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Assignment on Buying a Franchisee

Objectives

Students will identify and evaluate a franchise as a business opportunity.

1. You are an entrepreneur looking for a business to start up. Assume that you havefinancial backing and the educational and business experience needed for this venture.

2. Research and evaluate a franchise opportunity that is of interest to you. And justify why are you choosing that particular franchise.

. !hat does the initial franchise fee cover"

#. $ow are the periodic royalties calculated and when are they paid"

%. Are all trademarks and names legally protected"

#. !ho selects the location of your business"

%. Are you assigned an exclusive territory"

&. 'f the territory is not exclusive( does the franchise have the right of first refusal onadditional franchises established in nearby locations"

). 's the franchisee re*uired to purchase e*uipment and supplies from the franchisor orother suppliers"

+. ,nder what conditions can the franchisor and-or the franchisee terminate thefranchise agreement"

. /an the franchise be assigned to heirs"

10. !ho provides and pays for advertising and promotional items" 11. !hat are the estimated profits you are going to get"

12. What other fees should I plan on? You may be re*uired to lease property ore*uipment from the franchisor. You may also have to pay the franchisor a percentage ofyour annual sales. hose numbers must be cranked into your own e*uations whenyou re trying to figure out if a franchise deal makes sense.

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13. What kind of regional protection am I getting? 3o you have any guarantees thatthe franchisor isn t going to sell other franchises or open up its own outlets in your geographicarea" 'f so( how long are those guarantees good for"

14. What is the training set up? 15. Renewal, Termination and Transfer? 16. Legal documentation what is needed?

HOW TO EVALUATE A FRAN H!"E Study the opportunity before committing. Study financial information.

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Talk to other franchisers.

Work for someone who owns a franchise.

Buying a Franchise Checklist

If you are interested in purchasing a franchise, remember you are not buying a business; you arebuying a legal right to use the franchisor's trademark, brand, operating system and ongoingsupport for a fee. In return, you pay an upfront franchise fee and provide a share of your incomeback to the franchisor. Weve compiled a list of key pieces of information you should obtain frompotential franchisors before you make your decision: Franchise rgani!ation

4 "etermine #ho are the shareholders, officers and directors of the franchise organi!ation. 4 Find out the level of e$pertise and e$perience of the franchise principals.

4 %$amine the franchisors financial health & years of operation, number of franchises, three yearsof financial statements, and audit results.

4 "etermine the typical franchisees financial health and its profitability. 4 ccess a list of other franchisees in your local trading area & intervie# them for feedback.

4 btain information on failed franchisees, if any & #hat reasons #ere attributed to the failure(

4 btain information on any litigation against the franchisor.

4 Ways in #hich this franchisor innovates, develops ne# products and services.

Franchisor's Support of Franchisee 4 "etermine the franchisors reputation of dealing #ith franchisees & talk to several franchise

o#ners to get the picture.

4 )earn the selection process of franchisees & ho# are franchisees screened( 4 Find out ho# the franchisor #ill monitor and inspect your operation.

4 "etermine ho# advertising budgets are established & is it by the franchisor, franchisee or both(

4 Find out ho# advertising and promotional campaigns are decided & #ill you have input(

4 *ave franchisees been terminated in the last + years( *o# many( For #hat reason(

Franchise Fees 4 %stimate initial franchise fees, royalties, and site development costs & are they reasonable( 4 %stimate the cost of initial inventory, e-uipment and other costs associated #ith start up.

4 "etermine franchisor financing availability. 4 %stimate annual franchise earnings.

4 %stimate the average time from start up to cash flo# to profitability.

Products or Services 4 %stimate the future demand for the franchisors products or services & is demand likely to

increase or decrease(

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4 "oes the franchisor hold any intellectual property like patents, copyright or trademarks on theirproducts, or corporate visual identity( If so, #here & /anada, 01, %urope(

4 )ook at the industry in #hich this franchise operates. What is the future outlook for this industry( 4 )ook at competitors product and services. What is their competitive advantage(

4 %$amine product and service #arranties. "etermine #ho is responsible for honoring #arrantyclaims & the franchisee or the franchisor(

4 "etermine #hat products have to be purchased from the franchisor or specified supplier &determine if the price paid by the franchisee is competitive.

4 "etermine the nature of training and ongoing support offered to you by the franchisor & is itsufficient(

Expansion Plans 4 "etermine the franchisors strategic plans for the future & ho# many franchisees and #here(

4 "etermine the e$tent of e$clusivity of trading area offered.

4 "etermine if you can purchase a second franchise location & ho# many franchises can youbuy(

Franchise Contract 4 2ake sure the contract clearly specifies the payments to the franchisor & franchise fee,

deposits, royalties, percentage of gross sales, advertising find contribution and other payments. 4 2ake sure you kno# if you must purchase proprietary inventory from suppliers and ho# much.

Find out if you can find your o#n supplier if youre not happy #ith the franchisors designatedsupplier.

4 "etermine if you must meet a sales -uota and if the -uotas are reasonable.

4 "etermine the contract term, rene#al option and conditions. 4 %$amine location choice and lease specifications & ho# is the location chosen( Is it a lease or

sublease( Is it the same term as franchise agreement( What are the rene#al options and terms( 4 "etermine the e$it strategy. 0nder #hat conditions can you sell your franchise or terminate the

franchise contract(