Franchising 101

1 12, 2018

Two-Way Streets

By |2018-12-01T18:42:30+00:00December 1st, 2018|Categories: Franchising 101|Comments Off on Two-Way Streets

Young Professionals

Two-Way Streets

Franchisors want to know that potential franchisees are a good fit

By Paul Segreto

Recently, a group of people inquired about a franchise opportunity with a fast-growing, emerging brand my firm had been representing for the past year. The candidates were financially qualified for several locations. We had multiple calls, including an FDD review, and on every call the group’s focus was on location and getting started ASAP.

Despite their aggressive nature, we kept them on course and guided them through the process. During Discovery Day, they met the brand’s founders for the first time. Here’s where things went south. The five candidates kept themselves busy talking to each other. They spent their time scribbling notes, running numbers, talking about location, all amongst themselves. They made no effort to speak with the founders, ask them questions, or interact at all. They merely told the founders how they should change this or revise that—and how they’d like to do so when they opened their business.

Seeing how quickly this meeting was going off course, we tried to create interaction between the parties. The founders worked hard to engage with the candidates, asking questions, trying to determine if there was a fit. When a founder asked the group, “Why this brand? What do you like about it?” The response was cool: “We know we can make money and when we do, we’ll commit to other locations.”

A day later, the group had signed a letter of intent on a location, procured a cashier’s check for the franchise fee, and they were ready to sign the franchise agreement that very day. The franchisors, however, weren’t interested. They didn’t believe these individuals would follow the processes and procedures the founders had meticulously developed and invested in for more than eight years. The founders knew their system was working quite well, as evidenced by high customer satisfaction and great unit economics including excellent profit margins. Long story short: They rejected the candidates.

This scenario isn’t uncommon—in fact, it’s unfolding more and more as franchisors are focusing on finding the right candidates for their franchises. Processes have evolved from applications and financial qualifications to evaluations of whether candidates are right for the franchise system and with where the system is today. Want to own a franchise? Start by working on your relationship with the franchisor.

COMMUNICATION IS KEY

A statement frequently heard is the franchise relationship is interdependent—the franchisor and the franchisee are dependent upon each other. Your success is our success, and our success is your success. Franchisors are emphasizing strong foundational components of relationships built on open, two-way communication, as opposed to the old cliché, “You’re in business for yourself, but not by yourself.” Many believe the franchise relationship is like a marriage, complete with a courtship before the I do’s.

Candidates are known to push through the process entirely focused on whether the opportunities are right for them. They give little to no thought about the franchisor’s perspective. Many believe the franchisees are the only ones making big commitments in ‘buying’ the franchise. They think the franchisor should be grateful, never giving thought to what that franchisor brings to the table.

Franchisors want to know that their franchisees are good fits for the brand—and for them, too. That’s where my group of candidates went wrong. The founders passed on their application because they believed the values they worked so hard to build throughout the brand—the ones their franchisees instilled every day—would ultimately be missing under this group’s management.

Had they tried to demonstrate that they were team players and interested in a relationship that worked both ways, the outcome could have been different. Learn from their mistake: A little genuine interest in the franchisors—along with the brand—could be the most important step toward sealing the deal.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at Contact Segreto at paul@franchisefoundry.com.

Young Professionals

Two-Way Streets

Franchisors want to know that potential franchisees are a good fit

By Paul Segreto

Recently, a group of people inquired about a franchise opportunity with a fast-growing, emerging brand my firm had been representing for the past year. The candidates were financially qualified for several locations. We had multiple calls, including an FDD review, and on every call the group’s focus was on location and getting started ASAP.

Despite their aggressive nature, we kept them on course and guided them through the process. During Discovery Day, they met the brand’s founders for the first time. Here’s where things went south. The five candidates kept themselves busy talking to each other. They spent their time scribbling notes, running numbers, talking about location, all amongst themselves. They made no effort to speak with the founders, ask them questions, or interact at all. They merely told the founders how they should change this or revise that—and how they’d like to do so when they opened their business.

Seeing how quickly this meeting was going off course, we tried to create interaction between the parties. The founders worked hard to engage with the candidates, asking questions, trying to determine if there was a fit. When a founder asked the group, “Why this brand? What do you like about it?” The response was cool: “We know we can make money and when we do, we’ll commit to other locations.”

A day later, the group had signed a letter of intent on a location, procured a cashier’s check for the franchise fee, and they were ready to sign the franchise agreement that very day. The franchisors, however, weren’t interested. They didn’t believe these individuals would follow the processes and procedures the founders had meticulously developed and invested in for more than eight years. The founders knew their system was working quite well, as evidenced by high customer satisfaction and great unit economics including excellent profit margins. Long story short: They rejected the candidates.

This scenario isn’t uncommon—in fact, it’s unfolding more and more as franchisors are focusing on finding the right candidates for their franchises. Processes have evolved from applications and financial qualifications to evaluations of whether candidates are right for the franchise system and with where the system is today. Want to own a franchise? Start by working on your relationship with the franchisor.

COMMUNICATION IS KEY

A statement frequently heard is the franchise relationship is interdependent—the franchisor and the franchisee are dependent upon each other. Your success is our success, and our success is your success. Franchisors are emphasizing strong foundational components of relationships built on open, two-way communication, as opposed to the old cliché, “You’re in business for yourself, but not by yourself.” Many believe the franchise relationship is like a marriage, complete with a courtship before the I do’s.

Candidates are known to push through the process entirely focused on whether the opportunities are right for them. They give little to no thought about the franchisor’s perspective. Many believe the franchisees are the only ones making big commitments in ‘buying’ the franchise. They think the franchisor should be grateful, never giving thought to what that franchisor brings to the table.

Franchisors want to know that their franchisees are good fits for the brand—and for them, too. That’s where my group of candidates went wrong. The founders passed on their application because they believed the values they worked so hard to build throughout the brand—the ones their franchisees instilled every day—would ultimately be missing under this group’s management.

Had they tried to demonstrate that they were team players and interested in a relationship that worked both ways, the outcome could have been different. Learn from their mistake: A little genuine interest in the franchisors—along with the brand—could be the most important step toward sealing the deal.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at Contact Segreto at paul@franchisefoundry.com.

31 10, 2018

Emerging Brands versus Legacy Brands

By |2018-10-31T23:53:28+00:00October 31st, 2018|Categories: Franchising 101|Comments Off on Emerging Brands versus Legacy Brands

Smiling woman business owner

Emerging Brands versus Legacy Brands

What you need to know

By Paul Segreto

As franchising continues to strengthen, new concepts are entering the market in a variety of industries. If you’re looking to buy into a franchise business, you now have more options than ever before. Along with exploring opportunities in legacy brands—those household names like McDonald’s, The UPS Store, and Gold’s Gym—you can also consider emerging brands, which are relatively new like Sub Zero Nitrogen Ice Cream, The Toasted Yolk Café, and Hummus & Pita Co. But why would you want to get involved with an emerging brand? After all, isn’t it safer to invest in a recognized brand with a proven system as opposed to investing in something new and relatively unknown?

Legacy Brands
Typically, a legacy brand has been developed over many years—in some cases, 20 to 50 years or more. There’s a relative level of success as exemplified by the shear number of locations across a region or the country. The perception of success is even greater. And you’ll pay for that success—buying into a legacy brand tends to cost more than an emerging brand. But the brand name is well known from a multitude of geographic locations and a huge amount of advertising. Some legacy brands are equated to slogans or spokespersons—think KFC’s Colonel Sanders. For training and support, you’ll most likely find an impressive corporate office with various departments and possibly local field offices or training centers.

Obviously, this type of business is well established and offers lots of support from corporate. It may be best suited for a franchisee who has a lot of upfront capital and who wants to follow systems—not develop them—that are already in place. An entrepreneur who can afford to make a big investment can make huge rewards.

Emerging Brands
An emerging brand is one where the initial business, from which the franchise has been developed, is well known locally. The founder is also well known and may be a local hero, of sorts. Customers live in the founder’s neighborhood with some knowing him or her from way back when. The brand is viewed as the antithesis of a big-chain establishment, attracting customers like magnets.

An emerging brand lets you get in on the ground floor of something—there is the possibility of a big payoff, but there is also huge risk. This brand is in its infancy; it is not well known and its mass market appeal may still remain a mystery. For an entrepreneur who wants to help shape a brand and who is willing to take on more risk for more potential reward, an emerging brand might be for you.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at Contact Segreto at paul@franchisefoundry.com.

Smiling woman business owner

Emerging Brands versus Legacy Brands

What you need to know

By Paul Segreto

As franchising continues to strengthen, new concepts are entering the market in a variety of industries. If you’re looking to buy into a franchise business, you now have more options than ever before. Along with exploring opportunities in legacy brands—those household names like McDonald’s, The UPS Store, and Gold’s Gym—you can also consider emerging brands, which are relatively new like Sub Zero Nitrogen Ice Cream, The Toasted Yolk Café, and Hummus & Pita Co. But why would you want to get involved with an emerging brand? After all, isn’t it safer to invest in a recognized brand with a proven system as opposed to investing in something new and relatively unknown?

Legacy Brands
Typically, a legacy brand has been developed over many years—in some cases, 20 to 50 years or more. There’s a relative level of success as exemplified by the shear number of locations across a region or the country. The perception of success is even greater. And you’ll pay for that success—buying into a legacy brand tends to cost more than an emerging brand. But the brand name is well known from a multitude of geographic locations and a huge amount of advertising. Some legacy brands are equated to slogans or spokespersons—think KFC’s Colonel Sanders. For training and support, you’ll most likely find an impressive corporate office with various departments and possibly local field offices or training centers.

Obviously, this type of business is well established and offers lots of support from corporate. It may be best suited for a franchisee who has a lot of upfront capital and who wants to follow systems—not develop them—that are already in place. An entrepreneur who can afford to make a big investment can make huge rewards.

Emerging Brands
An emerging brand is one where the initial business, from which the franchise has been developed, is well known locally. The founder is also well known and may be a local hero, of sorts. Customers live in the founder’s neighborhood with some knowing him or her from way back when. The brand is viewed as the antithesis of a big-chain establishment, attracting customers like magnets.

An emerging brand lets you get in on the ground floor of something—there is the possibility of a big payoff, but there is also huge risk. This brand is in its infancy; it is not well known and its mass market appeal may still remain a mystery. For an entrepreneur who wants to help shape a brand and who is willing to take on more risk for more potential reward, an emerging brand might be for you.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at Contact Segreto at paul@franchisefoundry.com.

21 08, 2018

Exploring Franchise Opportunities

By |2018-08-21T14:21:01+00:00August 21st, 2018|Categories: Franchising 101|Comments Off on Exploring Franchise Opportunities

Business meeting

Exploring Franchise Opportunities:

Get the Answers YOU Need!

By Paul Segreto

Potential franchise buyers know before making a final decision, they need to obtain information from other franchisees and also, their possible franchisors. But what information do they need to get?

Generally, I recommend using the Franchise Disclosure Document (FDD) as a guide. Read through it and ask a potential franchisor very specific questions about each item listed. It’s a can’t-miss road map. Here’s a start.

What is the history of the franchise concept?
What is the founder’s vision? Who is on the executive and support teams? What experience do they bring to the table? If a franchisor hasn’t worked at a location, how has he learned about daily operations? Has he owned a business before? It’s important to understand how these individuals relate to franchisees.

How high could expenses go?
All expenses should be clearly defined. It’s imperative to gain a complete understanding of the range of expenses—and why they are what they are. Inquire about assistance for everything from advertising to site selection to your grand opening.
What is the temperament of the franchise group nationally and within your market? Of course, I recommend speaking with franchisees, too. Make sure to ask them about costs, problems, profits, and trends. Discuss competition with both the franchisor and franchisees.

Ask about exit strategies.
At some point, you may want to exit the system or you may have to exit. If you have to exit, is there support if you’re in trouble? Ask about transfer fees and the process of selling your business. Understand the franchisor’s approval process. What happened to each franchisee listed under terminated or closed franchises on the FDD? What happened to their locations? Have they continued operation under a new franchisee or corporate? Is the location still available?

Ask yourself if you would consider a long-term relationship with this brand and its leadership.

After this process is complete and you’ve reviewed your notes, trust your gut instinct! Take your time and think things through until you’re 100 percent sure of your decision. Make sure you have all your support mechanisms in place, including friends and family. Do not kid yourself. Do not lie to yourself. And, do not justify any negatives. Being honest with yourself will help you make the right decision.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at paul@franchisefoundry.com.

Business meeting

Exploring Franchise Opportunities:

Get the Answers YOU Need!

By Paul Segreto

Potential franchise buyers know before making a final decision, they need to obtain information from other franchisees and also, their possible franchisors. But what information do they need to get?

Generally, I recommend using the Franchise Disclosure Document (FDD) as a guide. Read through it and ask a potential franchisor very specific questions about each item listed. It’s a can’t-miss road map. Here’s a start.

What is the history of the franchise concept?
What is the founder’s vision? Who is on the executive and support teams? What experience do they bring to the table? If a franchisor hasn’t worked at a location, how has he learned about daily operations? Has he owned a business before? It’s important to understand how these individuals relate to franchisees.

How high could expenses go?
All expenses should be clearly defined. It’s imperative to gain a complete understanding of the range of expenses—and why they are what they are. Inquire about assistance for everything from advertising to site selection to your grand opening.
What is the temperament of the franchise group nationally and within your market? Of course, I recommend speaking with franchisees, too. Make sure to ask them about costs, problems, profits, and trends. Discuss competition with both the franchisor and franchisees.

Ask about exit strategies.
At some point, you may want to exit the system or you may have to exit. If you have to exit, is there support if you’re in trouble? Ask about transfer fees and the process of selling your business. Understand the franchisor’s approval process. What happened to each franchisee listed under terminated or closed franchises on the FDD? What happened to their locations? Have they continued operation under a new franchisee or corporate? Is the location still available?

Ask yourself if you would consider a long-term relationship with this brand and its leadership.

After this process is complete and you’ve reviewed your notes, trust your gut instinct! Take your time and think things through until you’re 100 percent sure of your decision. Make sure you have all your support mechanisms in place, including friends and family. Do not kid yourself. Do not lie to yourself. And, do not justify any negatives. Being honest with yourself will help you make the right decision.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at paul@franchisefoundry.com.

31 07, 2018

Words
to Know

By |2018-08-21T13:56:24+00:00July 31st, 2018|Categories: Franchising 101|Comments Off on Words
to Know

Reading Dictionary

Words to Know

Important terms that potential franchisees should know.

By Susan Scotts

Absentee ownership: The potential to manage and own a franchise without active involvement in the day-to-day operations. The franchisee will purchase the franchise unit but will hire someone else to manage and run the unit.

Owner-operator: The franchisee will run the franchise unit him or herself and be hands-on during day-to-day tasks.

Advertising fee: The amount that is paid, annually or monthly, by the franchisee to the franchisor to cover some of the costs relating to advertising. These are sometimes calculated as a percentage of gross sales.

Discovery day: The opportunity to visit a franchise’s corporate headquarters in order to meet the management and support team and learn more about the franchise. Not all franchisors require them or offer them.

Franchise Disclosure Document (FDD): The Federal Trade Commission mandates that franchisors provide detailed of information about the franchisor. This information, which includes the buy-in costs and initial start-up expenses, is packaged in a 150-page document known as the Franchise Disclosure Document. It is commonly referred to as the FDD.

Franchise: The authorization of a right or brand name to a person to sell or distribute the company’s goods or services. Franchisee: The person or entity that purchases and is granted a franchise.

Franchise agreement: The actual contract which includes the responsibilities of the franchisor and franchisee. This document is signed by both parties.

Franchise fee: The initial up-front fee a franchisee pays for the right to purchase a franchise and use the trademark and business system. This is typically paid at the signing of the franchise agreement.

Franchisor: The franchise company and owner of a franchise system’s trademark brand that provides usage rights to a franchisee.

Federal Trade Commission (FTC): A federal agency assigned to regulate franchises. This agency protects America’s consumers and assists in protecting them against false, deceptive, or unfair trade or advertising practices.

International Franchise Association (IFA): Founded in 1960, this membership organization includes franchisors, franchisees, and suppliers.

Initial investment/start-up costs: The initial investment that the franchisee makes in becoming a franchisee during the start-up period. These costs can include the franchisee fee, lease improvements, asset costs, inventory, deposits, working capital, and other costs required to establish the business.

Net worth: Total assets minus total liabilities of an individual. A franchisor may require a minimum net worth prior to approval as a franchisee.

Receipt acknowledgement: In franchising, the receipt to be signed by potential franchisee as proof of the date of receiving of the FDD.

Renewal: Franchise agreement lengths vary and expire after anywhere from five to 20 years. After the initial agreement, the contract may be renewed but not always under the same original conditions. A renewal fee may be less than the original franchise fee.

Royalty fee: The share or percentage of gross sales paid by the franchisee to the franchisor on a recurring basis from the franchisee’s generated sales.

Small Business Administration (SBA): The SBA connects entrepreneurs with lenders and funding to help them plan, start, and grow their businesses.

With three decades of experience, Susan Scotts, of The Entrepreneur’s Source®, can help you determine if a franchise may be the best way to achieve your personal income, lifestyle, wealth, and equity goals. For more information, call 561-859-9110 or visit www.SScotts.EsourceCoach.com.

Reading Dictionary

Words to Know

Important terms that potential franchisees should know.

By Susan Scotts

Absentee ownership: The potential to manage and own a franchise without active involvement in the day-to-day operations. The franchisee will purchase the franchise unit but will hire someone else to manage and run the unit.

Owner-operator: The franchisee will run the franchise unit him or herself and be hands-on during day-to-day tasks.

Advertising fee: The amount that is paid, annually or monthly, by the franchisee to the franchisor to cover some of the costs relating to advertising. These are sometimes calculated as a percentage of gross sales.

Discovery day: The opportunity to visit a franchise’s corporate headquarters in order to meet the management and support team and learn more about the franchise. Not all franchisors require them or offer them.

Franchise Disclosure Document (FDD): The Federal Trade Commission mandates that franchisors provide detailed of information about the franchisor. This information, which includes the buy-in costs and initial start-up expenses, is packaged in a 150-page document known as the Franchise Disclosure Document. It is commonly referred to as the FDD.

Franchise: The authorization of a right or brand name to a person to sell or distribute the company’s goods or services. Franchisee: The person or entity that purchases and is granted a franchise.

Franchise agreement: The actual contract which includes the responsibilities of the franchisor and franchisee. This document is signed by both parties.

Franchise fee: The initial up-front fee a franchisee pays for the right to purchase a franchise and use the trademark and business system. This is typically paid at the signing of the franchise agreement.

Franchisor: The franchise company and owner of a franchise system’s trademark brand that provides usage rights to a franchisee.

Federal Trade Commission (FTC): A federal agency assigned to regulate franchises. This agency protects America’s consumers and assists in protecting them against false, deceptive, or unfair trade or advertising practices.

International Franchise Association (IFA): Founded in 1960, this membership organization includes franchisors, franchisees, and suppliers.

Initial investment/start-up costs: The initial investment that the franchisee makes in becoming a franchisee during the start-up period. These costs can include the franchisee fee, lease improvements, asset costs, inventory, deposits, working capital, and other costs required to establish the business.

Net worth: Total assets minus total liabilities of an individual. A franchisor may require a minimum net worth prior to approval as a franchisee.

Receipt acknowledgement: In franchising, the receipt to be signed by potential franchisee as proof of the date of receiving of the FDD.

Renewal: Franchise agreement lengths vary and expire after anywhere from five to 20 years. After the initial agreement, the contract may be renewed but not always under the same original conditions. A renewal fee may be less than the original franchise fee.

Royalty fee: The share or percentage of gross sales paid by the franchisee to the franchisor on a recurring basis from the franchisee’s generated sales.

Small Business Administration (SBA): The SBA connects entrepreneurs with lenders and funding to help them plan, start, and grow their businesses.

With three decades of experience, Susan Scotts, of The Entrepreneur’s Source®, can help you determine if a franchise may be the best way to achieve your personal income, lifestyle, wealth, and equity goals. For more information, call 561-859-9110 or visit www.SScotts.EsourceCoach.com.

1 05, 2018

The Types of Franchise Arrangements

By |2018-06-20T00:38:07+00:00May 1st, 2018|Categories: Franchising 101|Comments Off on The Types of Franchise Arrangements

Map with markers

Types of Franchise Arrangements

Selecting the right franchise is important. But it’s just as important to select the best franchise ownership arrangement. You can start by understanding your options—and the responsibilities that come with each one. We’ve outlined the basics here. Once you align your background with a franchise—and an ownership arrangement—you’re well on your way to success.

Single-Unit Franchises

What it Means: Single-unit franchising is the simplest ownership arrangement. Here, a franchisee gets a single franchise license that enables her to operate one business location. It’s a great way to learn the system before making more purchases.

Your Territory: A franchisee may be granted a small radius of exclusive territory —a retail store, for example, may have a radius of two to three miles around its location. In other cases, licenses are non-exclusive but the sky’s the limit on where you can set up shop.

Your Role: This kind of ownership is great if you’re a hands-on manager, because single-unit franchisees are usually very involved with their franchises. Even semi-
absentee owners participate in the day-to-day operations.

How Much? Plan on $25,000-$60,000 initial out-of-pocket investment with a total investment of $50,000 and up.

Multi-Unit Franchises

What it Means: Multi-unit franchises are comparable to single-unit franchises, but instead the franchisee acquires more than one unit, sometimes at reduced franchise fees. If you’re a franchisee who wants to expand quickly, this could be for you.

Your Territory: Generally, the territory varies depending on the franchise. A franchisee might choose to have one unit in one section of town with another unit in another section of town a few miles away. Or, she may have an additional franchise in another county or state.

Your Role: Though you have more units, typically you’d be less involved in the day-to-day operations. But you will have to hire managers for each unit to provide structure and supervision. If many units are open, you may need to add additional administrative staff and training.

How Much? Figure $50,000 to $70,000 or more initial out-of-pocket capital to take care of the initial franchise fees. The rest of the investment is usually financed when each unit opens.

Area Development Franchises

What it Means: If you plan to open a bunch of franchises in a particular area you might sign on for an area development franchise contract. As a franchisee, you’d get the rights to open and operate a number of individual franchises in a designated territory or area.

Your Territory: You get an exclusive geographic territory as long as you adhere to the opening schedule. Territories can range from a small city to parts of—or all of—a larger city or designated area.

Your Role: You’ll be involved in the initial stages of the first location to make sure it’s successful. Once several locations are open, you’ll need to hire managers to oversee those units.

How Much? Plan at least $60,000-$120,000 initially to secure the area and pay all franchise fees. Then plan on additional start-up capital. You will need to be able to finance the rest of the start-up costs for each location as it opens.

Master Franchises

What it Means: Sometimes dubbed regional developers, master franchisees pay a franchisor a significant initial fee for the rights to develop a whole territory.  Franchisees who buy into the territory pay the master franchisee initial fees and royalty fees. In fact, this is the only franchisee who earns royalties instead of paying them.

Your Territory: Usually a large metropolitan area, a state, or even several states or a country. It is generally an exclusive area and will remain exclusive as long as the master franchisee meets the development schedule.

Your Role: Masters are responsible for recruiting individual franchisees and providing all the training and support they need, both initially and on-going. The master franchisee will sometimes set up and operate at least one unit, enlisting a manager to manage it while working on selling other “sub-franchises.”

How Much? The initial costs are more, but so is the earning potential. Figure $100,000 to $250,000 or more to acquire the territory and for the initial liquid capital to start the area.

Susan Scotts has more than 25 years of experience in the franchising industry. She helps her clients realize their goals of self-sufficiency through business ownership. For more information, visit www.sscotts.esourcecoach.com

Map with markers

Types of Franchise Arrangements

Selecting the right franchise is important. But it’s just as important to select the best franchise ownership arrangement. You can start by understanding your options—and the responsibilities that come with each one. We’ve outlined the basics here. Once you align your background with a franchise—and an ownership arrangement—you’re well on your way to success.

Single-Unit Franchises

What it Means: Single-unit franchising is the simplest ownership arrangement. Here, a franchisee gets a single franchise license that enables her to operate one business location. It’s a great way to learn the system before making more purchases.

Your Territory: A franchisee may be granted a small radius of exclusive territory —a retail store, for example, may have a radius of two to three miles around its location. In other cases, licenses are non-exclusive but the sky’s the limit on where you can set up shop.

Your Role: This kind of ownership is great if you’re a hands-on manager, because single-unit franchisees are usually very involved with their franchises. Even semi-
absentee owners participate in the day-to-day operations.

How Much? Plan on $25,000-$60,000 initial out-of-pocket investment with a total investment of $50,000 and up.

Multi-Unit Franchises

What it Means: Multi-unit franchises are comparable to single-unit franchises, but instead the franchisee acquires more than one unit, sometimes at reduced franchise fees. If you’re a franchisee who wants to expand quickly, this could be for you.

Your Territory: Generally, the territory varies depending on the franchise. A franchisee might choose to have one unit in one section of town with another unit in another section of town a few miles away. Or, she may have an additional franchise in another county or state.

Your Role: Though you have more units, typically you’d be less involved in the day-to-day operations. But you will have to hire managers for each unit to provide structure and supervision. If many units are open, you may need to add additional administrative staff and training.

How Much? Figure $50,000 to $70,000 or more initial out-of-pocket capital to take care of the initial franchise fees. The rest of the investment is usually financed when each unit opens.

Area Development Franchises

What it Means: If you plan to open a bunch of franchises in a particular area you might sign on for an area development franchise contract. As a franchisee, you’d get the rights to open and operate a number of individual franchises in a designated territory or area.

Your Territory: You get an exclusive geographic territory as long as you adhere to the opening schedule. Territories can range from a small city to parts of—or all of—a larger city or designated area.

Your Role: You’ll be involved in the initial stages of the first location to make sure it’s successful. Once several locations are open, you’ll need to hire managers to oversee those units.

How Much? Plan at least $60,000-$120,000 initially to secure the area and pay all franchise fees. Then plan on additional start-up capital. You will need to be able to finance the rest of the start-up costs for each location as it opens.

Master Franchises

What it Means: Sometimes dubbed regional developers, master franchisees pay a franchisor a significant initial fee for the rights to develop a whole territory.  Franchisees who buy into the territory pay the master franchisee initial fees and royalty fees. In fact, this is the only franchisee who earns royalties instead of paying them.

Your Territory: Usually a large metropolitan area, a state, or even several states or a country. It is generally an exclusive area and will remain exclusive as long as the master franchisee meets the development schedule.

Your Role: Masters are responsible for recruiting individual franchisees and providing all the training and support they need, both initially and on-going. The master franchisee will sometimes set up and operate at least one unit, enlisting a manager to manage it while working on selling other “sub-franchises.”

How Much? The initial costs are more, but so is the earning potential. Figure $100,000 to $250,000 or more to acquire the territory and for the initial liquid capital to start the area.

Susan Scotts has more than 25 years of experience in the franchising industry. She helps her clients realize their goals of self-sufficiency through business ownership. For more information, visit www.sscotts.esourcecoach.com

1 04, 2018

The Types of Franchise Ownership

By |2018-06-20T01:17:32+00:00April 1st, 2018|Categories: Franchising 101|Comments Off on The Types of Franchise Ownership

Coffee Franchise

The Types of Franchise Ownership

Owner/Operator,” “Semi-Absentee,” and “Absentee” are three of the most commonly used terms in franchising. They refer to the different styles of franchise ownership and describe the owner’s role in the business. Ownership may vary in terms of time commitment, upfront and operating costs, scalability, and flexibility, depending on how involved you want to be. The terms themselves sound pretty self-explanatory, right? Yet, these three terms are all too often used inaccurately by franchise companies, consultants, and prospects—basically everyone in the business.

Before buying into any franchise, it’s important to know what kind of owner you want to be. Are you a “Type A” personality who wants to be hands-on everything? Are you planning to keep your day job and just want an easy investment? If you understand your motives, you have a better chance of reaching your goals.

So, how do ownership styles differ? We cover what every prospective franchisee needs to know.

Owner/Operator
What it is: If you’re the kind of business owner who likes being front and center in the day-to-day grind, then this type of ownership is for you. Owner/operators are responsible for daily operations. In a brick-and-mortar business, these owners typically work onsite most or all days that the business is open. In a service-based business, these owners are out in the field doing business development or servicing clients. This type of ownership is often referred to as, “buying yourself a job.”

Who it’s for: Anyone who has recently been forced into a career transition from a recent layoff or job change.

Upside: It’s a full-time job, which means you have lots of control over the business’s success.

Downside: Lots of hours, little flexibility, lots of responsibility.

Semi-Absentee
What it is: If you’re an exceptional manager, you may have what it takes to be a semi-absentee owner—and there are many perks with this style of ownership. With semi-absentee owners, the operational responsibility falls somewhere between absentee (hands-off) and owner/operator (hands-on). Many semi-absentee franchisees are people who want to keep their day jobs and rely on the help of managers to get their first stores off the ground.  Hence, this style is often referred to as “manager run.” You hire a managing staff for day-to-day operations and you oversee them. Your primary focus is leading the overall business strategy. Your time commitment is low, meaning you can continue your regular 9-to-5 gig, while you enjoy the security that comes with a steady income from the franchise. This type of ownership-style is a good fit for those who are good people managers. Another bonus? You don’t require industry knowledge, because the managers you hire already have it.

Who it’s for: Exceptional managers, who can keep up with the business without a full-time presence.

Upside: You lead the business strategy and hire managers to deal with daily responsibilities. Lots of flexibility, low time commitment, steady income.

Downside: Could mean less income because you have to pay managers to take care of the business.

Absentee
What it is: If you’re a hands-off manager looking for an investment opportunity, absentee ownership may be right for you. Absentee ownership is passive ownership. An absentee franchisee owns the business, but he hires the positions required to operate it, including day-to-day management. This person often has little to no physical presence at the business location and owns the business purely as an investment. If you’re in the market for a sound investment, this business model is best suited for you. The time commitment is minimal and you have minor involvement in the daily operations.

Who it’s for: Someone looking for an investment opportunity, more than a job.

Upside: You collect the big paychecks, while everyone else does all the work.

Downside: Most franchise brands are not structured to operate this way, so if this is your preferred path of ownership, your industry options will be limited.

As part of FranNet of Boston, Eric Schechterman works closely with clients to understand their goals, values, lifestyles, and interests. He coaches them through the franchising process and helps determine if franchising is a good fit. For more information, contact Eric at eschechterman@frannet.com

Coffee Franchise

The Types of Franchise Ownership

Owner/Operator,” “Semi-Absentee,” and “Absentee” are three of the most commonly used terms in franchising. They refer to the different styles of franchise ownership and describe the owner’s role in the business. Ownership may vary in terms of time commitment, upfront and operating costs, scalability, and flexibility, depending on how involved you want to be. The terms themselves sound pretty self-explanatory, right? Yet, these three terms are all too often used inaccurately by franchise companies, consultants, and prospects—basically everyone in the business.

Before buying into any franchise, it’s important to know what kind of owner you want to be. Are you a “Type A” personality who wants to be hands-on everything? Are you planning to keep your day job and just want an easy investment? If you understand your motives, you have a better chance of reaching your goals.

So, how do ownership styles differ? We cover what every prospective franchisee needs to know.

Owner/Operator
What it is: If you’re the kind of business owner who likes being front and center in the day-to-day grind, then this type of ownership is for you. Owner/operators are responsible for daily operations. In a brick-and-mortar business, these owners typically work onsite most or all days that the business is open. In a service-based business, these owners are out in the field doing business development or servicing clients. This type of ownership is often referred to as, “buying yourself a job.”

Who it’s for: Anyone who has recently been forced into a career transition from a recent layoff or job change.

Upside: It’s a full-time job, which means you have lots of control over the business’s success.

Downside: Lots of hours, little flexibility, lots of responsibility.

Semi-Absentee
What it is: If you’re an exceptional manager, you may have what it takes to be a semi-absentee owner—and there are many perks with this style of ownership. With semi-absentee owners, the operational responsibility falls somewhere between absentee (hands-off) and owner/operator (hands-on). Many semi-absentee franchisees are people who want to keep their day jobs and rely on the help of managers to get their first stores off the ground.  Hence, this style is often referred to as “manager run.” You hire a managing staff for day-to-day operations and you oversee them. Your primary focus is leading the overall business strategy. Your time commitment is low, meaning you can continue your regular 9-to-5 gig, while you enjoy the security that comes with a steady income from the franchise. This type of ownership-style is a good fit for those who are good people managers. Another bonus? You don’t require industry knowledge, because the managers you hire already have it.

Who it’s for: Exceptional managers, who can keep up with the business without a full-time presence.

Upside: You lead the business strategy and hire managers to deal with daily responsibilities. Lots of flexibility, low time commitment, steady income.

Downside: Could mean less income because you have to pay managers to take care of the business.

Absentee
What it is: If you’re a hands-off manager looking for an investment opportunity, absentee ownership may be right for you. Absentee ownership is passive ownership. An absentee franchisee owns the business, but he hires the positions required to operate it, including day-to-day management. This person often has little to no physical presence at the business location and owns the business purely as an investment. If you’re in the market for a sound investment, this business model is best suited for you. The time commitment is minimal and you have minor involvement in the daily operations.

Who it’s for: Someone looking for an investment opportunity, more than a job.

Upside: You collect the big paychecks, while everyone else does all the work.

Downside: Most franchise brands are not structured to operate this way, so if this is your preferred path of ownership, your industry options will be limited.

As part of FranNet of Boston, Eric Schechterman works closely with clients to understand their goals, values, lifestyles, and interests. He coaches them through the franchising process and helps determine if franchising is a good fit. For more information, contact Eric at eschechterman@frannet.com