Franchisee Resources

Acid Test to Become a Franchisor

In order to become a franchisor, you must pass the acid test of profitability.  No franchisor can have long term success without the consistent profitability of the franchisees.  Before franchising your business, take the iFranchise Acid Test  - 

 

1)  Begin with the profitability of the prototype operation. Adjust for changes in gross margin (if you will be selling product to your franchisees at a mark-up).

 

2)  Add to that number any investments made during the year (e.g., new signage, remodeling, etc.)

 

3)  Add any non-recurring expenses (e.g., litigation, funding costs, etc.)

 

4)  Add any expenses the franchisee will not incur (e.g., trademark registration, logo development costs, franchise registration, consulting fees, etc.)

 

5)  Add the cost of any excess benefits taken by the owner or other tax minimization strategies you may have utilized (e.g., life insurance, automobile, country club membership, etc.).

 

6)  Add any excess compensation (above the market rate) you may have taken. If you took a salary that was less than the market rate for the position you held, subtract that amount. Note: The purpose here is to include an "average" compensation package for the a franchisee who acts as a manager. Remember, the franchisee is entitled to a return both on their time (salary) and on their investment.

 

7)  Add back depreciation and amortization.

 

8)  Add back interest paid (If you are working off of a cash flow analysis, add back debt service in its entirety.)

 

9)  Deduct a royalty payment based on comparable franchises -- usually between 4% and 6% of gross revenues.

 

10)  The resulting number is your franchisee's projected adjusted net income.

 

11)  Estimate your total investment. Be sure you estimate using full costs in today's dollars. Assume you pay cash for everything -- no financing at all.

 

12)  Divide the franchisee's projected adjusted net income by your estimate of the total investment. The result will be the franchisee's projected Return on Investment. The franchisee's ROI should be at least .15 (15%) or higher.

 

Note: This model can also be done as a Return on Equity model. In that case, reduce your anticipated investment to the equity portion alone, and deduct debt service from the franchisee's anticipated net profit.

 

Remember, you cannot acheive long term success as a franchisor unless your franchisees are profitable.  This test can help you determine if you should consider becomeing a franchisor.  To view the 12 Criteria of Franchisability, click here.

 

The 'iFranchise Acid Test' is created and copyrighted by the iFranchise Group and reprinted with express permission of the iFranchise Group.  To learn more about the ifranchise Group click here.

12 Criteria of Franchisability

If you are considering franchising your business and becoming a franchisor, one of the first questions you need to ask is whether your business is franchisable.  Not every business can be franchise and there are many criteria you need to evaluate in regard to whether it makes sense to become a franchisor.  Below you will find a list of the 12 Criteria of Franchisability by the iFranchise Group.

 

1)  Credibility – To sell franchises, a company must first be credible in the eyes of its prospective franchisees. Credibility can be reflected in a number of ways: organization size, number of units, years in operation, look of the prototype unit, publicity, consumer awareness of the brand, and strength of management, to name the most prominent.


2)  Differentiation – In addition to credibility, a franchise organization must be adequately differentiated from its franchised competitors. This can come in the form of a differentiated product or service, a reduced investment cost, a unique marketing strategy, or different target markets.


3)  Transferability of knowledge – The next criteria of franchisability is the ability to teach a system to others. To franchise, a business must generally be able to thoroughly educate a prospective franchisee in a relatively short period of time. Generally speaking, if a business is so complex that it cannot be taught to a franchisee in three months, a company will have difficulty franchising. Some more complex franchisors offset this handicap by targeting only franchise prospects that are already "educated" in their field (e.g., a medical franchise targeting only doctors).


4)  Adaptability – Next, measure how well a concept can be adapted from one market to the next. Some concepts (e.g., barbecue) do not adapt well over large geographic areas because of regional variations in consumer tastes or preferences. Others (e.g., medical practices) are constrained by varying state laws. Still other concepts work only because they are in a very unique location. And some work because of the unique abilities or talents of the individual behind the concept. Finally, some concepts are only successful based on years of perseverance and relationship building.


5)  Refined and successful prototype operations – A refined prototype is necessary to demonstrate that the system is proven, and is generally instrumental in the training of franchisees. The prototype also acts as a testing ground for new products, new services, marketing techniques, merchandising, and operational efficiencies.


6)  Documented systems – All successful businesses have systems. But in order to be franchisable, these systems must be documented in a manner that communicates them effectively to franchisees. Generally speaking, a franchisor will need to document its policies, procedures, systems, forms, and business practices in a comprehensive and user-friendly operations manual and/or computer-based training module.


7)  Affordability – Affordability merely reflects a prospective franchisee's ability to pay for the franchise in question. This criterion is as much a reflection of the prospective franchisee as it is of the actual cost of opening a franchise. For example, a multi-million dollar hotel franchise is affordable to real estate developers, whereas a franchise with a $100,000 start-up cost that targets prospects with clerical experience might not be.


8)  Return on Investment – This is the real acid test of franchisability. A franchised business must, of course, be profitable. But more than that, a franchised business must allow enough profit after a royalty for the franchisees to earn an adequate return on their investment of time and money. Profitability is always relative. It must be measured against investment to provide a meaningful number. In this way, the franchise investment can be measured against other investments of comparable risk that compete for the franchisee's dollar. Typically, the iFranchise Group looks for the franchisee to achieve a ROI of at least 20 percent by the second to third year of operations. To see how your business measures up to this criteria, click here to take the iFranchise Acid Test .


9)  Market trends and conditions – While not an indicator of franchisability as much as a general indicator of the success of any business, these trends are key to long-term planning. Is the market growing or consolidating? How will that affect your business in the future? What impact will the Internet have? Will the franchisee's products and services remain relevant in the years ahead? What are other franchised and non-franchised competitors doing? And how will the competitive environment affect your franchisee's likelihood of long-term success.


10)  Capital – While franchising is a low-cost means of expanding a business, it is not a "no cost" means of expansion. A franchisor needs the capital and resources to implement a franchise program. The resources required to initially implement a franchise program will vary depending on the scope of the expansion plan. If a company is looking to sell one or two franchised units, the necessary legal documentation may be completed at costs as low as $15,000. For franchisors targeting aggressive expansion, however, start-up costs can run $100,000 or more. And once the costs of printing, audits, marketing, and personnel are added to the mix, a franchisor may require a budget of $250,000 or more to reach its expansion goals.


11)  Commitment to relationships – Successful franchisors focus on building long-term relationships with their franchisees that are mutually rewarding. Unfortunately, not all franchise organizations understand the link that exists between relationships and profits. Strong franchisee relationships enable the franchisor to sell franchises more effectively, introduce needed changes into the system more easily, and motivate franchisees and their managers to provide a consistent level of products and services to their customers.


12)  Strength of management – Finally, the single most important aspect contributing to the success of any franchise program is the strength of its management. The iFranchise Group has found that the single most common contributor to the failure of start-up franchisors is understaffing or a lack of experience at the management level. Oftentimes, new franchisors will try to take everything on themselves. In addition to absorbing several new jobs for which the franchisor has little to no time, the franchisor needs to exhibit expertise in fields in which he or she may have little or no experience: franchise marketing, lead handling, franchise sales, ad fund management, training, and multi-unit operations management.

 

The 12 Criteria of Franchisabiltiy is created and copyrighted by the iFranchise Group.  The reprinting of this list is done with the express permission of the iFranchise Group.  To learn more about the iFranchise Group click here

 

Remember, just becuase you have a succesful business, it does not mean that franchising is an appropriate method of expansion.  First step is to determine if your concept is franchisable.  Any comapny should undertake this analysis before implementing a franchise strategy.

The great news for those who are considering franchising is that the franchising world offers tremendous variety in terms low cost franchises and home based franchises.

 

When people think about franchising, they normally think about quick service restaurants, hotels and other store front franchises.  Although these can be good business opportunities, they are also some of the more expensive franchises.  At the other end of the spectrum, you can find quite a few low cost franchises and home based franchises with investments of less than $100K.

 

View Franchise Business Review's Report - Top Low Cost Franchises

 

One of the great advantages of low-cost franchises and home based franchises is that they require minimal fixed expenses. Home based franchises obviously have no rent and very little overhead often leading to a faster break even.  In addition, low cost franchises and home based franchises often have strong growth potential over time and can provide a significant return on investment for those with the right skills and the willingness to work hard.

 

But, as you might imagine, low cost franchise and home based franchises are not risk free.  In some ways, they are riskier than higher cost franchises.  These franchises tend to attract individuals that are focused only on cost ignoring the reality that low cost sometimes means low quality.  The goal of course is to make sure that you purchase a high quality franchise - regardless of the investment.

 

If you are interested in home based franchises or low cost franchises, you need to read The Educated Franchisee. The research techniques outlined in The Educated Franchisee will help you discern low cost franchises that offer a good system and support from cheap franchises that fall into the category of buyer beware.  By asking the right questions and turning over the right stones, the potential franchisee can identify low-cost franchises and home-based franchises that offer both high quality and reasonable cost.

Funding & Finance

Franchise funding questions are among the most critical questions for anyone thinking of buying a franchise. The ability to secure franchise funding is often key to a potential franchise owner’s decision to move ahead with the purchase of a franchise opportunity. Although there are many possible sources of franchise funding, the best avenue is usually with reputable franchise loan consultants.  But where do you find reputable franchise loan consultants?

 

In Chapter 13 of The Educated Franchisee, you’ll find a thorough discussion of franchise business financing. The chapter includes discussions on both debt and equity funding. By the end of the chapter you will have a thorough understanding of the various options available for franchise funding.

 

Prospective franchisees have many options in terms of franchise funding. These options include hiring franchise loan consultants, getting bank loans, home equity and more. What follows is a list of reputable franchising loan consultants and other sources of franchise funding information.

 


 

Premier Franchise Funding Sources

 

Benetrends

Benetrends, Inc. (franchise loan consultants)
866-423-6387  www.benetrends.com

BeneTrends has been helping entrepreneurs launch their dreams successfully for nearly 30 years, with proven and innovative funding strategies that make the most of opportunity, while minimizing risk. Benetrends has been at the forefront of developing 401(k)/IRA business funding, without penalty, and is regarded as the authority in franchise and small business funding. Benetrends has decades of expereince and can be a reliable partner as you explore your financing alternatives.

Franfund

FranFund (franchise loan consultants)
1 877 372 6386 www.franfund.com

At FranFund, we are to franchise funding what a concierge is to the hospitality industry: a single, expert resource that will search the marketplace for the best options to fund your franchise and then provide you with one or more capitalization solutions based on your individual needs and goals. At FranFund, we do the homework, the legwork, and the paperwork. So you can focus on growing your business.

Guidant

Guidant Financial Group (franchise loan consultants)
888-472-4455    www.guidantfinancial.com

Guidant Financial Group is the premier provider of business-funding solutions through IRAs and 401(k)s. By using Guidant’s retirement account structure, you can effectively finance your enterprise and earn a higher return within your account. Launching your business with retirement funds instead of debt financing significantly lowers overhead – a tremendous advantage for any new business. For those who need additional financing, Guidant’s program allows multiparty purchases and combining retirement funds with loans. Let Guidant Financial Group put you on the fast track to success!




 

Other Sources of Quality Franchise Funding

Catchfire Funding (franchise loan consultants)
877-702-2040  www.catchfirefunding.com

Diamond Financial Services (franchise loan consultants)
877 508 2274 www.franchisefunding.net or http://www.easysba.com/

Directed Equity (franchise loan consultants)
877-839-8064 www.directedequity.com

Franchise Finance (franchise loan consultants)
501.228.4047 www.franchise-finance.com



 


 

Other Franchise Funding Resources

 

SBA

SBA Registry
http://www.franchiseregistry.com/registry/

The SBA Registry lists names of franchise companies whose franchisees enjoy the benefits of a streamlined review process for SBA loan applications. Loan applications for registered franchisors can be reviewed and processed quickly and efficiently. Small business owners get better service and quicker loans.

SBA

SBA Loan Information
http://www.sba.gov/services/financialassistance/sbaloantopics/index.html

The SBA offers numerous franchise funding programs to assist small businesses.  It is important to note, however, that the SBA is primarily a guarantor of loans made by private and other institutions and does not offer franchise funding loans directly to small businesses.

SBA

SBA Charge-Off Table by Brand

https://opendata.socrata.com/Business/Franchise-Failureby-Brand2011/5qh7-7usu

This table provides 2011 Charge-off data for approximately 550 brands that used the SBA program to secure franchisee loans.  This list is not complete but it is a good stating point if you are lookng for this type of data.

Patriot

SBA Patriot Express Program
http://www.sba.gov/patriotexpress/index.html

This program was introduced in 2007 and is targeted to benefit many US citizens with military service backgrounds and those individuals seeking to transition into private-business ownership.


 

If you need franchise funding sources, we hope the above list of franchise consultants and other lenders will be helpful.  If you know of any other franchise funding resources or if you specialize in franchise funding and would like to be listed here, please email us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Data & Analysis

In measuring business opportunities, access to good data and analysis can be vital.  The franchise business is no exception.  Franchise opportunities flourish where the data and analysis support growth.  The best place to begin gathering data is directly from the franchisor.  Any high quality franchise business will have access to the data impacting its business model.  But keep in mind, the franchise opportunity usually pays a considerable fee for this data.  In The Educated Franchisee you can access much of this data for free - download center

 

There are also companies that supply independent surveys on specific franchise opportunities.  These surveys usually include interviews with franchisees from the specific franchise business and a general sense for the health of the system.  Although these should not be used in lieu of your due diligence, they can be a useful starting place.

 

If you want to gather general data on the franchise business, there are other places to look.  Every few years a comprehensive study is conducted on the franchise business.  A few of these studies are listed here for download.  Also listed are various companies that offer packages or specialized studies on either the franchise business or on specific franchise opportunities.  Although these studies can be costly, in some cases, they are the only place to secure the data you may need.

 



Franchise Data, Surveys, Studies and Analysis

 

FBR

Franchise Business Review
(603) 433 2270

 www.FranchiseBusinessReview.com

Franchise Business Review is the leading source of independent franchise information, ratings and reviews of the top franchise opportunities in the marketplace. Download reports on today’s top franchises based exclusively on franchisee satisfaction.


 

Other Resources for Franchise Business Data and Analysis

frandata-logo

FRANdata - Downloads

FRANdata’s objective is to positively impact decisions at all levels of the franchise industry.  For more than 15 years the FRANdata has been the company everyone turns to for information with which to support business decisions and activities of businesses operating in and around the franchise world. 

The Profile of Franchising is a study conducted by FRANdata and published in Franchising World Magazine in March 2007.  Click to go to our Download Center and download the report.

 

pwclogo

Price Waterhouse Study  - Download

The Economic Impact of Franchising studies for the International Franchise Association Educational Foundation are conducted by Price Waterhouse each year.  These studies are quite lengthy with some being over 400 pages. In the Download Center we have many years of studies that you can download at your pleasure.

 

FranSurvey
800 410 5205  www.fransurvey.com

 


If you are looking for great sources of information on the franchise business, the above mentioned sources are a great starting place.  If you are looking for access to additional resources regarding the franchise business, please feel free to contact us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and we will do our best to assist.

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