What I Would’ve Done Differently – Episode 1

By Paul Giggi

Today I’m here to talk about things that I’ve done in the past that haven’t worked out so well. I’d love to stand here and share my successes, but I’d probably bore you to tears, hearing me either talk about things that I have done, that if I had the chance, I would do differently. So the one experience that I want to share with you today has to do with the area of site selection.

Continue reading “What I Would’ve Done Differently – Episode 1”

What Fees are Associated with a Franchise?

By Paul Giggi

Continuation of our series: “Five Key Questions to ask a Franchisor”

Question #3

If you haven’t had a chance to see our video on this topic I would like to suggest you do so for our conversational piece on this important topic. For this blog, we will focus on Questions #3 of our Five Key Questions to ask a Franchisor during your initial interview regarding the concept of your interest.

During your introductory discussions with the Franchisor we have shared that there are many questions to consider asking in your discovery phase to help you to determine if a concept and Franchisor are the right ones for you to partner with in operating the business.

The 3rd of our Big 5 Questions to Ask:

Continue reading “What Fees are Associated with a Franchise?”

What is the ROI and why is that important to me?

By Paul Giggi

Five Key Questions to ask a Franchisor – Question #2

If you haven’t had a chance to see our video on this topic I would like to suggest you do so for our conversational piece on this important topic. For this blog we will focus on Questions #2 of our Key 5 questions to ask.

During your introductory discussions with the Franchisor we have shared that there are many questions to consider asking in your discovery phase to help you to determine if a particular concept and Franchisor is the right one for you to partner with in operating the business.

The second of our Big 5 Questions to Ask:

What is the ROI?

Once you have received some of the financial data that you should expect to pay as a part of your investment, which is the focus of question #1; your next questions should be about your expected Return On Investment, or ROI, from your investment in, and operation of, the concept in consideration.

The Return of Investment can be measured in both time to recover your initial investment as well as the amount of money you make above and beyond your initial investment.

I would typically first want to look and the ROI on the basis of time to recover my initial investment.  As an example, if my initial investment is $1 Million and the business makes $100K per year, my ROI is 10 years; in other words it will take you 10 years to earn your initial invest back and this is not a desirable plan, particulary when you consider that you will more than likely be infusing additional monies into the business as you operate for items such as maintenance, updates, replacements, etc…  Typically, you should try to recover your investment within the first 4 to 5 years which would then give you the out years (years 6 – 10) to make your true profit on your investment. Generally, with a franchise restaurant, you will be required to sign a 10-year term for each site you wish to open and this term will match the lease (should you choose this approach to occupancy) as well as the term of your lender should you use debt financing, so all of your forecasting for the return is based upon that term. Therefore, an investment of $1M in which you receive back $200,000 per year would be a solid investment as you would recover your investment in 5 years and then be earning a return of 20% on your initial financial investment.

The amount of profit you make above your initial investment is the monetary return on your investment. For example, if your initial investment is $1.0 Million and after you have recovered your initial investment you are making 100 K/year then your monetary return is 10%. Understand that the Franchisor can not share what your expectations of your ROI but can direct you to how you can acquire the necessary information that will allow you to accurately forecast your return.

Calculating your ROI will also help you determine when you may be best positioned to sell your restaurant should this be something you have as a strategy in your business.

When you look at a franchise restaurant you want to add to your initial investment all of the items if cost to get started so don’t forget your Franchise Fee and any other start-up costs such as legal charges.  This can be an involved process so be sure to get sound advice on expectations and objectives.

What Is The Total Investment Cost?

By Paul Giggi

Question 1 of 5 in the Blog Series: Top 5 Questions To Ask a Franchisor

If you haven’t had a chance to see our Video on this topic I would like to suggest you do so. For this blog we will focus on Question #1 of our Key 5 questions to ask the Franchisor.

At your first introduction to a Franchisor, there are many questions to consider asking. Some are more important than others in the initial phase as you try to determine if a particular concept and Franchisor is the right one for you to partner with in operating the business.

The first of our 5 Key Questions to Ask:

What is the Total Investment Cost?

You’ll probably come to the table knowing your total available investment capabilities. But to ascertain if you can afford the cost and risk of the venture, you need to understand the Total Investment Cost of the Franchise. Asking the question about Total Investment Cost has many parts to it, so be sure to ask for specifics and fully understand the reply.

Franchisors are governed by the Federal Trade Commission and, therefore are restricted in the detail of the information they can share as they are not allowed to make an earnings claim to prospective Franchisees.  This is to protect them (and you) as you move forward in your due diligence. Without this protection the Franchisor could fall prey to lawsuit liability; if they tell a prospect what they will see as a return and that return is later not realized. It protects you from unscrupulous Franchisors that otherwise might offer false financial promises and information so to entice you to become a Franchisee.

Franchisors are normally going to share with you a range of costs for the complete operations build-out and opening of a single unit. Within this range are numerous items to be sure to understand and discuss. Many of these costs are disclosed in the Franchise Disclosure Document that you will receive as your next step in the qualification and discovery process.

The range offered could be small or large depending on what type of construction (i.e. free standing, end cap, in line, etc.…), the purchase approach (build to suit, your own build, lease, etc.…),  and other important components. When this range is offered to you, if some of these items are not offered immediately, be sure to ask what category the range covers and then discuss the inclusions and exclusions of this range so you have a firm understanding of what additional costs you may have to incur.

Typically, the range will cover your construction costs, FF&E (Furniture, Fixtures and Equipment), permit costs, opening inventory, signage, POS (Point of Sale) systems, opening training costs, opening marketing costs and may even include a certain amount of working capital. There will be more items included and be sure to ask what items are in the range. Also, and as important, be sure to understand what is not in the range.  Often items such as your Real Estate costs and liquor licensing (if applicable) will not be included. Once you have the “all in” figure you are prepared to review the Franchise Disclosure Document (FDD) with a better understanding of the cost areas to target and get a clear understanding.

This question is an important one to fully understand and you may want to consult with those who are current franchisees of a concept or with people who have experience in this area so to be sure you leave no stone unturned in your informational search.

Please check out our Video and watch for future blogs on the other important questions to ask of your Franchisor.

Understanding the Franchisor’s Approval Process

By Paul Giggi

As you research information regarding the franchised concepts you want to consider owning, you will eventually pare down your choices based upon a number of factors.  More than likely, these factors will include the concept’s financial requirements, the available markets, your comfort with the concept, your background in operating the specific type of business and other components we will cover in future blogs.

Once you reach the point of having chosen a concept to pursue ownership with, you will have an initial discussion with the Franchisor; I covered some of the base questions you should plan on asking in a previous blog (click here).

One of those questions was to ask for details regarding the particular Franchisors approval process and hurdles for new franchisees.  This is important area to understand as meeting these hurdles could potentially require an investment in your time and  some sort of financial investment. 

Typically, the approval process will cover the following areas and you should be prepared to discuss them during your initial discussion with the Franchisor:

·       Background & Experience – There may be a requirement of a certain amount of experience in the industry you are investigating or in not direct experience, some background in running a business enterprise.

·       Financial Resources – You will be required to submit an Application covering your background and your financial resources, but this will come up in your initial discussion and you should be one and honest about this important matter.

·       Industry References – If you have a background in the industry you should be prepared to discuss that experience and supply names of people you have worked with that would provide a reference on your experience and successes.

·       Franchisor Financial Hurdles – There are typically minimum Liquid and Net Worth hurdles for financial approval.  The Liquid area is the money that you can readily access and is available for you to invest. This could be cash investment or equity. The Net Worth is the difference between your total financial assets and your total financial liabilities. This speaks to the depth of your financial resources. You should also be prepared to discuss how you will be financial the investment beyond your liquid cash infusion.  If your financial resources do not meet the hurdles or are very close to them, you may not meet Franchisor approval and may want to consider a partner to join in the investment.

·       Personal Financial Resources – Be sure to understand the financial requirements of the concept from the entry fees you will be charged, royalties, build out costs and any costs that are not included in the build out cost range you should receive from the Franchisor. You need to be sure to enter into your due diligence phase with your eyes wide open to all potential costs you will incur.

·       Interview / Discovery Day – One of the requirements that most concept Franchisors will have is you and your partner’s attendance in a Discovery Day. This event is normally held at the Franchisor’s corporate headquarters and is typically a day of discussion.  This event serves a number of purposes. It allows the Franchisor to meet you and you should consider this an interview of you as a potential Franchisee.  In turn, it is your chance to meet the members of the Franchisors staff and the people who will be supporting you and your business going forward… it is your chance to interview them. You should attend prepared with questions of all areas of the support you will be receiving and of the concept itself.  Additionally, in many cases you will have an opportunity to visit one of the concepts that are local… be sure to attend.

We will discuss the Discovery Day in more detail at another time, but this is an important component of the approval / research process and not to be overlooked.

First Step of Discovery with the Franchisor… WHAT TO ASK

By Paul Giggi

There are a number of items to consider when in the discovery phase of a franchised concept that we will cover in more detail in coming articles. This message will focus on your planning for your initial discussion with a Franchisor and preparing your questions… what ground should you be sure to cover in this first conversation?

I suggest you give yourself time for this discussion and ask for an hour.  You may find you don’t need this much time but you want to assure that, if you do, the Franchisor is ready to spend that amount of time with you in discussion.

·       Plan your discussion.  If you have partners sit down and discuss the information you need addressed to commence your discovery process of the concept.  Be sure to make a list of questions and identify the key areas you need information.

·       Make a visit.  If possible, visit an operating location of the concept and watch it run.  I would suggest you introduce yourself to the manager of the location you visit and explain your interest; request if they have time to explain how the concept operates.  You will find this very helpful as most people operating a restaurant want to help others and are willing to share their successes and challenges.

Your list of questions for the Franchisor discussion needs to include, although does not be limited to, the following areas:

·       Average Unit Volume (AUV): This is the current average annual sales that the concept is experiencing across all of their operating locations.  This should include the Franchisor operated locations as well but be sure to ask this as not all may do this and have the franchisee average only.

·       What is the Total Cost of a Site to be developed?  This one can be complicated and we will delve into details in the future,  but simply it is the cost of from start to opening of the development of a single location.  Typically, the Franchisor will offer you a range of cost which will represent the range of experience of cost to build a site. You should ask for the details of this number as there will be exclusions in some cases that you need to consider when building your investment model.

·       Available Territory.  Be sure to understand if the area you are interested in building is available for development or already owned by another party.

·       Support offered.  This is an important topic… be sure to understand the general detail of what support you can depend on from the Franchisor and to what depth in each support discipline you can expect assistance.

·       Be sure to inquire what other financial operating information the Franchisor is willing and/or able to offer you at this time. It may be that the Discovery Day would be the next time you can get more financial data but whatever you can obtain initially will always help in your decision process

·       Financing Options. What assistance does the franchisor offer whether direct, third party or no assistance?  This is important as you begin your search for a lender.

·       The development and Approval Process.  Be sure to fully understand the Franchisors process from your first call through to Franchise Agreement and the hurdles of approval they are measuring in Franchisee prospects. One of the items you should address will be your attendance to a Discovery Day.  This is an important step in your discovery process as well as with the Franchisor so be sure to get the details on this event and plan to attend, this is the meeting that will give the Franchisor the opportunity to meet and understand you and your partners as a part of their approval process and will give you an opportunity to evaluate the Franchisor as well… to understand who this group is and if you get a sense that you are comfortable partnering with the Franchisor going forward.

There are many details to these questions we will cover in future articles but this is an outline of your initial questions to start your journey to agreement and development of a franchised concept.

 

 

Want to Purchase a Franchise but not sure if you Qualify?

By Paul Giggi

If you have decided to purchase a franchise one of your first considerations may be questioning if you and your partners will meet the qualifications of the Franchisor. This is a reasonable question as you don’t want to spend too much of your time and energy researching a concept and managing through a process, if you don’t qualify and the Franchisor will not want to begin investing time in discussion and research with you and your partners if you don’t meet their qualifications hurdles.

There are a few standard hurdles that you should understand and so you can make a self-evaluation with regards to in your moving forward strategy.

Experience

Some Franchisors maintain minimum requirements regarding experience while others may not be as demanding of your background.  In the restaurant industry the typical requirement will be linked to your background and normally the requirement will be restaurant experience for a certain period of time or experience in managing a business enterprise and its P & L.  This should be an easy self-audit, but if there are questions in this area be sure to ask the Franchisor for clarity before proceeding.

Financing

In this area you will often find more stringent qualification hurdles. The two typical financial items that will be highlighted are minimum financial resources on you or your partnership in both Liquidity and Net Worth.

·       Liquidity refers the amount of money that you have easy and quick access to and that you wouldn’t have to add debt in order to access.

·       Net Worth is a set formula; basically your current assets minus current liabilities yielding a dollar amount of which your financial portfolio is valued.  The Franchisor will normally have a format for you to use to determine your net worth but, if not, there are many templates you can access to calculate for yourself. The SBA provides a good one to use.

If you don’t meet the financial hurdles the Franchisor maintains, they may suggest you try to add a financial partner and if that is not feasible, may deny you approval to be a franchisee.

Typically, the financial hurdles set by the Franchisee are in place to assure that the Franchisee prospect is not going to over reach their financial capabilities to develop and operate the concept thus causing greater risk of failure for all parties.

Background Checks and Credit Checks

A Franchisor will make it a part of their approval process to complete a Background check and a Credit Check of you and/or your partners.  This is to assure that you have a strong track record of managing your debt and that you have shown fiducially responsibility. The Franchisor is entrusting their brand name and concept to you and they need to be sure you will handle it in a professional responsible manner.

Approval Process

There are other components to your being approved through the Franchisor’s approval process that we will cover in future discussions.  The above noted items are those that you can check for yourself before spending much of your time and/or money in the pursuit of a particular franchised concept.

What are the Key Fees you should understand when you research your Franchising Plan?

By Paul Giggi

If you have decided to research a plan to operate a franchise then you should begin your due diligence in the brand, its costs and the development process.  With regards to costs, one of the important areas you need to fully understand is the fees you should be prepared to fund and what exactly they represent as part of the support of your franchised business.

These Key Items you will be funding are:

Franchise Fee

This is the fee you pay to the Franchisor to become an active Franchisee in their system. Typically, it is a flat fee that you would pay at the time you sign the Franchise Agreement. In some cases, the Franchisor will ask for a part of this fund at the time you sign up and then defer the remainder on a payment schedule or a lump sum payment at some time down the path to your opening your location(s).  There are a number of iterations of the payment plans and you should ask what they might be when you are doing your brand research. This is not a reoccurring payment and can be viewed as your membership fee. In addition, many brands will have discounts for different organizations, such as military veterans, so be sure to inquire about this possibility.

Royalty

This is the percentage you will pay on a regular basis which constitutes the fund that is your payment for the items I listed in my previous blog.  These Franchisor deliverables noted include brand awareness as well as all of the support systems that you will rely on as you manage your business.  This fee is calculated as a percentage of your sales and typically you pay this amount on a monthly basis. Usually, this percentage is not negotiable so be sure you understand what support you will receive from the Franchisor for the amount you will be paying.  Consider this as a set cost category in your Profit and Loss Statements each month.

Marketing Fund

This fund is based on a percentage of your sales as with your royalty amount.  This is a fund that is used by the Franchisor to create marketing collateral that support the marketing programs they have and will develop for the brand.  The items that are normally supported by this program are print material (i.e. direct mailers, signs, etc.…), creative design, media support, specific local marketing materials and marketing department administration costs.

In some cases, the Marketing fund is broken into National and then Local Co-op programs. The National Program will fund Marketing programs that are rolled out across the entire concept and support the brand’s total system.  These programs are normally Franchisor mandated programs that are implemented via large reach media such as television. Local co-ops are where franchisee funds go into a collected pool of dollars in a specific market area that is owned by a group of specific franchisees.  In this case, the franchisees of the Co-op decide what to spend this fund upon and are assisted in this endeavor by the Franchisor.  These funds are normally spent on marketing programs that impact the area in which the Co-op operates and are not planned to reach beyond the franchisee groups area of development.  These programs are typically approved by the Franchisor, who in turn assists in the specific program’s development and the associated collateral through their Marketing team and partners.

As with the royalty fee, this fund’s percentage is not normally negotiable so again be sure you understand what support you will receive from the Franchisor and consider this as a set cost category in your Profit and Loss Statements.