Franchising 101

2 06, 2019

Is Every Business Franchise-able?

2019-06-02T14:16:45-04:00June 2nd, 2019|

Business Woman

Is every business franchise-able?

There’s a lot to consider before franchising a business

by Geoff Batchelder
Certified Franchise Consultant

Today more than 3,000 franchise systems cover 300 different business types and account for over 745,000 franchise establishments. Franchise sectors include automotive, business services, child services, cleaning services, financial services, food and beverage, health services, home improvement and maintenance, personal care services, pet services, repair and restoration, retail, senior services, sports and recreation, technology services, vending… and I could keep going.

It would be hard to find a business type that could not be franchised. But the real question is looking at a particular business and determining whether it should be franchised.

What to consider

When a business owner approaches me about franchising, I consider these factors:

  • First and foremost, are the company-owned locations (or location) profitable? I can’t tell you how many owners have approached me
    with the idea of franchising as a way to make money, even though the business they run is struggling financially. Imagine trying to
    convince a potential franchise buyer that the company-owned location isn’t making money, but if they open a franchise location, it will.
    That’s not going to work.
  • What are the major reasons that the business is successful? Is it purely a great location? Is the success entirely attributable to an
    incredible owner? Or has the potential franchisor developed a documented system of products, services, and repeatable processes that can be replicated in multiple locations?
  • Does the owner have the capital to cover all aspects of franchise development: consulting work, legal work, documentation,
    presentation materials, website development, and lead generation?
  • Is the owner committed to franchising or simply looking for a way to get rich quick? He will need to realize that running his business
    will take a backseat to helping franchisees make their businesses successful. Many new franchisors struggle with this very necessary part of the transition.
  • Will he have the human resources in place to operate a growing franchise operation and also maintain his current business?
  • Is there “room” for this new offering in franchising? How many similar offerings already exist? Is there anything unique to make it
    stand out from the competition?
  • Is the branding professional? Are there multiple marketing and advertising strategies in place?

Sometimes the most important advice I can give a business owner is to not invest in franchising. Not all businesses are ready and
some may never be ready. Many times my advice is to focus on growing the business and revisit franchising later, after the important
issues are addressed.

Geoff Batchelder has been a franchise consultant and franchise development expert for the last 10 years after spending 25 years focusing on business development in the high-tech industry. Contact him at 1-877-222-3722 or geoff@compassfranchisegroup.com. Visit www.compassfranchisegroup.com.

2 06, 2019

Multiple Choice

2019-06-02T13:31:03-04:00June 2nd, 2019|

Man with Multiple Stores

Multiple Choice

Should you make the leap into multiunit ownership?

by Brian LaCour
Certified Franchise Consultant

Multiunit franchising happens when someone signs an agreement with a franchisor that allows the franchisee to open a certain number of units within the protected territories or areas the franchisee selects from available locations. This a great option for people who have franchise operation experience and/or already own a single franchise unit and are interested in rapidly expanding their business and income potential.

If multiunit ownership is your endgame, look for franchisors who will help you. All franchisors charge a franchise fee that averages from $25,000 to $50,000, but franchisors won’t necessarily make you pay $75,000 to $150,000 for three locations. This means opening multiple locations could be more affordable than you expect. You also can talk to franchisors about discounts on royalties and other fees.

The more locations you have, the more valuable your business becomes. And here’s another benefit: larger franchisees who diversify through a variety of locations are better positioned to withstand an economic downturn.

Owning a single location often means being there every day and essentially being the manager. But if you want to own multiple locations, being the site manager isn’t practical. You will still be involved in the business on a full-time basis, but your focus will shift to growing your network of locations. Rarely will there be situations in which you are working in an actual location each day—a manager is in charge of the daily operations. As a multiunit owner, you concentrate on the big picture of the entire system and scaling your business with additional locations.

Several economic and efficiency benefits come into play when you own multiple locations, particularly within the same market. In some cases, several franchises can share a single expense. For example, if you own several sites in one market, you can run one marketing program to benefit all locations. You can bundle human resources and staffing for multiple sites, perhaps sending a staff member from one location to another if someone doesn’t show up for work. The same goes if a site runs short on products or equipment; inventory can be shifted from one location to another until a new shipment arrives.

Many franchisees go multiunit immediately to take advantage of the frugalities of scale. Many want to do all the labor and make all the acquisitions up-front.

Occasionally that can come back to bite you. Having five or six subpar units may be less desirable than having two or three outstanding units.

I recommend being patient, setting everything up decorously, and bringing in the right people from the beginning. This will save you from having to go back and fix things later. You also would want to stay lean with your organizational structure.

You must be an expert in your franchise’s units so at the end of the day, you can always step in and properly support your operations team.

Brian LaCour has more than 20 years of business leadership experience in driving fiscal results, strategic planning, saving costs, increasing revenue, streamlining processes, and developing top performing teams. LaCour’s passion for helping people led him to the role as president of the International Franchise Group. Call LaCour at 561-502-7283 or email him at blacour@internationalfranchisegroup.com. Visit https://www.internationalfranchisegroup.com/.

2 05, 2019

Dig Into Due Diligence

2019-05-03T15:21:35-04:00May 2nd, 2019|Tags: , , , , |

Woman on Phone

Dig Into Due Diligence

by Diana Capirano
Certified Franchise Consultant

When exploring a resale, the level of due diligence will be driven by the complexity of the business model and how the owner is performing. Evaluation of resales must be comprehensive, even granular to mitigate risk. Although franchise systems are the same, owners are not, which leads to a great degree of variability in financial and operational performance.

A holistic approach is best in assessing the overall health of the business. Many buyers think they just need to evaluate financials. Not so! If you’re not prepared to ask the how and why behind the numbers, you may miss a whole lot more.

Following are the 3 most important categories and items that are fundamental in disclosure.

Financial
Standard disclosure is the past three years’ tax returns and corresponding profit-and-loss statements (P&Ls) and balance sheets. Also request current YTD (Year-to-Date) information. Tax returns tend to be of most value because they are holistic. Make sure the financials are verifiable or reviewed by a CPA as they are not audited. In some cases, a cash-flow analysis may be available. If not, view bank statements to verify money in and money out.

  • If the business carries accounts receivable (AR), you’ll need an AR aging report to see money that’s due, collection trends, and the largest outstanding AR sources considered an asset in the purchase that may not attach to the sale.
  • A current asset list should be documented in the tax returns if they are still being depreciated. These items may be cars, equipment, computers, furniture, etc. Get an updated list from the seller, and an inspection should occur later in the process.
  • Other supporting information will be required for owner salaries or distributions; adjustments to earnings before interest, tax, depreciation and amortization (EBITDA), and any irregular items that don’t really attach to running the business. These should be discussed with the seller as they were discretionary, not necessary (examples: extravagant staff party or personal expenditures). These numbers will help you validate the Seller Discretionary Earnings (SDE), which is significant because some sellers set their asking price based on a multiple of the SDE.

Operational
Leases, organizational charts, contracts, price lists, payroll, staff records, third-party companies utilized, and a review of SOP are just a few on my checklist. The more complex the business model, the more items you can expect to dig into.

Compliance/Legal
You’ll need to verify the business license(s), insurance policies, lawsuits/claims, liens, and other licensures (if required). Even if not planning a stock sale, any litigation is important as it can speak to the reputation of the brand name or future financial vulnerabilities. Businesses related to health and the trades tend to have more regulations. Make sure you check federal, state, and local requirements to operate this business. Verify that the existing business has been complying and is in good standing through past surveys or copies of licenses.

Opportunity Value

This is more about you than the seller. It’s how you can improve the top and bottom lines. Financials are a great indication of how the current owner is operating but not how you will run business. For example, if the seller has been in business for two to four years and revenue is declining rather than growing—why? This is a prime time for a great growth trajectory. For an owner after 10-plus years, declining sales may indicate burnout, not utilizing new or updated franchise processes, or in some cases, the competitive landscape changed and the owner did not adapt. Good data does not lie, and intangibles are harder to value but just as valuable!

Don’t be afraid if your due diligence doesn’t reveal great results. They may serve you well as leverage in negotiating. The nightmare would be not knowing the real deal and entering blindly into a sale.

 

Diana Capirano, CFC, has an expansive career which includes corporate and franchise sales and development, marketing and operations, merger and acquisitions, structuring and negotiations as well as business ownership. As a highly-respected consultant and mentor, Diana espouses a profound commitment to help prospective business owners and investors understand and navigate the process of deciding on a franchise business. Contact Diana at 941-999-0095, email diana@focusfranchise.com, or visit http://www.focusfranchise.com.

2 05, 2019

Building Relationships

2019-05-03T15:28:02-04:00May 2nd, 2019|Tags: , , , , , |

Building Relationships

Marketing your business at a local level

by Jessica Melendez
Certified Franchise Consultant

Relationships are the heart and soul of a business and crucial to its survival. In your community, you’ll have business relationships with customers, referral partners, employees, vendors, networking communities, financial institutions, cleaning crews, and more. The list can go on and on based on who comes in contact with your business in any way. These are two-way relationships with each party desiring to help each other achieve the highest level of success. No matter how big or small their role is, all of these relationships take part in building your empire, and these relationships need to be fed.

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As an example, let’s examine how Dryer Vent Squad franchisees use relationship-building in their local marketing.

First it’s worth noting that I own Dryer Vent Squad along with entrepreneur Leo Goldberger. Our partnership began with a relationship we formed while working together in the franchise industry.

A pro at social media, Goldberger uses it to strengthen the Dryer Vent Squad brand. Social media is a great way to tell a brand’s story, form bonds, loyalty, and a network within your community. Followers tend to feel connected with you, and gain an inside look into your business. Our franchisees use social media to advertise, run promotions and post pictures of jobs, their crew and community events they attend.

BUILDING PARTNERSHIPS
A big part of our business-to-business (B2B) success has been in building relationships with referral partners such as hotel associations, apartment associations, property managers, appliance repair companies, and dryer retailers. All of these partners can refer business our way and, in turn, we can refer business to them or sponsor their events. These types of relationships are not one-sided—there’s give-and take and we work together to support each other.

EDUCATING THE COMMUNITY
Dryer Vent Squad franchisees partner with local fire departments to raise awareness about fire safety. Dryer fires are the leading cause of household fires and education on the dangers of clogged dryer vents is vital for saving lives and property. In this case, the relationship works because both parties have a vested interest in the safety of the community and its residents.

Relationships empower you to aggressively try new things that will help you and your business evolve and learn continuously. Take care of them and keep your eye out for opportunities to build new ones.

Jessica Melendez

A trainer and mentor for FranServe, Inc., the world’s largest franchise consulting firm, and the CEO of WestStar Franchise Group, Jessica Melendez coaches and educates prospective franchise owners and helps them find businesses that align with their personal and professional ambitions. As a franchisor and president of Dryer Vent Squad, Melendez has first-hand experience in all aspects of franchising, which makes her an excellent resource for prospective franchisees. Contact Melendez at 915-202-8272, email Jessica@weststarfranchisegroup.com, or visit https://www.weststarfranchisegroup.com.

3 04, 2019

Getting Real About Resales

2019-04-03T15:48:20-04:00April 3rd, 2019|Tags: , , , , , |

Getting Real About Resales

by Diana Capirano
Certified Franchise Consultant

As a specialist in franchise resales, I’ll go on record saying that you’re as likely to find a flawless resale as hit a mega-lotto jackpot. But people continue to search for the diamond in the rough. “I’m looking for a business with a motivated seller, with low investment/high return, excellent cash flow (mid-six digits), and seller financing.” Sound familiar? Newsflash: EVERYONE is looking for the same thing. Lightheartedly I respond, “Wow! That sounds great. I’ll take 10!”

Many resales fall into the distressed category, something like buying a house with good bones but needing work and TLC. Premium resales may never even hit the open market because they sell internally (within the franchise system) or to personal/professional referral networks. Most great resales that hit the web portals come and go very quickly.

Some business seekers who concentrate only on existing entities can search web portals as a full-time job for years, logging countless hours, only to get beat out and then feel beat up. I’m not saying this to discourage you from looking for resales, but to caution you to be realistic and consider using a reputable resale consultant who can inventively search for them and then help navigate and vet the opportunities (Part 2 of this article in next month’s issue).

Three Major Considerations

  1. Investment level: First, determine a comfortable investment level, the necessary profitability, and a desirable industry. Please understand that you will probably not get high cash flow from a low investment. Also, be aware that businesses with great value potential could fail to qualify for Small Business Administration (SBA) or other traditional loans, so have a backup plan for financing if you can’t pay cash. Additional sources of income, such as a spouse’s paycheck, rental property, etc., may help you qualify for a loan.
  2. Owner benefit: If you’re looking to replace income immediately, what’s the target amount? Remember that you’ll have to fund the sale and need more time and capital injection so this “benefit” number will change.
  3. Desired industry: What are the requirements of the business model? Can you be an owner-operator if the franchisor mandates it? And don’t discount the fact that you should like what you’ll be doing. If it’s just a passive investment, you still need to get connected with growing the business.

Resale vs. Start-Up

A resale may be a good fit if you:

  • Like to improve things and consider yourself a fixer who thrives on challenges.
  • Are adept at problem-solving and at adapting when the unexpected happens.
  • Don’t make a practice of blaming others.
  • Want to buy low and sell high, assuming you’re putting in the sweat equity to grow it.
  • Don’t mind—in some cases—overpaying for the foundation, good will, your opportunity value, or the extra work needed to right the ship.
  • Have the financial bandwidth for an additional cash injection (operating capital) and don’t need to finance with a traditional loan such as one from the SBA.
  • Have the time and wherewithal to complete granular due diligence and go the long haul.

A start-up may be better if you:

  • Don’t want to inherit others’ problems or put in the time required to right the ship.
  • Enjoy developing things from scratch.
  • Need to fund with a loan.
  • Feel there is better opportunity in an open franchise area.
  • Have other sources of income or enough for living expenses while you ramp up.
  • Are not prepared to do a deep dive into due diligence before investing.

Both resale and start-up franchises require you to undertake thorough due diligence, investment of time and financial capital, and full-on commitment. Following the franchise training and systems will be necessary in both cases, but may be even more important in a resale because the previous owner might have strayed from the proven process.

Diana CapiranoDiana Capirano, CFC, has an expansive career that includes corporate and franchise sales and development, marketing and operations, mergers and acquisitions, structuring and negotiations, and business ownership. As a highly respected consultant and mentor, Diana espouses a profound commitment to help prospective business owners and investors understand and navigate the process of deciding on a franchise business. Contact Diana at 941- 999-0095, email diana@focusfranchise.com, or visit www.focusfranchise.com.