So, you bought a franchise and it’s been successful for a few years and now you want to sell it.  The franchisor reserves some influence and financial discouragement.  The two biggest considerations given to the franchisor are:

1. Right of first refusal – the franchisor can match your highest legitimate offer and buy your franchise
2. Transfer fee – a fee you must pay to the franchisor for the privilege of transferring your licensing rights and obligations to another party

Sample Transfer fees:

FOOD:

• Pizza Factory: $12,000
• Quizno’s: $5,000
• Dominic’s of New York: $1,000 + 6% of sales price
• Submarina: $1,000
• Cheeburger Cheeburger: $12,250
• Pizza Patron: $5,000
• The Dugout: $5,000
• Arby’s: $13,500
• Doc Green’s Gourmet Salad: negotiated at time of sale
• Jerq’zine:  $10,000
• Original Hamburger Stand: $250
• Sub Station II: $5,000
• Steak-Out: $18,750
• Fazoli’s: Reaonable attorney, accounting, training and other related costs

OTHER:

• Bartercard: 10% of sales price
• Herman’s World of Sports: $12,500
• Sears Carpet and Upholstery: $3,000 – $6,000 (depends on market size)
• Stone Mountain Carpet Mill Outlet: $2,500
• Screenz:  $5,000
• Tax Centers of America: $1,000
• Sports Clips: $25,000
• Fantastic Sams: $20,000 or 10% of sales price (whichever is greater)
• Hair Cuttery: $5,000 ($0 if franchisee for 5+ years)
• Fastframe: 5-10% of purchase price

 Follow up to Franchisor as Exlusive Supplier (Krispy Kreme case)

More on the Krispy Kreme and Franchisee lawsuit:

Court documents filed in the case paint a cloudy financial picture for Sweet Traditions. In an affidavit, Sigurdson said a "continued catastrophic decline" in sales contributed to net losses of $1.2 million in 2003 and $3.2 million in 2004 and an operating loss of $2.2 million so far this year for Sweet Traditions.

He blamed Krispy Kreme for pressuring the franchise to expand too quickly, for overcharging it on supplies and equipment and for failing to promote the brand, even though Sweet Traditions has paid $2.5 million into a "brand fund."

Should you buy a franchise, or start your own business? After reading this you may not be so scared to start your own.

Let’s assume you have decided to start your own "coffee and sandwich cafe" instead of buying a franchise. The franchise fee would have carried a $30,000 and a 7% royalty on gross sales. Here is one way to proceed with your business and fee savings:

1. Take the $30,000 franchise fee and invest $25,000 in the market or real estate. With compound interest of 11% over 20 years, you’ll have over $201,000 nestegg to retire on. Take the other $5,000 and hire a franchise or business consultant to help you build out and set up operations.
2. Let’s assume you’ll spend the equal amount on advertising as you would have with the franchise, say 4% of sales. Assuming your sales are $400,000, that is $1,333 a month on advertising. How about you spend that plus an additional $2,333 ($3,666 total) on local promotions and media buys to build your own brand awareness? You can with 7% or $2,333 royalty you’ll be saving. That can go a long way considering radio spots and many TV spots can be had for less than $100 per spot. Many small businesses would salivate to have a $3,600 advertising budget each month.
3. By cutting out the premiums you pay to the franchisor for supplies and food, you can spend that money on an extra employee to help during high traffic hours or on creative consultants to help with advertising and promotions. In other words, you can invest that money in building a customer base.
4. Take the franchise fee you must pay to renew your franchise every 10 years (some are only 5 years) and invest it in a consultant to help build your business further. Or, if you have been obtaining feedback and outside and you are certain there is nothing left to improve, use the money to pay yourself a bonus.
5. Altenatively, if the business is stable and advertising has proven not to pay off, you can pocket some of the royalty money. But, I’d wait a few years until the business is well established.

What you are giving up by not buying a franchise:

• a method to operating a business and buying inventory that has been shown to work
• existing brand awareness
• pooling advertising dollars with other franchisees
• knowledgable resources (though they are obligated to maximize their profits, not yours)

What you gain:

• Freedom in all aspects of operating your business, from site selection to operations
• Easily sell the asset (your business)
• Lower cost inventory (no franchisor markup or required suppliers)
• Higher rate of reinvestment of gross sales into business
• Investing the franchise fee can provide a nice retirement safety net

One big reason franchises succeed more often than startups is the franchisor requires discipline — discpline in capital requirements, discipline in advertising and operations. If you have the discipline, you can succeed on your own.

We report, you decide

I rarely deviate from franchise talk, because that is what people come here to read. But, I just watched this heart touching tribute to former President Ronald Reagan on the 1-year anniversary of his death. I recommend people watch it regardless of their own political affiliation. Sometimes we need step back from business and keep perspective about what is truly important in life. Reflecting on great Americans can sometimes help us in that personal journey.

Some franchisors allow their franchisees to conduct their own promotions. Be especially careful of "free" coupon giveaways in whatever form. Subway is ending their free sub card (you need to get a certain number of stamps and you get a free sub).

If you want to be a franchisee, understanding the motivations and decisions made by franchisors is important. I came across this article that walks through the general considerations a franchisor must deal with when deciding whether to franchise their business. Reading the article will help franchisees evaluate whether the franchise fees and royalty are a fair exchange for the training and franchise system. The article lays out 13 steps, all of which should be included and considered during a franchisee’s due diligence.

First, the article helps evaluate whether a particular business can be franchised effectively. Franchisees need to understand what makes a good franchise business before evaluating the thousands of franchise oppotunities out there.

The article also describes the intellectual property consideration (mainly trademarks) which will somewhat strengthen the exclusionary power of franchises. It discusses the importance of the business, strategic and execuation plans of the business.

The article further describes how important pro-active operations and training support are to a franchisee’s success and for establishing a consistent brand image.

All of the above are important research points for franchisees, even when the franchisors has hundreds or thousands of units already sold. If a franchisee has weak training, poorly thought out business plan or poor site selection rules, you will find yourself one unhappy franchisee.

update 6-9-2005: Thanks for the link, Dane.

As a follow up my previous post, this article contains a relevant list.

10 MAJOR TASKS WHEN STARTING A NEW BUSINESS

1. Determine startup costs and find the money (e.g. savings, home-equity loan, business loan, etc.).

2. Find location (many startups begin in owner’s home).

3. Choose legal structure (sole proprietorship, partnership, corporation, limited liability corporation).

4. Apply for business license if city requires it and/or other required permits and licenses, depending on type of business.

5. Register a fictitious business name and/or apply for trademark (a franchiser will handle this issue).

6. Obtain seller’s permit if business will sell products subject to sales tax.

7. Apply for tax-identification number for IRS if business will have employees.

8. Set up business bank account to keep company revenue and spending separate from personal account.

9. Set up record-keeping system to track finances, deductible business spending, etc.

10. Write a business and marketing plan.

Of course, these are the most basic prerequisites and there are MANY more major tasks and gut checks, but this is a good start.

I found this story interesting. It tells the story of a working family ditching their jobs for the life of a franchisee.

Are they making more money? No. Are they working less hours? No. Are they happier? Yes.

They’re living on less, spending more hours at work and couldn’t be happier.

They are saving money on business clothes, gas and travel costs, food, and other work related expenses.

How do they market and advertise the business?

With no advertising budget, the couple do their own marketing. Don and Kasey tour the nearby residential neighborhoods dropping off menus sporting their Z Pizza address. Don delivers small pizza boxes to nearby businesses with an invitation to bring it to the restaurant in exchange for a free pizza.

I find many franchisees are making less money but are more happy in the end.

You may have seen the garage organization and shelving ads in the mailers, I know I have. I think the idea is novel and can make someone a nice living. I didn’t realize it was a franchise business, but I suppose it can be profitable enough. One franchisee of the Garagetek system with a territory in Jacksonville, Florida, has sold the franchise business and area expansion rights for about $300,000 (he initially paid $25,000).

Often, if you can afford it, signing a franchise agreement to develop a geographic or metro area is the safest and most financially protectable position. The restrictions on where in your terriroty you can set up shop, how many locations you plan to saturate the area with, and many other competitive factors are much more within your control.

Have you been putting off the decisions that are important? Are you spending your short time on earth the way you want? What if you knew you were gong to die in 2 years, what would you do different? Attorney Carolyn Elefant from MyShingle.com legal blog wrote a touching reminder that life is sometimes unexpectedly short no matter how healthy our lifestyle, and the decisions you make TODAY are important and long lasting.

How you lead your life is your decision, and maybe the risk of buying a franchise is a risk worth taking.

If the Franchise Pundit hasn’t given you enough reasons to research your franchisor before buying into the company, here is another one. As a franchisee, you are required to purchase inventory, supplies and other items through the franchisor or one of its listed suppliers. What if the franchisor is slow in delivering the product you need to sell? Well, you are out of luck. You’ll be in legal trouble for breaching the franchise agreement if you buy supplies or products elsewhere.

Moral of the story? Research the franchisor’s management, talk to other franchisees, ask to see the financial results of the franchisor and their credit ratings based on audited financial statements. Demand (or better, ask your lawyer to demand) the franchise agreement include a clause that you can buy necessities from alternative equivalent sources if the franchisor fails to deliver in a certain amount of time. If they refuse, I’d walk.

You’ll find some interesting information in this document from the 2005 Franchise Finance Conference. Using their methodology, our friend Dippin’ Dots was the fastest growing franchise. The median investment was between $93K – $185K, with CompuChild USA being the lowest with a $8,850 franchise fee.

The Federal Trade Commission (“FTC”) requires that a franchisor provide full disclosure of the business to a prospective franchisee in the form of the UFOC. You must be given the Uniform Franchise Offering Circular (“UFOC”) at least 10 days before signing any franchise agreement or during your first face-to-face meeting, whichever comes first.

Ever wonder what a UFOC look like? Download and check out Durango Grill’s UFOC (pdf). It’s from 2001, so it probably isn’t their current UFOC.

Update 4-27-2005: Fixed broken link to UFOC

Well, I made it! Now I live downtown and have a wonderful view of the skyline.

I used eMove to hire some guys to help me move. On that site (owned by U-Haul) you can hire strong laborers by the hour to help you load a truck. I’ve used them 3 times already, and they cost between $15 to $40 an hour per man.

Hello loyal readers. I’m moving and need the next few days to pack and unpack my stuff. I’ll repost again starting Monday, April 25.

Get ready for some educational reads such as REAL financial statements from a variety of franchises that the smart Franchise Pundit fans have emailed in.

The Franchise Pundit discussion board (or forum as some call it) is now ready and waiting for you! On the forum you can ask questions, share you experiences, make recommendation, dish the dirt, spread the gossip, complain, and much more .

There is a permanent link in the upper right corner of this page.