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Buying a Franchise Points to Consider Prepared by: Milton Zlotnick SCORE – Chapter 476 Staten Island, NY.

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Presentation on theme: "Buying a Franchise Points to Consider Prepared by: Milton Zlotnick SCORE – Chapter 476 Staten Island, NY."— Presentation transcript:

1 Buying a Franchise Points to Consider Prepared by: Milton Zlotnick SCORE – Chapter 476 Staten Island, NY

2 Points to Consider a. The type of experience required in the franchised business b. A complete understanding of the business; c. The hours and personal commitment necessary to run the business d. Who the franchisor is, what its track record has been, and the business experience of its officers and directors e. How other franchisees in the same system are doing f. How much it's going to cost to get into the franchise

3 Points to Consider g.How much you're going to pay for the continuing right to operate the business h. If there are any products or services you must buy from the franchisor and how and by whom they are supplied i. The terms and conditions under which the franchise relationship can be terminated or renewed, and how many franchisees have left the system during the past few years; and j. The financial condition of the franchisor and its system.

4 Disclosure document Uniform Franchise Offering Circular (UFOC) Federal regulation requires franchisors to prepare a disclosure document and to give a copy to any prospective franchisee 23 different categories of information about the franchise must be disclosed Order a free publication from the FTC entitled A Consumer Guide to Buying a Franchise, call (202) This Guide can also be downloaded at

5 UFOC contains three important components 1) A 23-item narrative disclosure describing various aspects of the franchise offering 2) Up to three years of the franchisor's audited financial statements 3) The franchise agreement form and other contracts you're required to sign to become a franchisee.

6 Uniform Franchise Offering Circular (UFOC) It's not a perfect document and should not be relied on to the exclusion of other research steps that all franchise investors are well- advised to take, such as interviewing existing franchisees.

7 Uniform Franchise Offering Circular (UFOC) Items 1 through 7 Describe the franchisor and provide an overview of the franchise offering. You'll find a list of key franchisor executives and directors in Item and the 10-year litigation history of the franchisor, its affiliates and the people. Also discloses any bankruptcies of the franchisor and its officers.. States the costs and fees typically incurred by franchise investors in the program. This cover fees paid to the franchisor, and a chart summarizing the overall costs of establishing a new business.

8 Uniform Franchise Offering Circular (UFOC) Item 8 This is the most difficult section of the UFOC for the franchisor's legal team to write, and it tends to draw the most attention from examiners reviewing the UFOC. This item requires disclosure of the limitations and dynamics of product sourcing and product specifications by the franchisor. Read this section carefully, and make sure you understand the limitations on your purchase of inventory and equipment

9 Uniform Franchise Offering Circular (UFOC) Item 10 tells you about any financing the franchisor provides Item 11 describes the "Franchisor's Obligations Items 12, 13 and 14 detail the intangible rights you receive as a franchisee: trademarks, patents, confidential information and territorial rights around your business location The territorial description in Item 12 can be tricky and easily misunderstood, so read it carefully and go over it with your legal counselor. Item 17 is a useful multipage chart that cross- references and summarizes provisions of the franchise agreement on the topics of "Renewal, Termination, Transfer and Dispute Resolution

10 Uniform Franchise Offering Circular (UFOC) Item 19 Disclosing "Earnings Claims" The franchisor can't talk about the future earning potential or past performance of its franchisees unless the information is presented here in Item 19, appropriately footnoted with its bases, assumptions and limitations.

11 Uniform Franchise Offering Circular (UFOC) Item 20 Gives you complete statistical information about the expansion or contraction of the franchise system over the past three years This section also contains full lists and contact information for existing franchisees and those who left the system for any reason in the past year.

12 Uniform Franchise Offering Circular (UFOC) Item 21 contains the franchisor's audited financials. Plan to take them to an accountant who can evaluate them and tell you about the strength or weakness of the company's financial status. Item 22 provides samples of all the contracts you'll be asked to sign. These are not required to be in plain English and may be difficult to understand. Ask an experienced attorney to look them over and explain them to you.

13 The International Franchise Association website, Offers very useful information for those considering investing in a franchise. IFA recommends that you engage an attorney to examine the contract. It is important to work with an experienced attorney. That you ask a competent accountant to examine your anticipated expenses, your financing needs, and your prospects for achieving your desired level of profitability before you sign any agreement.

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16 Top Ten Franchises Subway Curves Quizno's Franchise Co., The 7-Eleven Inc. Jackson Hewitt Tax Service UPS Store, The McDonald's Jani-King Dunkin' Donuts Baskin-Robbins USA Co.

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18 7-Eleven, Inc Provides training – 6 weeks 7-Eleven, Inc. owns or leases the land on which the 7-Eleven store sits The company develops the building, provides the store equipment and pays the utilities A 7-Eleven® franchisee does not own the property, store or equipment, but rather, leases or subleases it from 7-Eleven, Inc. as part of the franchise agreement.

19 7-Eleven, Inc 7-Eleven, Inc. maintains an "open account" for each franchisee, a "revolving" account that is credited with each day's receipts and debited with store purchases, operating expenses and other similar activity. Keeps bookkeeping and ordering system for Franchisee Average Franchise Fee $63,000 (one time) Franchisees are required to make an initial cash payment for initial inventory, supplies, business licenses, permits, bonds and cash register fund, a portion of which 7-Eleven will finance. 7-Eleven will also finance the franchisee's continuing operating expenses. Average cost $83,000. They may provide various forms of advertising for their 7- Eleven® stores 7-Eleven® franchisees are independent contractors.

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21 Home Helpers Low Start up costs No medical or health care experience required It's a cash business. No account receivables Added profit centers adding to the bottom line Exclusive territories Home Based Financing available through franchisor No equipment or inventory Extensive training Aggressive marketing program unsurpassed in the industry Marketing Program Startup Cash Required: $ $ Total Investment Required: $ $ 35900

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23 ServiceMaster Clean ServiceMaster Clean is a leading residential and commercial cleaning company, specializing in carpet, upholstery, and drapery cleaning; wood and hard-surface floorcare; commercial and janitorial services; and disaster restoration services. A worldwide network of over 4,500 franchises The franchise license, initial supplies, and equipment, ranging from $20,283 U.S. to $84,525 U.S., can be purchased together and financed through SMAC.* The comprehensive financing programs include the following:  Initial purchase of franchise license and product/equipment package  Lines of credit  Equipment to expand  Vehicles  Computers  Acquisition of additional franchise licenses

24 MAJOR GROWTH INDUSTRIES IN FRANCHISING Service-related fields home repair and remodeling, carpet cleaning, household furnishings, and various other maintenance and cleaning services; all business support services including accounting, mail processing, advertising services, package wrapping and shipping, personnel and temporary help services, and printing and copying services; Automotive repairs and services such as quick-lube and tune-up; and other areas such as environmental services, hair salons, health aids and services, computers, clothing, children's services, educational products and services, and telecommunications services.

25 Advantages - Franchising Possibly easier to finance Access to quality training and ongoing support Established concept with reduced risk of failure Access to extensive advertising Access to lower cost and possibly centralised buying Few start-up problems Use of well-known trademark or trade name Disadvantages-Franchising Onerous reporting requirements Costs of supplies or materials may be more expensive Possible exaggeration of franchisor advantages Franchisor may saturate your territory Cost of franchise and other fees may reduce your profit margins Inflexibility due to restrictions imposed by franchisor Termination policies of franchisors may allow little security

26 Finding funding But nearly three-fourths of 2004's Franchise 500® companies offer some type of financing for franchisees: 15.6% in house financing only 42.4% third-party financing only 14.6% combo in-house/third-party financing 27.4% no financing

27 Finding funding  AMRESCO Commercial Finance Inc.AMRESCO Commercial Finance Inc.  Business Lenders LLCBusiness Lenders LLC  Center Financial Leasing Inc.Center Financial Leasing Inc.  CIT Group Inc.CIT Group Inc.  The Commercial Capital Corp.The Commercial Capital Corp.  The Entrepreneur's SourceThe Entrepreneur's Source  FINOVA Group Inc.FINOVA Group Inc.  Franchise FinanceFranchise Finance  FranNetFranNet  GE Capital Corp.GE Capital Corp.  Global Financial ServicesGlobal Financial Services

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