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Franchising as a Career, Investment, or Both…A Good Strategy in 2020?

Heather Rosen, FranNet of Virginia

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With SCORE, You Are Not Alone on Your Journey

For over 50 years, SCORE has served as America’s premier source of free business mentoring and education.

As a resource partner of the U.S. Small Business Administration (SBA), SCORE has helped more than 11 million entrepreneurs through mentoring, workshops and educational resources since 1964.

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SCORE Can Help You Find the Way Ahead

• Free one-on-one business counseling and mentoring

• Business advisory services

• Low cost local workshops

• Free templates and recorded webinars

To meet with a mentor or learn more about SCORE’s resources, visit washingtondc.score.org

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Heather Rosen

• Owner – FranNet of Virginia/DC

• Former practicing attorney

• Former head of business development at AmLaw 100 law firm

• Co-author, More Than Just French Fries, 15 Business Thought Leaders Share Insights on Franchising Success

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• 30-year-old Franchise Consulting firm

• Over 100 locally-based consultants across North America

• National partnerships with SCORE & SBDC

• We match people who want to be business owners with a franchise that meets their needs.

• NO COST (Recruiter/Headhunter model)

Who is FranNet?

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1. Why business ownership?

2. Buying a business versus starting a franchise.

3. Franchise myths.

4. Minimizing risk and maximizing ROI.

5. Simplifying the search.

6. Financing options.

Topics for Discussion

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Why Own Your Own Business?

Imagine for a minute…

You are the owner of a successful business…

How would your life be better?

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Why Own Your Own Business?

Control Financial Security

No More Layoffs

Money

Fulfillment Flexibility Independence

SUCCESS

What is it for you?

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Job Safety?

Is working for someone safe? Short term yes, but …• Can you find a job in the city you live in?

• Can you be sure your job will be there tomorrow or next year?

• Will your age be a factor in finding a job?

• Can your excellent performance determine your stability?

• Can you ease off once you are established?• Will you meet your long-term financial

goals of security and retirement?

Risk

TimeJob(Then) Job(Now)

Risk Increases

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Risk of Business Ownership

At first, owning your ownbusiness can be scary, but ...

• No one can take it away. You can’t be downsized, transferred or fired.

• You can grow the business at the pace you want.

• The longer you own your business the safer it becomes.Risk Decreases

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Business Ownership Options

1. Create a start-up business

2. Buy an existing business

3. Buy a franchise

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Start Up Business

Advantages Disadvantages

• Total control• Make all decisions• Keep all profits• Biggest upside

• Must create systems• No one to turn to for

help• Limited financing

options• Years before you make

money• Highest failure rate

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Buy an Existing Business

Advantages Disadvantages

• Cash flow & good will• Actual historical results• Attractive to lenders• Established location &

customer base• Employees in place• Systems may be in place• Owner financing

• What is the real cash flow?

• What is the good will?• Hidden seller motives• Employee defection• Higher Debt Service• Poor training/support by

the former owner

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Advantages• Proven business model and

product/service; Familiar brand• Marketing/Sales/Ops support• Quick start up• Training, professional guidance;

Experience• Continued consulting

relationship• Access to other franchisees for

help• Regulated by the FTC

Buy a Franchise

Disadvantages• You have to follow the system

to be successful – limited choices

• Usually annual sales goals - not completely your own boss

• Franchise fees and royalties in exchange for quicker ramp

• Protected territories = operational boundaries

• Binding contract• Franchisor’s problems are your

problems

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You’re making a trade-off:

You’re exchanging some profits in the long term for risk reduction in the short term

Why Pay Royalties?

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• Good franchisors lose money in the short term on almost every franchisee

• Small royalty payments

• Support costs are high

• They make money in the long term

• Bigger royalty payments

• Support costs are low

Why Pay Royalties?

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• More than $2.31 trillion a year in output

• Only 10-12% of businesses are franchising businesses

• Franchise businesses receive HALF of the retail and service dollars in the U.S. annually

Further Justification for Paying Royalties

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Why Franchising Works

• Proven, systematic approach to starting and staying in business• Experience• Simplicity• Initial Training & Ongoing

Support• Name Recognition• Sales, Marketing & Operational

Systems• Culture of Teamwork

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“Franchises succeed because of the quality of their product.”

Franchising Myth #1:

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Reality Check:

• Can you make a hamburger?

• Is yours better than McDonald’s?

If it is not the product,what is it?

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Reality: The System

• Franchises are all about their business system:

• Marketing

• Sales

• Operations

• Accounting systems

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“Successful franchises emerge in a new industry with no competitors”

Franchising Myth #2:

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Reality: Market Dominance

Example: McDonalds

• Started when there was a burger joint on every corner

• McDonald's and other chains now dominate the market

• Fast food is 95% Franchises

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Reality Check: Market Share

Example: Hair Care

• Started franchising the ’80’s

• Only 30% consolidated

• Every year franchise companies take another 2% market share

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Conclusion:

• Successful franchises emerge in basic industries with lots of competitors.

• They develop effective systems to dominate the industry & create consolidation.

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“Only fast food and retail”

Franchising Myth #3:

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Your Choices in Franchise Ownership

• Food

• Automotive

• Retail

• Business Services

• Home/ Personal Services

• Hotels

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FACT: • Over 3,100 different franchise companies • In more than 90 industries • With over 900,000 operating unitsBUT:• Not all are available in your market• Not all licensed to sell in VA and MD• Not all are possible to operate in your state• Not all have a good track record (or any track record)• Not all would allow you to achieve YOUR financial and personal goals

Franchising Fact:

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“Franchises are expensive”

Franchising Myth #4:

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Start Up Cost (Including Working Capital)

There is no automatic correlation between the cost of the franchise and the potential

*Source: February 2016 FRAN data

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TOTAL INVESTMENTHow Much Do I Need?

Your Money: 25-30%

Financing: 70-75%

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Financing Sources

• Financing Sources:

• Personal savings

• Friends, relatives or partner

• Home equity line of credit

• Seller financing – resale

• 401K, IRA, etc.

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Formula:

Good system / track record $$

+ Can legally open in your market (registered, licenses available)

+ Available in your market

+ Product / service people need now and in foreseeable future

+ Good business for YOU

= Highest likelihood of success

Minimize Risk (and Maximize ROI)

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• Growing markets driven by demographics (e.g. Baby Boomers and Millennials)• E.g.: Health and Wellness, Residential Repairs, Cleaning, etc.

• Essentials• E.g.: Hair Care, Automotive, Damage Restoration, Bldg. Essentials –

Flooring, Window Coverings, Painting, Batteries, Light bulbs, etc.• Business that help other small businesses thrive

• E.g.: Safety Equipment, Workspace Rental, IT Services, Sales Training, Marketing, Advertising, Commercial Cleaning, etc.

Businesses in each of these categories are available in the DC Metro Area

Lower Your Risks: Recession – Resistant Businesses

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Things to Consider

• Professionals still need training

• People still want quality education for their kids

• Homeowners still prefer to fix their homes rather than move

• Businesses still need their offices maintained

• Employers outsource and use personnel companies rather than committing to new hires

• Many businesses thrive in all economic conditions

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• Many Units vs. Fewer Units

• Older, well established vs. Newer

• Structured vs. Flexible Systems

• Expensive vs. Inexpensive

• Full-time vs. Semi-absentee vs. Master/Area

No one-size-fits-all

Franchises Are Not All The Same

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Keep your day job!Popular Categories

• Office space• Beauty salons• Fitness• Kiosk model• Senior care • Business advisory services• “Simple” food (limited choices)• Simple retail or home services (more choices)• Retail or home services with exceptional, mature systems and support• Child education and entertainment (maybe)• Laundromat

Semi-Absentee Retail Businesses

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• If you pick a franchise that is a great fit for you, it is:

• Vehicle that can get you to your destination while meeting your lifestyle and financial goals

• Way to reduce risk

First Thing to Look For

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Identify your…

Financial & Lifestyle Goals

Where do you want to be in

5, 10, 20 years?

Determine Your Business Model

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• Transferable Business Skills

• Sales?

• Management?

• Customer Service?

• Marketing?

Determine Your Business Model

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Business Preferences

• Employees

• Budget

• Business environment

• Full or Part-time & Hours

• Number of units

• Type of customers

Determine Your Business Model

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• Control and balance

• Income and equity

• Time for family and interests

• Challenge and recognition

• Financial security

• Be part of my community

What do you want out of your business?

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Finding a Great Fit

Match your business model with franchisors who are looking for

people with your characteristics, attributes, goals and business

preferences.

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How Do You Find Franchises That Are a Great Fit?

Separate the function of the business, from the function of the

business owner!

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• Interview at least 6 to 10 franchisees, the ones who are doing well and the failures.

• How are you the same or different?

Finding a Great Fit

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W-2

Legal Perks

Company Earnings

Increase in Equity

How Much Money Will You Make?

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• Do I “Fit” this business

• Attributes

• Characteristics

• Goals

• Am I willing to follow the franchisor’s system?

• Is it affordable?

• Is the risk level acceptable?

• Will I enjoy my business?

Business Selection Criteria

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• Does it have room for growth?

• Can I develop a strategic market advantage?

• Is it in a stable, not fad driven industry?

• Can it meet my financial and personal goals?

• Do I have the support of my family?

Never settle for something that does not fit your business model

Business Selection Criteria

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When to Seek Help

• Are you committed to being in business within the next 3-6 months?

• At least $50,000 liquid

• At least 6 months of personal living expenses

• Spouse attends meeting / calls

• Partnership agreement

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First steps

• Determine your net worth

• Know your living expenses

• Establish your investment level

• Build your business model

• Research, Research, Research!

• Get advice from the right people

• Consult and use professional advisors

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Our unique approach provides a SAFE process for discovery• Online assessment • Call to clarify and discuss timing

• Face to face meeting

• Build your business model• Present companies that match your model

• Get you started on research• Provide mentoring and coaching

• Suggest finance, legal or other professionals

• All FREE OF CHARGE

The FranNet Process

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Additional Resources

• Professional Advisors:

• Franchise Attorney

• Accountant

• CPAs

• Business Coaches

• SBA

• SCORE

• Lending Sources

• Suggested Reading:

• More Than Just French Fries

• E-Myth Revisited, by Michael Gerber

• Street Smart Franchising, by Joe Matthews

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10 MINUTE BREAK

Next…Legal Considerations

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SOME LEGAL CONSIDERATIONS RELATING TO FRANCHISING

Part 2 – Legal considerations

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• Owner of the particular franchise develops the format, operational techniques, brand, other confidential information the use of which is licensed to others.

• By duplication of the individual outlets and provision of consistent service/product, it allows for more penetration into consumer consciousness.

• Pooling of economic resources allows for economies of scale.

What is the Franchise Business Model?

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Based on the FTC Rule which applies in all states, a continuing commercial relationship will be deemed a franchise when 3 conditions are met:

• Use of certain trademarks or enforcement of quality standards

• Exertion of considerable control over or assistance with operations

• Payment of more than $500 in six months as a condition to operate

What Constitutes a Franchise?

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• Disclosure document with 20 categories of information required by FTC to be provided by the franchisor before a sale may take place

• In addition about 14 states require franchise registration and/or disclosure (MD & VA) before any sales in those states

• FDD contains examples of all agreements franchisee required to sign

What is a Franchise Disclosure Document (FDD)?

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• FTC considers such action to be an unfair or deceptive trade practice subject to remedies

• Cease & desist order; federal court penalties up to $10,000 per violation; state and federal court order to redress injuries

• For states requiring registration, they can bring their own enforcement actions and such laws provide other relief to franchisees

What Can Happen if Disclosures Not Made?

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• This is the basic agreement in which the franchisor licenses (grants) use of the trademarks, the system developed, and confidential information in a particular territory, in exchange for payment of fees and royalties and the undertaking of certain tasks for the term of the agreement.

Considering the Franchise Agreement

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• Granting a license to franchisee for certain activities (use of trademarks, system’s confidential information)

• Identification of territory

• What does the franchisor agree to do (training, site selection, ongoing support)

• What the franchisee agrees to do (pay royalties, operate strictly within system guidelines)

• What happens if there is a default by either party

Topics Covered in the Franchise Agreement

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• Guaranty

• Assignment of a lease from franchisee to franchisor

• Restrictive covenants (not to compete, retain confidentiality)

• Agreements with third party vendors ( software usage, computer, point of sale services)

Other Agreements Franchisee May Be Asked to Sign:

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• It depends…

• Is it a new franchisor

• Will there be more than one location

• Will franchisee also be an area representative

Does Franchisee Have Any Bargaining Power?

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• Bargaining power could be more than with franchisor

• Is the franchisor or franchisee going to be the tenant

• Avoid conflicts between the terms of the lease and the franchise agreement

• Likely, franchisee will be asked to guaranty franchise agreement and lease

What to Expect with Commercial Lease?

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• To limit personal liability, likely want to be some kind of entity and not operate as a sole proprietor

• Franchisor usually operates through several entities

• Most frequently used forms—corporation or limited liability company

• Consult with tax advisor to understand tax implications of either choice

Legal Entity to Operate Franchise Business

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FranNet

• 20% of our business is relocation

• 20% of the people we work with first met us over a year ago

• 90% tell us…

• Never knew it was a franchise

• Never would have picked it from a list!!!

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Remember, if you don’t have a dream, the person you work for probably does...

Questions?

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Heather Rosen

(703) 291-0939

hrosen@frannet.com

Connect with me:

LinkedIn: www.linkedin.com/in/heatherrosen

Facebook: www.facebook.com/FranNetNVirginia

Website: www.frannet.com/hrosen

Twitter: @vafranchise

Contact Information

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