Franchise operations can generate substantial profits. (The good)

Every hour in the United States a franchise is sold. Franchising has grown to become an established driving force business. Large corporations are using franchises as a means of diversification, while franchisees are seeking them as a competitive advantage over other small businesses. It is evident that franchising has become a major force in the food industry. Not only are fast food restaurants franchised today, but theme restaurants, catering operations, and family-style restaurants are packaged and marketed to a seemingly endless market of eager would-be restaurateurs, even during times of economic downturn. Franchising is unique in that it is probably one of the few forms of business that, by its very nature, recreates itself by establishing new business units from within itself. The United States Department of Commerce has reported that more than a third of all retail sales are now made through franchised stores. This growth is expected to continue.

Buying an existing franchise opportunity (the good and the bad)

Owning a successful franchise in the food service industry can be a truly comforting feeling. You go to work, you hang up your shingles, you open your doors, and crowds rush in to buy all your world-famous wares. They pay top dollar for them and then they walk out singing the praises of your establishment and another 50 customers walk in and start the cycle all over again. This continues until you close for the day. You then lock yourself in and get ready to start the process all over again the next day. Right?

Wrong! This may be the stereotypical version of the way it’s supposed to be, but in many cases this example doesn’t apply. The reality of the situation is exactly the opposite. Keep in mind that in some cases, candidates who pay fees to purchase a new franchise are actually signing on to research and develop the concept on their own. These newer franchisors often haven’t marketed their product long enough to know if it will work in all parts of the country, or indeed the world. Instead, they use their franchise money to further develop their concepts.

Knowing this, why open a company store in a new market area when the risk can be transferred to an unsuspecting franchisee? I say “unprepared” because the profile of a prospective franchisee typically shows much less experience and exposure in the field than that of a seasoned independent operator. And after all, isn’t that the reason a prospective franchisee, usually with little experience, buys a franchise? Please note that not all franchises may be for you. Today, there are still dozens of fly-by-night franchise concepts that go in and out of business every year, taking many investors with them in a fiery collapse.

Start a new franchise. (The good)

I have been involved for many years with franchise operations and issues as Vice President and CEO of franchise companies. I understand that franchising is a relatively low-cost and quick way to expand your business compared to the money, people, and time that would otherwise be required to build, open, and operate a chain of company-owned stores.

Restaurant owners interested in successfully expanding their business venture may know that now is the time to expand, but do not have the financial resources or management staff to build and operate a chain of company-owned stores. They should consider franchising. It can be an effective way to raise capital to build stores and get dedicated people to run those stores. Franchising has proven to be a successful method of expanding the business and gaining national name recognition.

A successful franchise system starts with a successful prototype store. (The good)

The franchised business must be profitable, have a name that can be registered as a trademark, and have business operating systems that can be taught to a new franchisee. A new franchisor must have sufficient capital to start a franchise program. Before selling or even offering to sell a franchise, the franchisor must prepare a comprehensive franchise agreement and file a franchise offering circular. Federal and state franchise laws regulate the disclosure of pre-sale information to prospective franchisees. A franchisor must understand the ongoing special franchise relationship, select qualified franchisees, and develop strong, long-term relationships with franchisees.

The initial franchise fee is a one-time fee charged to new franchisees to secure the franchise, and can range from $10,000 and more. The ongoing royalty fee is based on a percentage of the gross sales of each franchise location. The franchise fee, royalty fees, and the sale of supplies to franchisees are typical ways a franchisor makes money. Although the amount of these fees varies widely, a franchise fee of $25,000 and a 6% royalty would be fairly typical. A franchisor can also provide money savings for all stores, including company-owned stores, through volume discounts from suppliers of equipment, inventory, services, and advertising.

To carry out the legalities of a new franchise, you need a franchise attorney and restaurant consultant with franchise knowledge. Your franchise attorney will draft the franchise agreement, draft and file the franchise offering circular, register sellers and franchise advertisements, review real estate lease agreements, prepare the necessary corporate documents, and have connections to all necessary business services for you. fledgling franchisor to get started. The restaurant consultant can help with operating manuals, training programs, public relations and advertising materials, franchise recruitment programs, business plans, and communication programs required by your state’s franchise authority. This consultant can also help you adjust your original operation into a smooth running multi-unit business.

Problems with the franchisee (The bad)

As the franchise has flourished, so have the problems between the operators and the franchisor. Over the years, franchisors have formed a large number of franchisee advisory groups and franchise councils to learn what franchisees want and need from the franchisor in order to grow and prosper. State and federal regulations, enacted beginning in the late 1970s, more strictly controlled franchises and tended to benefit the franchisee. The Federal Franchise Law of 1979 reflects modern trends at all levels of government for tighter control of what franchisors can say and do and with established procedures for the protection of franchisees with respect to terminations, renewals, additional franchises and claims against the franchisor. Even so, there are often serious drawbacks.

A real franchise problem (The Ugly)

Here’s an example: My company, GEC Consultants, Inc., was called in to assist a franchisee of a small-sized but well-known 1950’s hamburger concept. The customer’s problem was diagnosed as not having enough of the right items to enter the Chicago coffee shop market. GEC suggested five new items which were then inserted into the deal and for twenty-two days they sold incredibly well. The franchisee then made a fateful mistake. He did not inform the Franchise Company of his intentions. This was a violation of your agreement. As a result, the Company threatened legal action if these items were not removed. The articles were later removed. A short time later, the franchisee made a request to put these items back on their menu and was denied permission. Without the ability to modify the menu to help himself, the franchisee was ultimately forced to return his unit to the franchisor for very little compensation. The Company went ahead and began operating this unit as its own. A short time later, a story appeared in an industry publication stating that this franchise was rolling out “new” menu items to all of its stores and the reception had been fantastic. These were basically GEC’s suggested menu changes.

Here was a case where the operators were resourceful enough to see problems with the stability of your franchise vehicle and found solutions to your problem, but were unable to use them, in accordance with your franchise agreement, and ended up solving a problem for you. the parent company. throughout the unit. When this happens, a franchisee almost never receives compensation or any credit for helping with the solution. They may even lose their franchise. It is a dead end proposition.

This case indicates that the Franchise Company had always known about the weaknesses in its menu. The fact that it was hurting its franchisees didn’t seem to bother the Company. Because I should? They allowed GEC’s customer to pay for the market research and development of the new recipes. After restricting the franchisee’s ability to use these new menu items successfully, they just went in, picked up the pieces, and then did all the things they weren’t allowed to do. The result was extremely profitable for the franchisor.

Unfortunately, the same cannot be said for the poor franchisee. After paying good money to buy what he felt was a fully developed concept, he got a flimsy sister idea instead. After the franchisee hired professionals to help salvage their sinking ship, the parent company hid all the life preservers from them. They bailed themselves out and discarded their franchisee (our client) like a tattered old pair of pants. This doesn’t seem fair.

The moral of this story reads like something out of Business Law 101. Caveat Emptor buyer beware! When you go out to buy franchises, you better bring in an expert or you may be buying nothing but trouble and paying your money to further the development of someone else’s company.