agreement. We are actually not seeing a decline in the number of deals coming through our door. The deals are just a little different than they were before.

Scott Kern practices franchise law nationwide. Mr. Kern’s franchise industry practice is a broad mix of work for franchisors. He also represents franchisees in the review and execution of franchise agreements. Before starting his own firm, Scott ran the Carvel ice cream shop franchise chain with over 400 locations. Visit www.FranchiseLawSource.com for more information.

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Terry Dunn wrote a good post on his franchise blog about how franchising seems to be a safer bet than starting your own business during these tough economic times.

Depending upon your source of information, we are headed into a recession or a depression or even a catastrophic cessation of all business activities. By any definition, things do not look promising and we are looking at a new economic landscape. The question arises as to how that will affect franchising. People will tell you that franchising is counter-cyclical, that it continues to thrive during a downturn in the general economy.

Terry then shows us a bunch of statistics showing that buying a franchise is indeed safer than starting a business on your own. I do have to slightly disagree with these numbers. Actually, it’s not that I disagree with them but these stats are from the 70’s and the 90’s and I don’t think they are relevant at all anymore.

These statistics consistently support the notion that franchised businesses are more growth oriented and survive at a higher rate than non-franchised businesses. For instance, a US Department of Commerce study is quoted on more than one site as showing that from 1971 to 1997, less than 5% of franchised businesses close each year, while those same websites cite a US SBA Study looking at the period 1978 to 1998, which found that 62% of non-franchised businesses close within the first 6 years of their opening.

Numbers speak for themselves, but is it relevant? I doubt it.

As Terry says it, “the question remains whether the current economic environment is so toxic that any business venture, be it franchised or self-invented, will find it impossible to thrive.”

What do you think?

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When buying a franchise, one of the greatest tools you have at your disposal is the ability to contact current franchisees. Not contacting them and investigating their opinion of the franchisor thoroughly would be a big mistake. When you contact a current franchisee, you get the opinion and outlook of someone who is in the same position that you will be in, should you decide to accept the franchise agreement. For this reason, their advice and input is more valuable than any other you might get. If you have concerns about what the franchisor is like, whether or not their claims are true, how many hours you might work, or how the business is run, a current franchisee may be able to help you make a more informed decision about buying a franchise.

Often, the franchisor will introduce you to a few franchisees, and even take you on a tour to see their locations and to talk with them. These meetings can be helpful, but you have to do extra work to really get the most out of learning from current franchisees. It is a good idea to go back to those franchisees after the tour to ask them any questions you did not feel comfortable asking in front of the franchisor, or to get any answers they might not have wanted to disclose in front of the franchisor. However, keep in mind that even if you are alone with these franchisees, they may not give you a full picture of the franchise as a whole. Some franchisees are paid to solicit new ones, and if the franchisees you speak to were given money, they may not be entirely truthful. Read more »

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You have to always aim at having a better franchise business operation by seeking to improve your methods and making them as efficient as possible especially at the level of your outlets. This is important in all businesses in modern times but especially in a franchising organization. The ultimate secret that will enable you to both streamline your operations and eliminate any possible weaknesses in a franchising Company is doing constant evaluation and asking all the right questions. Below is an example of such a question and its answer :

What are your thoughts on streamlining as well as eliminating existing weaknesses? Read more »

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If you thought that the only finances you need to come up with in order to set-up your franchise business are the initial franchise fees, you thought wrong. In order to set up your dream business, there are many other finances to think of.

Understand that the initial franchise fee is simply the money you put forward to obtain trademarks and rights you need to run your business. Don’t imagine that there are no other costs required to get the business off the ground. This of course is besides the fact that part of your profits will be taken by the franchising company in the form of royalties. In fact, to get a good idea about the various expenses that are expected to be fulfilled by you, take a look at the Uniform Franchise Offering Circular (UFOC), or the Franchise Disclosure Document (FDD) as it is now called. Read more »

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A quick post to let everyone know that the World Franchising team is currently compiling information about a large amount of franchise companies for the third Edition of Bond’s Top 100 Franchises.

How does that work? Well, we evaluate companies on the basis of historical performance, brand equity, market dynamics, franchisee satisfaction, the level of initial training and on-going support, financial stability and other key factors.

Each of the Top 100 Franchise companies selected will be featured in the book Bond’s Top Franchises, which will be published in December 2008, as well as on the dedicated website www.100TopFranchises.com.

If you are a franchisor or a franchisee and want your franchise to be considered, please call me at (760) 479-5790, or you can email me at “seb /at/ worldfranchising /dot/ com.

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An article titled “Owners Say Franchisers Are Passing on More Costs” in the Wall Street Journal today highlights how some franchise companies are asking franchisees to pay for expenses that those franchisees were not supposed to pay in the first place.

Why this sudden way of changing “who pays what”? Well, simply because of the economic situation. What franchisors used to pay for is becoming a real financial burden for them and they don’t want to be responsible for 100% of these costs, which I totally understand and agree with.

Here are a few snippets from the WSJ’s article.

Franchisees of Hollywood Tans LLC, an upscale tanning salon chain, say the company is billing them for maintenance on some equipment they had purchased under warranties that covered servicing charges.

“They’re reclassifying what had been normal wear and tear [and] we now have to pick up” the cost on items such as fans and booth door locks, says Jeff Wogan, who operates a salon in Ranson, W.Va., and is a member of the franchisee owners’ association. He adds that it can take days for someone to show up to fix items, partly because the company’s maintenance crew has been downsized.

These tough economic times are even influencing the training that franchise companies provide:

Training is another contentious area for some franchised systems. “More franchisers are saying, ‘We’ll do it, but only for a fee’ or ‘We’re going to drop that activity,’ ” says Andrew Selden, a franchising attorney at law firm Briggs & Morgan in Minneapolis. “It adds an unexpected cost to the franchisees’ business.” Franchisees in such situations may not realize services they had assumed were contractually promised really were provided at the franchiser’s option, he says.

While I understand that franchise companies want their franchisees to chip in on the various costs associated with the business, I think we may see some lawsuits coming up in the near future. Any comment on this situation is more than welcome. In the meanwhile, hop over to the WSJ to read the full article.

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The International Franchise Association created a website called www.FranchisingVotes.com to help the franchising community register to vote and make it to the polls on Nov. 4.

The site includes access to registration requirements and deadlines for every state, information on federal candidates around the country, voting records of current lawmakers in the 110th Congress and the dos and don’ts of election law.

This website has an educational side as it wants you to learn more about the elections and the candidates by accessing important recourses. In addition, members can learn more about the candidates’ viewpoints on key issues by reading this month’s issue of Franchising World, which includes an exclusive interview where the candidates answered IFA questions.

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I was playing around on YouTube when I came across this video about A All Animal Control. Wildlife in the home or office can do serious structural damage. Animals destroy electrical wiring, phone, cable, computer lines and security systems. Wildlife can also be carriers of disease such as rabies, distemper and many other serious diseases. If you are currently seeking a wildlife franchise, then an exciting career as a A All Animal Control franchise owner could be closer than you think!

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When you’re going into the fiercely competitive world of franchising, you have to understand that you’ll basically be walking into a battleground. There are hundreds just like you everywhere, who could not be happier than when they see you fail. In the world of franchising there are customers to win, market shares to possess and simply the difficult task of standing your ground in the face of all business related difficulties, whether financial or otherwise.

It doesn’t make sense by any stretch of the imagination to enter a battlefield unprepared. You can’t exactly be swinging a dinner knife around when everybody else is swinging a sword now, can you? That’s why you have to remember one of the most important tools to achieving success in a Franchise System which is the proper training. Read more »

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