1st time franchise buyer's guide - get educated!

1st Time Franchise Buyer

Guide

Key Questions & Checklists for Your Discovery Process

Brought to you by

The Franchise Advisor.com

So I Want to Buy a Franchise…

_____Do you have the personal drive to be a successful entrepreneur? _____Are you willing to work whatever hours it takes to make your business a success? _____Are you willing to give up the perks of being an employee to invest and run your own business? _____Are you self-reliant? _____Can you work without support? _____Are you healthy? _____Do you have the physical ability to meet the needs of operating on your own? _____Can you handle stress? _____Do you have the mental ability to meet the everyday needs of operating your own business? _____Can you handle the crisis situations and deadlines? _____Do you like people? _____Do you listen well? _____Do you have patience when working and interacting with others? _____Do you communicate well? _____Can you be a leader and a trainer for your staff as well as a front person for your business? _____Can you maintain a positive relationship with the people who work for you? _____Can you meet the needs of your customers? _____Do you have the ability to sell-yourself and your products and services? _____Can you afford to start your own business? _____Do you have the support of your family and friends?

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The Franchise Advisor - Mariel Miller 732 481 5188 Page 1


Congratulations on your decision to investigate franchise business ownership!

The process can be a long one, but a thorough due diligence process is important to insure against a bad decision, to prepare you and to help you understand and set reasonable expectations.

In my 27 years in franchising, I have seen many very average people build significant 6 and 7 figure businesses, and I have seen good people lose everything. The good news is that the former greatly outweighs the latter, but all business involves risk and franchising is no different.

You have a lot in your favor! The internet is a wealth of information. Franchising is governed by the FTC, and has to comply with strict disclosure law and perhaps most comforting is to know there is a whole profession geared toward helping you conduct a good process and find a business that you would be successful in. This is my profession, the work of a Franchise Advisor, Coach, and Consultant.

We work with you similar to a real estate agent, guiding and advising throughout your process. Should we do a good job and help you find an ideal business, our professional fees are paid by the franchisor company. Your services are completely free of charge, always. And, regardless if you enlist the services of an advisor or not, you would pay the exact same franchise fees – so you have nothing to lose and everything to gain by partnering up with an educated, experienced franchise guide.

We would be happy to help you on your journey to self-employment.

Thoroughly answer the questions and give yourself time! You are at a crossroads that can be life-changing and we wish you all the best! Welcome to the world of franchising! Check back at www.TheFranchiseAdvisor.com for more guides and workbooks or call us at 732-481-5188 with any questions along the way.

Much Continued Success!

MarielMariel MillerFounder, The Franchise Advisor, LLC


http://www.TheFranchiseAdvisor.com/


DO I HAVE WHAT IT TAKES TO BE A FRANCHISEE? Once you have determined that you have the abilities, skills and desire to start your own business, you have to further determine if you have the requisite traits to become a franchisee.

Can you follow someone else's rules, even when you think you have a better way?

Are you prepared to accept coaching and advice on how to run your business from a franchisor's field and headquarters staff?

If the Franchisor turns down your great idea for changing the system, can you live with that?

Can you trust that a franchisor is working for the benefit of the entire system-even when their decisions do not necessarily go your way?

Are you willing to share your financial information and prepare required reports each month?

Are you willing, able and eager to learn new skills?

Can you set aside old habits and beliefs to follow a franchise system?

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DO I HAVE ALL THE ANSWERS I NEED ABOUT THE FRANCHISES I AM CONSIDERING?

This is where an educated, experienced and skilled franchise consultant can assist you. In my work with potential franchisees, we walk you through a complete analysis of specific franchises and compare qualified offerings based on a 45+ Question process –The process can take from 4 to 12 weeks on average, exploring several franchise offerings that fit your particular and individual requirements. Once you have investigated the franchise thoroughly, you can then make a very educated decision for yourself and your family.

The Questions we coach you to use fall into these categories:

Can you afford a franchise? 14 Questions

Do you understand the terms of the contract? 5 Key Questions, 23 Items in the FDD

Are the franchisees happy with their investments? 7 Questions and how to get the info

Does the franchisor have a history of litigation? 3 Questions

Can you make enough money with this franchise? 6 Questions and how to get the info

Is the franchisor making money and where is the money coming from? 3 Questions

Does the franchisor understand franchising and project a stable future? 7 Questions

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Sample Validation Questions to ask Franchisees

This outline is meant as a starting point for you to develop your list of questions. Depending upon the franchise you are investigating, some of the questions may not be relevant. You may also have other questions that are important to you. Please remember that these business owners are participating as a courtesy to you. When you get great feedback or not-so-great feedback, it is important for you to compare your operating style to the person you are speaking with, drawing your own conclusions.

Background and Opinions

What type of work did you do before you got into your own business?

Why did you leave that to go into your own business?

When did you open your business?

Why did you choose this franchise?

Initial Training & Opening Support

Did your initial training prepare you for opening your business?

During your first year in business, did the franchise company support your business activities and results to the level of your expectations or need? Can you give an example?

What do you think is the biggest mistake that a first year franchise owner can make?

What would cause a franchisee to fail?

Ongoing Support

Has the franchise company supported your business activities and results to the level of your expectations or need? Can you give an example?

After initial training, what additional training exists? Is it regularly scheduled, at random, as needed, or a combination? What additional training have you undergone? What differences has that made?


So I Want to Buy a Franchise…Is there enough/too much training? Is the franchise company flexible in giving more training to franchise owners who need/want it?

Does the franchise company host franchisee annual meetings or teleconference calls? (This can often be a great source for information, training and networking with other franchisees)

Marketing Programs

How does the franchisor contribute to your marketing efforts? What are the results of those marketing efforts?

What programs for lead generation has the franchise company introduced you to? Do you use those tactics? What are the results and costs of those tactics? Do you consider them worthwhile? What have you added locally to generate business?

Do you have any strong competitors in your area? If so, who? What do you think are your major competitive advantages that set you apart?

Purchasing Power

Must you purchase from the franchisor, or may you purchase locally?

Are you allowed to purchase items from vendors outside the franchise company? Do you consider that good or bad? What makes you say that?

Does the franchisor use the collective buying power of the entire franchise to obtain discounts on supplies and/or inventory beyond what the individual franchisees could achieve? Can you give an example?

Franchisor / Franchise owner Relations

Is the franchise company supportive and caring about you and your operations? What makes you say that?

Is the home office competent? Do they act with your interests in mind? Why do you say that?(The answer will tell you this owner’s perception as to whether or not everyone at HQ is on the same page and performing as a team, in the franchise owners' best interests).

Investment and Owners Role

How did you determine the location/territory you have?


So I Want to Buy a Franchise…How much investment did it take you to get your business up and running? Did that include some working capital? How much working capital did you budget? How long a period was that intended for?

Currently, what is your hourly commitment to your business per week? Has the amount of time you work changed since the first few months you were open? Is your role in the business what you wanted/expected it to be? If not, how is it different?Earnings

What were your expectations for annual revenue? How long did it take you to realize those expectations?

How long were you in business before you reached breakeven?

What was your annual net profit, as a number or percentage of sales last year? (If open for several years, was that fairly consistent with prior years? If not, greater, less?)

What has the greatest effect on your annual net profit?

What will you do differently in your business this year? Why have you decided that?

What separates higher performers from lower performers in your franchise system? Why do you say that?

Most Important Question

If you had it to do over, would you decide to get into this business again? Why/ why not?

Remember,

Validation is a part of the investigation process that offers a wonderful opportunity for you to get a feel for the culture, competence and owner perception of the franchise company. It is also a chance for the franchise company to consider how their owners perceive you as a potential franchisee – so allow these conversations to reflect you, at your very best!



Funding Your Franchise

Commercial banks fund many franchises, so look to these lenders first. The single most important issue in landing bank financing is your credit rating. You will need to present a complete loan package including a personal financial statement, copies of personal tax returns for three years, and verification of the source of your down payment.

Bankers favor businesses with brand names and long track records of consistent cash flow, so your choice of a franchise system can help or hurt you. Ventures with few locations are less attractive, in part because they lack proof that they can do well in all types of areas or economic climates.

Bank loans unsecured by collateral are relatively rare, even for those with good credit. In addition to securing a loan with a mortgage on your home or other asset, be ready to be asked to put your own money into the deal, typically about 20% of the amount needed. Even with healthy businesses and solid collateral, most bank loans to new franchisees occur when a borrower has established relationships with a banker, or have previous experience, or are a figure in the community. If that’s not you, consider a loan backed by the U.S. Small Business Administration (SBA).

SBA loans are partially guaranteed by the government, making them less risky. The standard SBA loan for franchisees is known as the 7(a), which is issued by a bank or other qualified lender, and partly guaranteed against default by the government. Because of that backing, such loans are seen as relatively low-risk.

SBA loans of five- to six-year maturities can provide short-term working capital and equipment. Real-estate loans can run for 20 years or more. About 10% of all SBA loans go to franchisees, with the size running between $250,000 and $500,000, and maximum of $2 million. Most of that money is for franchise entry fees, improvements or working capital. Borrowers must be creditworthy, typically must contribute some equity, and are expected to repay the SBA loan out of the franchise’s cash flow.

Many SBA loans carry fluctuating interest rates. While the actual rate is negotiated between the bank and the borrower, it’s subject to SBA maximums, which are tied to the prime rate. While a low



rate may be attractive initially, make sure you can generate enough business to cover the payments if the rate rises.

Another government lending program involves the Department of Veterans Affairs. The program, called Patriot Express because of its relatively fast approval time, makes loans up to $500,000 to active-duty military preparing to transition to civilian life, as well as to spouses and survivors of veterans. The loans come with the SBA’s lowest rates.

A few franchisers offer internal financing. For example, a company may defer a portion of the initial franchise fee, essentially financing the deal. Interest rates are likely to seem high compared to other options. However, you may not have to put up collateral.

Sometimes it makes sense to tap 401(k), Individual Retirement Account or other retirement funds rather than seek a loan. But rather than just taking an early withdrawal, which may be subject to taxation, you may want to consider setting up a C corporation that will own and operate the business. Then roll over money from your self-directed retirement account into that corporation’s profit-sharing plan and direct that those funds be invested into the franchised business. But this is a risky option: If the franchise fails, your retirement fund can be wiped out. Check with a professional on possible tax implications, and consider the tradeoffs carefully.

Remember that a business is franchised for two reasons: to expand the business and to raise capital. So if you have a reasonably good credit record and pass all the financial requirements, most franchisors will bend over backwards to get you on the team. The help that franchisors provide to help you get financing usually includes assistance with business plans and introductions to lending sources. In many cases, franchisors serve as guarantors of loans you take out.

Other Sources of FinancingAfter you've determined the extent of financing available from the franchisor, make a working list of all other available sources of capital. Most sharp operators use the following sequence of contacts: friends and relatives, home mortgages, veterans' loans, bank loans, SBA loans and finance companies.

Often, banks that aren't willing to work with you based on your financial profile become more amenable if you suggest working with an SBA loan guarantee; these loans are guaranteed up to 90 percent by the SBA. Small businesses simply submit a loan application to the lender for initial review, and if the lender finds the application acceptable, it forwards the application and its credit


So I Want to Buy a Franchise…analysis to the nearest SBA office. After SBA approval, the lender closes the loan and disburses the funds; the borrower makes loan payments to the lender.

Some franchisors report being approached by financial brokers--historically more interested in big deals--to put together large pools of money using SBA and private funds. These funds would be available to franchisees through the franchisors like a trust fund. Groups of smaller banks with funds to invest would contribute to the fund from all over the country.

Other options would be to take out a home-equity line of credit or a second mortgage on your home. Be careful when utilizing this type of financing, however. The home-equity line of credit and a second mortgage are secured by your home. If you can't repay the amount you finance using this source, you risk losing your home.

You can also use assets such as stocks, bonds, and mutual funds to secure a loan as long as they're not part of a qualified plan like an IRA profit-sharing plan. Also, if you are over age 59 and have a lot of money tied up in an IRA, you could use it for part of your financing requirements. Although you'll have to pay taxes on the amount used, not to mention suffer the loss of income from interest, it can be a good financing tool.

If you are under age 59 and your IRA is one of your largest assets, you still may be able to take advantage of this avenue without accruing the 10-percent penalty associated with early withdrawal. By taking Substantial Equal Periodic Payments spread over a minimum of five years, based on your life expectancy, and a set of annuity tables published by the IRS, you can eliminate the 10-percent penalty, although the money is still taxable. Many franchise advisors can suggest financial institutions that work with franchises. These companies offer a complimentary one hour consult to help you explore what options would work best given your particular condition and financial objectives.

Tips to ConsiderThere are infinite sources of financing available to help you launch the franchise of your dreams. However, operating a franchise with no reserves and blinding yourself to unexpected business problems can lead to disaster. A good rule to remember: Never invest more than 75 percent of your cash reserves. If you have $10,000, invest $7,500. If you have $25,000, invest $18,750.

More important, remember that the price of a franchise doesn't always reflect the actual cost of the business itself. Additional costs can include down payments on the land, building, equipment, fixtures and signs, and can cover inventory, leasehold improvements, and training, opening promotional costs, administrative costs and even sales commissions.


So I Want to Buy a Franchise…Be sure you understand the requirements of your cash investment. You will need a "pillow" of working capital to properly guide the business through its ups and downs. If you do your homework thoroughly, and remember that financing a business is the most important sale you'll ever make, then you'll be head and shoulders above the competition.

15 Fast Franchise Financing Tips

1. Talk to your franchisor before searching for outside financing; get approved or pre-qualified.

2. the most common source of start-up capital is friends and family. Use them.

3. Seek out lenders that understand not just small business but franchising as well.

4. be totally honest and upfront with lenders. Hide nothing. Be prepared to explain everything.

5. Neatness counts. Fill out your credit and loan applications clearly. Typed is better.

6. Don't weigh down your loan application with attached documents.

7. Don't exhaust your liquidity by paying off outstanding debts before filing a loan application. Lenders want you to have capital available.

8. If you lack liquidity, find a partner with money.

9. Consider equipment leasing to conserve start-up capital and improve the appearance of your balance sheet.

10. Keep debts and expenses to a minimum. Many business owners take on too much debt, forgetting that cash flow must pay that debt.

11. Consider buying used equipment, furniture, vehicles, etc.

12. Let your fingers do the walking on the Internet before wasting time, energy, gas and phone calls. You'll find useful information. Some sites even allow you to file loan applications online.

13. Don't overlook angel investors and venture capitalists.

14. Avoid dipping into your kids' college funds.


So I Want to Buy a Franchise…15. Don't give up.
