Lesson: Beginning Your Search

OBJECTIVES:
At the end of this lesson, the student should be able to:
1. Understand different options of engaging in a business and investigate desired options.
2. Know the criteria for selecting a good franchise.
3. Understand the key subjects in a franchise agreement.

LESSON

MODULE 3

WHAT ARE YOUR OPTIONS WHEN YOU BEGIN YOUR BUSINESS?

Once you make the decision to start your own business, you need to decide whether you want
to be an independent business owner or a franchisee.

Options for beginning a business:

 Start a new business
 Buy a new franchise
 Buy an existing franchise
Starting a New Business

Advantages:
+ usually, lower start-up cost
+ independence and creative freedom
+ freedom with location and procedures
+ no inherited problems from an existing business
Disadvantages:
+ requires more time and energy
+ high risk of failure
+ takes longer to become profitable
+ financing may be more difficult to obtain

Buying A New Franchise

ADVANTAGES:
 Reduced risks of failure
 Proven methods and products
 Start-up assistance
 On-going training and support
 Local, regional and national advertising
 Collective purchasing power
 Research and development
 Association and synergy with other franchisees
 Easier to obtain financing

DISADVANTAGES:
 Costs more (fees, royalties, supplies)
 Smaller profit margins
 Lack of independence and freedom
 Difficult to achieve redress if franchisor fails to meet obligations
 A franchisor’s problem may become your problem

BUYING AN EXISTING FRANCHISE

ADVANTAGES:
 The business is already up and running
 Risk and uncertainty may be reduced
 The basic infrastructure is in place.
 Established location
 Existing customers and reputation
 Employees
 Vendors
 Policies and procedures
 Cash flows
 No start-up period – quicker profitability
 Easier to obtain financing
DISADVANTAGES:
 Tangible limitations:
 Design problems
 Location problems
 Merchandise problems
 Intangible limitations:
 Customer or employee ill will
 Pricing problems
 Inadequate procedures
 Lease problems
 Potentially higher costs to buy
 Legal liability in inheriting lawsuits

HOW DO YOU INVESTIGATE YOUR OPTIONS?

Regardless of whether you choose to become an independent business owner or become a
franchisee, research is the single most important activity in making your decision. Without
adequate information, you may end up making the costliest decision of your life.

Steps for beginning a business:

✔ What business?
✔ Is there a market?
✔ Can you afford it?
✔ Can you make enough money to make it worthwhile?

What Business Should You Start?

“Find something you love to do and you’ll never have to work a day in your life.”
—Harvey Mackay

Sometimes people start a business because they think they’ll make a lot of money, only to
find out that they do not enjoy the business. The adage, “know thyself” certainly applies here. You
should start a business in an industry that you will enjoy for the next 10 to 15 year
Determine If There Is a Market
All successful businesses must:
✔ satisfy a need or
✔ solve a problem or
✔ respond to a trend

Before starting any business, determine if there is a market for your product or service.

Conducting market research:

 How many potential customers are in your area?

 Will your product or service sell?
 What need does it satisfy?
 What problem does it solve?
 What trend or fad does it address?
 What should the appropriate pricing be?
 Who are your competitors?
 How many competitors do you have?
 What do they offer?
 How will your product or service be unique?
 What marketing niche can you capture? Niche a comfortable or suitable position in life or
employment.
Determine If You Can Afford to Start A Business

MAKE PROFIT POTENTIAL YOUR MOST IMPORTANT CONSIDERATION!

In order to start a business, you have to have money!

In order to stay in business, you have to make money!

Costs to consider:
✔ Estimate your start-up costs:
• location design and construction
• professional fees
• equipment and fixtures
• furniture
• opening inventory and supplies
• insurance
• Pre-opening labor
• Opening advertising and promotion
✔ Estimate how much working capital you will need (the money you will need until the
business becomes profitable—include your living expenses, if necessary)
• salaries
• insurance
• utilities
• advertising
• rent
• interest on a loan, if applicable

✔ Brainstorm where you might be able come up with money:

 yourself
 family
 friends
 savings and investments
 a partner
 selling personal assets
 loans
Determine If You Can Make Enough Money To Make The Venture Worthwhile

✔ Estimate the profit potential for the business:

• income
• expenses
• profit (income – expenses)

✔ Think about the amount of time and energy it will take to make the business
successful.

✔ Make a decision as to whether you think you can make enough money to make the
entire venture worth your time and energy!

HOW DO YOU INVESTIGATE A FRANCHISE?

Like starting any business, buying a franchise involves a risk. Studies show that successful
franchisees:
✔ conduct their own marketing research
✔ use their own financial and legal advisors
✔ develop thorough marketing and business plans
✔ have prior work experience

Prospective franchisees must devote a vast amount of time researching the franchises
available and evaluating the strength of the franchisors.

Evaluate the strength of the franchisor:

✔ Investigate the franchisor’s history:
 How long has the franchisor been in business?
 How many current franchisees are there?
 What is the failure rate of the franchisees?
 Are there any pending or past lawsuits and what have they been for?
 Does the franchisor have a reputation for quality products or services?
 What is the franchisor’s financial health (get its Dun & Bradstreet rating)
 credit rating
 profitability
 reputation
 What are the earnings claims and profit projections? Plan for the future
 On what are they based? Projections outline financial outcomes based on what might
possibly happen (in theory)
 Are the projections based on franchisor or franchisee-run units?
 How long have the units used for projections been in business?
 What is the background of the principals/management?
 What is their business experience?
 Have they personally had any bankruptcies?
 Have they personally had any recent litigation? pagsasakdal
arraignment, indictment, suit, crimination, denunciation, litigation
✔ Carefully study and obtain professional advice concerning the franchisor’s UFOC
Uniform Franchise Offering Circular (UFOC)A regulatory document describing a franchise
opportunity that prospective franchisees have to receive before they pay any money, sign
any papers or, in some cases, even meet with the franchisor. and franchise agreement,
paying special attention to:
• costs
• term (duration of) agreement and renewal provisions and conditions costs
• training and support your abilities
• franchisor’s experience demand and competition
• expansion plans
• termination clauses
• franchise territory
• procedures and restrictions
• training and assistance
• earnings potential - gross sales, net profit
• expansion plans
• How fast do they plan to grow?
• Where do they plan to grow?
• Do they have a business plan for your area of location?
• What is their analysis of the competition in your area?
• How many units are being planned for your area? Why that many?
• How much is going to be spent in regional advertising in your area?

 Visit and talk with existing franchisees, emphasizing the:

o level of training
o quality of products or service
o level and promptness of support
o operations and quality of the operations manuals
o earnings potential/claims
o any problems or difficulties with the franchisor
 Visit/talk with franchisees who have left the system and find out why they left.

 Visit the franchisor’s headquarters:

o meet the support team
o review the operations manuals and see if you can sit in on a training class

 Go to work in an existing franchise for a couple of weeks and really get to know the:
o system
o manuals
o training program
o support
o earnings potential

 Seek the advice of an attorney and accountant who specialize in franchises.

WHAT ARE THE CRITERIA FOR SELECTING A FRANCHISE?

Before buying any business, you must carefully consider many factors that are critical to your
success:
Costs:
✔ How much money will this franchise cost before it becomes profitable?
✔ Can I afford to buy this franchise?
✔ Can I make enough money to make the investment worth my time and energy?

Your Abilities:
✔ Do you have the technical skills or experience to manage the franchise?
✔ Do you have the business skills to manage the franchise?

Demand:
✔ Is there enough demand in your area for the franchisor’s products or services?
✔ Is the demand year-long or seasonal?
✔ Will the demand grow in the future?
✔ Does the product or service generate repeat business?

Competition:
✔ How much competition do you have, including other franchisees?
✔ Are the competing companies/franchises well established?
✔ Do they offer the same products and services at the same or lower prices?
✔ Is there a specialty or niche you can capture?

Brand Name:
✔ How well known is the franchise name?
✔ Does it have a reputation for quality? he beliefs or opinions that are generally held
about someone or something.
✔ Have any consumers filed complaints with the local Better Business Bureau?
Training and Support:
✔ What kind and how much training and support does the franchisor provide?
✔ Do existing franchisees find this level of training and support adequate?

Franchisor’s Experience:
✔ Has the franchisor been in business long enough to have established the type of
business strength you are seeking?

Expansion Plans:
✔ Is the franchisor planning to grow at a rate that is sustainable?

WHAT ARE THE KEY SUBJECTS IN THE FRANCHISE AGREEMENT?

✔ Use of trademarks. One of the main benefits you receive when purchasing a franchise is
the use of well-known trademarks. This section lists the trademarks, service marks or logos the
franchisee is entitled to use.
• Has the trademark been in operation for a significant amount of time and is it well
known?
• Are there any restrictions on its use by the franchisor or franchisee?

✔ Location of the franchise. This section describes the exclusive area or territory granted to
the franchisee.
• Do you have exclusive rights in a certain territory?

✔ Term of the franchise. In this section, the duration of the agreement is specified.
• How long does the agreement last?
• Can the franchisor purchase the franchise before the agreement expires?
• Do you have the right to renew the agreement?

✔ Franchisee’s fees and other payments. In this section, all the mandatory fees are
described:
• initial fee and what the franchisee receives for that fee
• royalty payment, what it is based on and when it is due

 Obligations and duties of the franchisor. This section describes, in detail, all the services
which the franchisor will provide:
• training
• operations support
• advertising

✔ Obligations and duties of the franchisee. This section describes the franchisee’s
responsibilities:
• requirements for training
• requirements for participation in the business
• requirements for keeping and submitting adequate records

✔ Restriction on goods and services offered. This section describes any restrictions placed
on the goods or services offered, including:
• required quality standards
• approved suppliers
• approved advertising
• hours of operation• pricing

✔ Renewal, termination and transfer of franchise agreement. This section includes:

• the rights and obligations of a franchisee upon termination
• descriptions about the transfer of the franchise agreement
• descriptions about the renewal of the franchise agreement