What Happens When You Don’t Pick A Tested Franchise

By Steve Slowey

Last week I was in Denver Colorado for a trade show; everything concept you could think of was represented there, from oil changing to cupcakes. As a potential franchisee,  seeing all these concepts, where do you even begin? Yes, some folks know what they want but there may have been several branded concepts representing the same niche, so again, where do you begin?

I had the opportunity to speak with a lot of people and as the show went on, I found myself asking people how much they knew about Franchising. Honestly, I found that they didn’t know exactly how it works or even what a franchise agreement was.

So how do you make a decision, or pick between so many concepts, when you’re making such an important choice? You don’t, you do your research,  remove all emotion, and realize this could be the best, or the worst decision, depending on how you approach it.

Franchises should represent a concept that has been tested and proven to increase the opportunity for a potential Franchisee to make money. This idea only holds true if the Franchisee follows the advice and direction of the Franchisor. Considering the length of time a franchise agreement represents (usually 10 years), a concept should not even consider Franchising until they are solid in every facet of their operation. While I don’t believe a concept needs to be operational for a certain amount of time before franchising, they better be able to prove they know what they are doing. Just because someone has an idea that seems unique today doesn’t mean it will be successful as a franchise.

Newer concepts rely heavily on the Franchisee to give them credibility and help them build relevance in the market. Every Franchise we see began somewhere, but believe me, they all went through some growing pains typically at the expense of some Franchisee.

Personally, I have been successful in some franchises and I have been financially hurt by others. With the ones I was hurt by, the Franchisor allowed me to open even when things weren’t exactly right. What risk did the Franchisor have, more than that, what did the Franchisor do to help me through the struggle and to ensure that I was successful?

If you buy a Franchise, you will be paying for the use of their branded name and what they consider proprietary information, that should help you to be successful. Remember, this is a big decision and you need to ask the right questions and get sound advice before you commit. Let us help you. We are not here to convince you to buy a Franchise, we are here to simply help you do it the right way.

 

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.

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.

 

 

The Value of Franchising

By Paul Giggi

If you have made the decision to become a restaurant owner, one of the first questions to address is if you want to operate a franchised concept or go it on your own. Many feel they want to create and open their own concept and that is an admiral objective but be sure you understand the process of concept development and roll-out. If you are not in that position or wish to consider all of your options, you may want to research a franchised concept.

When considering why you would franchise versus develop your own, you should think about the points that underline the reason to seek a franchise.  These factors include:

  • You would be purchasing an established and recognizable concept name and would not have to go to market and drive brand awareness and consumer trial where there was none
  • The franchised concept has a track record with associated historical information on financial performance, franchisee success, programs to support the concept, best practices and the experience of their concept testing: all of which expedite your opening for business and would be attractive to lending institutions if you chose that route for financing.
  • If you are not experienced in the field, or the concept, then the learning curve is much steeper and your risk of high cost and/or failure is greater; a Franchisor offers their experience and expertise in the business as a piece of your business foundation
  •  The normal cost of developing and commercializing a concept can be much greater that you expect and includes design planning, recipe development, brand identity, FF&E, food distribution and much more… all which require time and testing which translate to monetary cost.
  • You may not have experience in all of the components of restaurant development, and if not, understand that the Franchisor delivers this to you. These areas include Real Estate, Marketing, Operational Systems/Standards, IT Systems, Management/Staff Training, Purchasing Programs, Design and Construction. Each of these disciplines carry a host of detailed components each of which you will require understanding and the Franchisor will bring these to the table for you. The Franchisor also has the responsibility of keeping the concept refreshed and in-step with the industry. This means they should be conducting ongoing research and development of the items mentioned; this takes time, effort, testing and funding… all of which will be done for your concept once you are a Franchisee
  • An additional and long term benefit of a franchised concept is that there will be ongoing operational/field support and training which you will receive in the areas of operations and marketing.  Franchisors offer this support, through field personnel, not only assure that you are upholding the standards of the concept, but to assist you in maximizing your potential financial returns

These are some of the key factors to consider when deciding if franchising is right for you. Understand that the fees and royalties you will pay as a Franchisee are there to afford you this expertise and support in the successful marketing and operations of your restaurant(s).