The AAFD Road Map to Selecting a Franchise

"Bringing Fairness to Franchising"

Written and produced by the Staff of the American Association of Franchisees and Dealers
Our thanks and appreciation to the many current and prospective franchisees whose experiences, insights, and "learning experiences" contributed to the making of this publication.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers.
Copyright, 1994 American Association of Franchisees and Dealers

[ Introduction ] [ Building Your Team ]
[ Healthy Wealthy and Wise ]
[ 8 Things to Look For ] [ Educating Yourself ]
[ How AAFD Can Help ]


Introduction

Welcome! You are reading this booklet because you're interested in buying a franchised business. Some of you already have a fair amount of business experience and are merely seeking useful resources for your selection process. Others of you, however, may find yourselves newcomers to the small business world and are eager not only for resources, but a plan to help you conduct your selection process.

In preparing this booklet, we have attempted to provide both a suggested "road map" for your selection and a variety of resources we think will be helpful to you in your decision-making. It is not intended as a comprehensive survey of all resources available about buying and owning a franchised business, but is intended to point you in the right direction and get you started.

Remember, you are considering investing your hard earned money (or borrowed capital) as well as your financial future and dreams in a new franchised business. The time and money you "invest" now, with in-depth research and investigation, together with legal and financial guidance from experienced professionals, may well save you many unpleasant and costly hours in future litigation and/or financial ruin.

It is the desire of the AAFD to see that your plans for selecting a franchised business are realized in such a way that you open the door to success. We invite you to let the AAFD assist you with its many resources.
Our best to you for a successful selection!

The Staff of the AAFD

"Farming looks mighty easy when your plow is a pencil, and you're a thousand miles from the corn field."
Dwight D. Eisenhower


Building Your "Success Team"

Frequently we hear people say they want to "save money" in their selection process by doing it themselves, or using a friend or family member instead of using qualified counselors. Failure to obtain experienced counsel, your own "success team" can be "penny wise and pound foolish." Cutting corners in your franchise selection process is not a very good idea. The AAFD can help lower your costs with special member discounts and pricing from many fine professionals.
Given the level of your potential investment, including site acquisition, build-out, fees and commissions, make allowance for a reasonable budget for expert advice. Typically, a budget of 2-5% of your total investment is sufficient to afford a competent "success team" to steer you through the selection process. Building your success team won't guarantee your success, but our experience shows it will save you from the "penny wise, pound foolish" trap.


Your Success Team:
  • You, as an educated buyer of the franchise, are the most important part of the "team."
  • An experienced franchise attorney who understands franchise agreements and can review your offering circular and assist you in the establishment of your business.
  • An experienced financial consultant or accountant who understands franchise business and can review your offering circular with a view to projecting the profit potential and risk of your opportunities, and can assist in setting up proper financial control systems.
  • The AAFD for referrals to these and other experienced professionals, through our exclusive Franchisee LegaLineSM, FinanciaLineSM and CounseLineSM. These services are tailored to active and current franchisees. All AAFD affiliated service providers offer substantial discounts to our members.

    The AAFD is your ally, always seeking to provide those services which will assist you in being successful.

Healthy Wealthy and Wise

Some of you reading this booklet will be old hands on business matters, and these questions will merely serve as "touch stones" as you move through your selection process. For others of you, however, you may have intuitively understood the need for these questions, but were uncertain how to focus your exploration. Once again, these few questions are intended to guide and prompt you into further personal investigation, or what franchise experts call "due diligence."

  • How much money do I have available to spend, and can I afford the financial risk of buying a franchised business?
  • How much money will it take to fully fund the purchase of a franchised business, including start up costs and working capital for your first year in business?
  • How can I find and qualify for financial funding?
  • What kind of support is really provided from the franchisor?
  • Do I have the requisite business skills to qualify me for an investment of this nature?
  • Consider a Personality Profile Assessment to assist you in assessing your business and personal interests, skills, strengths and weaknesses.
  • If my franchised business fails, what are my rights and what are the consequences for my long-term financial health?
  • Does my franchisor collectively bargain with its franchisees, and what is my franchisor's reputation for fairness and support for its franchise system?

The AAFD's "8 Things to Look For in A Franchise"
  • Select a franchising company that is primarily interested in distributing quality products and services to ultimate consumers. Although this rule may seem obvious, many (if not most) franchising companies are primarily interested in selling franchises and are less concerned with the quality of the products and services they are theoretically in business to sell.
  • Your franchising company should be dedicated to franchising as its primary mechanism of product and service distribution. Be wary of franchisors with a large number of company-owned stores, or who distributes its products through other channels such as supermarkets or discount stores.
  • Your franchising company should produce and market quality goods and services for which there is an established market demand. The value of franchising emanates from the value of the franchisor. Too many prospective franchisees cannot qualify for a widely-recognized franchise and settle for a lesser known system thinking the franchise concept is more important than the product and trade name.
  • Select a franchisor with a well accepted trademark.
  • Evaluate your franchisor's business plan and marketing system. A well-established, well-designed marketing system promises substantial and complete training and overall franchisee support.
  • Your franchisor should have good relationships with its franchisees. Likewise, the franchisees should have a strong franchisee organization which has negotiating leverage with the franchising company. A franchisor who does not permit its franchisees to organize is a sure sign of trouble ahead. Strong franchisee associations, on the other hand, will pave the way to successful and cooperative franchising systems.
  • Only deal with franchising companies that provide sales and earnings projections which demonstrate an attractive return on your investment. Do not believe franchisors who claim they are forbidden by law to provide earning projections and evidence of actual performance. To the contrary, all state and federal laws regulating franchising encourage franchisors to provide earnings claims to prospective franchisees.
  • Select a franchisor that supports the AAFD's Franchisee Bill of Rights and agrees to respect these rights as they apply to your franchise.

    • The American Association of Franchisees Dealers
    Only Select A Franchise Which Meets ALL 8 Criteria!


Educating Yourself

Learning What to Ask and What to Look For is Critical

This is the "homework" -- of buying a franchise. Franchisors want you to buy their franchise and their materials are structured with this goal in mind. The more you learn about franchising and the franchise selection process, the more successful you will be at understanding what the franchisor is really offering you. The AAFD Resource Store can provide you our recommended resources.

The Franchise Handbook: Available by subscription or can be purchased at your local news stand or book store.

Enterprise Magazine: AAFD member price available

The Entrepreneur Authority www.eAuth.com


How The AAFD Can Help

AAFD: The prospective and current franchisee and dealer's association.
Franchisee InfoLine: 800-733-9858
For information on the following:

Member Discounts: All service provider professionals offer special discounts to AAFD members.

Franchisee Suppliers NetworkSM: AAFD member referrals to a network of consultants and business offering the following:

- Assistance with business plans
- Marketing studies
- Information on demographics
- Incorporation assistance
- Financing resources
- Sources of government assistance to franchising
- Independent franchisor investigation (e.g., civil suits, litigation, corporate officers)
- Business support products (e.g., business insurances, merchant accounts, check guarantee services)

Franchisee FinanciaLineSM: AAFD member referrals to a network of experienced accountants, CPA's, and other financial services professionals who can provide a "Franchise Opportunity Review"

Franchisee LegaLineSM: AAFD member referrals to a network of experienced franchise attorneys can provide a "Franchise Opportunity Review"

Workshops Seminars: Call the AAFD for information on events taking place in your area, or for referrals to individuals who can make your desired presentation


Other Sources of Information
  • Magazine articles in Entrepreneur, Kiplinger Personal Finance, Money Guide to Small Business and others.
  • Talk to your local Small Business Development Center about resources and opportunities in your area, or the region in which you wish to establish a franchise.
  • Classes on franchising may be available at local colleges or adult continuing education centers.
  • SCORE -- a network of retired business executives -- in your area.
  • Talk to your neighborhood franchisees ... learn what their experiences have been.
  • Contact the Franchisee association for your prospective franchises, if any.
  • Brokers and consultants specializing in franchise sales; BUT REMEMBER, These are often sales people!? The AAFD may be able to make a reliable referral.
  • Trade shows: for a sampling of what's available. But don't take your checkbook - do not buy without completing your investigation and careful evaluation!

Narrowing the Choices

Critical Questions!

  • Does the franchisor you are considering collectively bargain with its franchisees?
  • What is the prospective franchisor's reputation for fairness and support for its franchise system?
  • Buy a notebook for each franchise you are contacting and always take notes.
  • Make a file permanent for each franchisor you're investigating and keep all the information you gather, in your notebook. You'll accumulate a lot of information!
  • Contact prospective franchisors to find out what their application procedure is. Request a Uniform Franchise Offering Circular for each franchise system of interest to you.

    • _ Do not pay any money before receiving any circular you request: By law the franchisor should not charge any fees until you have reviewed your offering circular for 10 days.
    _ Make a record of ALL conversations with each franchisor: include date, time, person talked to, promises, questions and answers.

  • Retain this information for future discussions with your attorney and accountant
  • Use the AAFD's "8 Things to Look For in Selecting A Franchise" and "The Franchisee Bill of Rights" to aid you in your review and negotiations.? (see page 4)

Evaluate Your Selection:

Franchise and Franchisor
Doing Your Due Diligence

  • Due diligence means market research, market research, market research!
  • Due diligence means examining the offering circular closely. All research you've previously done is invaluable in knowing what to look for and what questions to ask.
  • Research start up costs, suppliers; summary of all the franchisor agrees to provide including training; site or territorial rights; business and financial investigation of the franchise and its owners, your competitors, etc.

    • _ Make a record of ALL conversations with the franchisor including date, time, and person talked to, promises, questions and their answers

  • Franchisors are required by law to disclose any litigation: ask and research.
  • Use your "success team," including an AAFD referral to a LegaLine lawyer and FinanciaLine accountant for an "Opportunity Review," i.e., to review the offering circular with you.
  • Give both your accountant and attorney a copy of your notes (keep originals for your files).

Cautions

Critical Caution!

_Do not sign any agreement without having it reviewed by your attorney and accountant.

_ Do not pay for any circular you request.

_ Promises made by a franchisor may not be binding unless included in the final franchise agreement.

_ Record ALL conversations with each franchisor -- include date, time, person talked to, promises, questions and their answers.

_ The UFOC does not mean the government has reviewed and/or approved your franchise.

_ Do not be pressured into signing an agreement:? It's in the salesman's interest to create a sense of urgency that may not be real.? Remember:? Trade shows and franchise brokers are in business to sell franchises.

_ Talk to lots of franchisees including those the franchisor doesn't recommend or who have recently left the system.? Include some in similar geographic areas, some who've been in business 3-12 months, and some who've gone through a renewal cycle and have been in the system for many years.

_ The Franchisor must give names of all franchisees who? left in the past 3-5 years.

_ Never underestimate the start-up costs of getting into the franchise. Make sure you have enough funds to carry you until the business makes a profit.

_ Don't assume that because a franchisor is a member of the IFA, it is a "reputable" franchisor.