Franchise Management For Dummies. Mazero Joyce

power of the many franchisees operating in a franchise system. Typically, the buying group or purchasing cooperative negotiates supplier arrangements and facilitates its members’ purchases on uniform pricing and delivery terms.

      Reliance on buying groups and cooperatives is especially common in the food sector, but they exist across all industries. A well-managed buying entity will ordinarily generate significant cost savings, and for that reason franchise systems that embrace these groups often enjoy a competitive advantage.

      

It is important to understand that franchisees who participate in these groups are still required to follow the franchisor’s brand standards and specifications. For this reason, franchisors often exercise significant influence over quality and other standards applicable to selection of products and the suppliers themselves. Some franchisors even participate directly in the groups, to better service the franchisor’s corporate (non-franchised) locations. For more on buying groups and cooperatives, see Chapter 9.

Buying Franchisor-Owned Locations

      

On occasion, franchisors make company-owned locations available for sale to franchisees. This is called either retrofranchising (locations that have never been franchised) or refranchising (locations that once were franchised but were acquired and operated by the franchisor). For all practical purposes, for franchisees looking to invest in established businesses, they are the same.

      Franchisors have many reasons for wanting to sell company-owned locations:

      ❯❯ They may no longer fit the franchisor’s strategic plan.

      ❯❯ The franchisor may want to consolidate the number of markets or number of locations it directly operates.

      ❯❯ The franchisor wants to stimulate the development of additional units in a market, and providing franchisees with cash flow from established units is part of that strategy.

      ❯❯ The franchisor may simply need the proceeds from the sale.

      In some situations, franchisees are just better at operating locations than the franchisor, and the franchisor is selling locations simply because it believes the locations work better under the control of a franchisee than under the franchisor’s own personnel.

      Acquiring an existing location from another franchisee or from the franchisor has many advantages:

      ❯❯ It shortens the time to get the business up and running because you don’t have to find the location or work through constructing and equipping the business – and it already may have a trained staff and management team.

      ❯❯ Bank financing may be easier because the business exists.

      ❯❯ The seller may offer seller financing, and a motivated seller might be willing to cut you a good deal.

      ❯❯ You are buying a business that currently is operating, has existing customers and an established cash flow, and you know the performance of the operating business. Your investment decision is based on current operations and not on projections.

      ❯❯ If the location is being sold by the franchisor, it can share with you the financials for the location, even if it doesn’t include an Item 19 Financial Performance Representation in the FDD (see Chapter 6).

      As with any purchase, you should take your time to evaluate the business. Sometimes you will find franchisors that are churning locations. Churning occurs when a franchisor is selling a company-owned location that it may have taken back from a franchisee because the unit is failing or has failed. If the unit wasn’t viable before, there is a good chance it won’t be viable under new ownership either and likely should have been closed. Churning frequently happens in some systems where the franchisor is trying to avoid disclosing in the FDD a unit failure and instead buys a failing location before it closes.

      

Always get a history of ownership of any business you are looking to purchase. Don’t assume that you are a smarter or better operator than the last guy. A franchisor that has a high percentage of churning may offer little chance for success to any type of franchisee and so may not be a sound franchise investment – even for franchisees not buying one of these recycled locations. Thankfully, not many franchisors churn their locations, but you still have to be alert to the possibility.

CONVERSION AND NONTRADITIONAL FRANCHISES

      A less common alternative to the traditional franchise relationship is a conversion franchise, in which an independent operator, in the same business as the franchise system, converts its operation substantially to the franchise system. For example, an operator of a local pizza restaurant completes remodeling and modification of its menu to operate as a Pie Five Pizza under a franchise agreement. In a conversion franchise, the new franchisee may execute a franchise agreement that has some material differences from the franchisor’s standard agreement, including fees and a transition plan to convert their existing business over to the franchise system’s retail offering.

      Other variations of the standard franchise fall into a broad category usually referred to as nontraditional locations, including mass-gathering locations – airports, train stations, hospitals, college campuses, sports stadiums, ballparks, food courts, portable kiosks in parks and amusement parks, military bases, and so forth – where traffic to your business is generated by someone else’s customers. Also included in this area are locations found in host locations, such as convenience stores, big-box retailers, and so on. These types of locations are generally not available to the average franchisee, and it is common for a franchisor, even when it is giving the franchisee some territorial rights to carve out these locations from the franchisee’s protected territory.

      Chapter 3

      Mirror, Mirror, on the Wall

      IN THIS CHAPTER

      ❯❯ Assessing whether franchising is right for you

      ❯❯ Understanding the advantages and disadvantages of investing in a franchise

      ❯❯ Recognizing the differences among franchisees, entrepreneurs, and employees

      You need to define who you really are and what you want to do. Self-evaluation may be the most difficult thing for anyone to do when they are caught up in the excitement of striking out on their own. However, at this point in your evaluation of franchising, it is essential that you be brutally honest with yourself. Your future happiness depends on being able to make an honest assessment about yourself.

      Most individuals looking to invest in a franchise will have an emotional reaction to the process of selecting one. That should not be surprising because when we train franchise salespeople, part of the training is to make certain they build an emotional bond between the candidate and the opportunity. But remember, you don’t need to become a franchisee and you should stay above the emotional fray and only make your franchise decisions based solely on the merit of the offering.

      Every franchise salesperson or franchise broker is going to tell you that you are perfect for their franchise opportunity. Their job is to sell you the opportunity they are offering because that’s how they make their living – they’re only paid their commission when you sign the franchise agreement.

      This chapter will help you define who you are and whether you’re the type of person who should be investing in a franchise. Your decision needs to focus on you: your lifestyle, family, likes and dislikes, work rhythms, values, ethics, and even dreams. If you’re not absolutely comfortable – for any reason – with one franchise opportunity, remember that there are hundreds more for you to consider. And you should. Franchising will not make you a new person, and it is not a self-help tool.

Starting Your Own or Joining a Team

      Franchising is not the right choice for some people. Although franchisees manage nearly every aspect of their businesses on a day-to-day basis, and how they establish their human resource