Successful Franchising

Keys to Successful Franchising: Why Franchise?

In my over three decades of experience as a franchise consultant, I am often asked “What makes one company a successful franchising entity while another fails?

Rarely is there a single reason for successful franchising versus franchising failure.  Here, I will examine some of the many factors that can help a Franchisor put together a successful franchising program.

When a person buys a franchise, he or she is purchasing someone else’s “system”, trade name and learning curve.  In return, the Franchisor receives money, typically both an Initial Franchise Fee and weekly or monthly royalties.

Successful franchising has been called the classic win-win situation.  A successful franchising program must be structured so that both the Franchisor and the Franchisee flourish.

The benefits of successful franchising to the Franchisor are many, including:

  • Potential Profit: One key to successful franchising is for the Franchisor to generate meaningful profits from their franchise operations, including the Initial Franchise Fee and on-going royalties or service fees.  Other potential income streams include the sale of products, services or equipment, sales of international licensing rights, leasing real estate and/or developing financing programs. Without profits, the Franchisor cannot sustain itself.
  • Fewer Managerial Problems: Successful franchising creates the most motivated managers in the world – Franchisees who have invested their money and time into their own futures.
  • More Rapid Expansion: Few companies have the strength necessary to penetrate and dominate a new market quickly. Through successful franchising, a company can develop new areas using the financial and managerial resources of its Franchisees, rather than investing its own money, time, personnel and energies.
  • Lower Capital Expenditures: The expense of expanding a business can be over-whelming. Through successful franchising, the Franchisor eliminates almost all of the costs normally associated with opening new locations.
  • Lower On-Going Expenses: The fixed and variable expenses involved in running a franchise company are much lower than operating a similar number of company-owned facilities.
  • Marketing Advantages: As the company grows through successful franchising, when local, regional and national campaigns take effect, all locations benefit, including company-owned units.
  • Economies of Scale: The more locations a company has, the more buying power it commands.  Using successful franchising to grow the firm also makes it easier to secure desirable sites.

For these and other reasons, thousands of U.S. companies have chosen to grow their operations through successful franchising.

Should you franchise your business?  Contact our highly experienced Our franchise consultants can help! today at 706.356.5637.

FPRs, What Are The Benefits For Franchisors?

In my over 30 years of franchise consulting experience, I am often asked if Franchisors can give financial projections, otherwise known as FPRs, that potential franchisees will use to help them determine if they should purchase a particular franchise opportunity.

In my last blog, we discussed the rules and regulations regarding the preparation of Financial Performance Representations (FPR).

FPRs, a quick recap:

The Federal Trade Commission oversees franchising and permits a Franchisor to provide information about the actual or potential financial performance of its franchises and/or Franchisor-owned outlets, if there is a reasonable basis for the information and if the FPR is properly included in the Franchise Disclosure Document (FDD).

An FPR can be any presentation to a franchise sales prospect – visual, written or spoken – which says or implies a particular level or range of potential income, profits or sales to be derived from the operation of the franchise. This definition can apply to information in the general media. Any FPR must have written verification, which must be furnished to a franchise sales prospect upon request.

Often, the area in which a franchise sales prospect is most interested is how much money can be made operating the business. All new Franchisors must determine if they will put a FPR in their FDDs. The FDD must be furnished to each franchise sales prospect by the first in-person meeting.

Due to the liability inherent in offering FPRs, most Franchisors decide against including a FPR in their FDDs. As with any business decision, there are pros and cons involved.

FPR pros include:

  1. Providing FPRs can make it easier to close the first few franchise sales.
  2. Without a FPR, franchise sales prospects must contact existing franchisees for information on how the franchise performs financially. A random sampling by franchise sales prospects can result in inaccurate information.
  3. FPRs can result in more informed franchise sales prospects.
  4. Projections may make it easier for the franchisee to secure financing for the new business.
  5. A properly prepared FPR can reduce the probability of a franchise sales person promising the prospective franchisee an unrealistic return on investment or income.
  6. Properly prepared FPRs may offer the Franchisor some protection from liability should litigation arise.

Remember, if a particular Franchisor-owned unit is available for sale, the actual financial performance of the specific location can be shared with the franchise sales prospect.

In our next blog, we will address the cons of offering FPRs.

Financial Performance Representations

In over 30 years of franchise consultant experience, people frequently ask me, “Can I give out financial projections to prospective franchisees?”

The answer is yes, if the earnings claims are compiled correctly and included in Item 19 of the company’s FDD (Franchise Disclosure Document).

The FTC (Federal Trade Commission) is the federal agency that oversees franchising.

The FTC permits a franchisor to provide information about the actual or potential financial performance of its franchises and/or franchisor-owned outlets, if there is a reasonable basis for the information and if the information is included in the FDD.

The FTC’s definition of an earnings claim is broad. Earnings claims include any representation — written, oral or visual to a prospective franchisee, including information in the media — which states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits or net profits.

Earnings claims also include tables, charts or mathematical calculations that show possible results based on a combination of variables.

The definition of an earnings claim further states financial performance information that differs from that included in Item 19 may be given only if a franchisor provides the actual records of an existing outlet that the franchisor is considering selling.

The franchisor may also supplement the information provided in Item 19, for example, by providing information about possible performance at a particular location or under particular circumstances.

The earnings claim must have a “reasonable basis” at the time the information is shared. Also, the franchisor must have written substantiation and make it available to prospects, upon request.

Some examples of earnings claims are:

  • Entrepreneur Magazine reports that gross sales for an average franchise unit are over $20,000 per week;
  • Most of our franchisees take home $2,500 a week;
  • During the first year of operations, the franchise will achieve a 100% ROI (return on investment);
  • You can anticipate annual sales of $750,000 a year with a profit margin of 30%.
  • A franchise typically breaks even in 18 months; and
  • In the first six months, you can earn enough money to buy a Porsche.

As you can see, if you give any financial information to a potential franchisee about sales or profits you have made an earnings claim. While many franchisors do give out earnings claims, due to the potential risks involved, the majority do not.

In future blogs, we will address the Pros and Cons of offering earnings claims as well as the legal, financial and sales implications.