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Nick,
I'm interested in learning more about how advertising
works with franchises. I know it varies across different
franchises but I'd like to know how many franchise companies
have national advertising campaigns and how many advertise
on the individual franchisee level. Any information on
this would be greatly appreciated. Thank you.
Marisa
Marisa,
Most franchise companies make provision
for a national advertising fund even if they don't have
enough franchisees to implement one. It is a hedge against
the future when they assume there will be more people
contributing. With regard to local advertising, again,
most franchisors obligate franchisees to spend a percent
of sales or a fixed monthly amount to promote the business
within their area of operation. There may also be provisions
for regional funds or cooperatives.
Best regards,
Nick
Nick,
I am about to franchise with a company overseas. Should
this company help with advertising?
Katz
Katz,
I am making the assumption here that
you are bringing a foreign brand to the U.S. as a franchise
as opposed to taking a U.S. brand overseas. If the founders
of a business have made it successful, they should have,
in the process, built certain systems, including marketing
plans that work. So, in the normal course of events you
would use the founder's plan, but pay for the advertising
yourself to bring in sales.
Make sense?
Nick,
We are in the middle of making one of the biggest decisions
of our lives. My wife and I are looking at a franchise
that seems to be a great investment for us. The FDD looks
okay but the franchise only has one location currently.
We all know that in order to establish direction or a
line you must have two points of reference or more. Should
this kill the idea?
Thank you
Aaron
Hello Aaron,
Your question is a good one and frankly,
I would also be skeptical of a franchise offering without
a track record. However, every venture has its starting
point, and franchisors are no exception. So let's examine
some of the issues.
First, the start-up franchisor has
the same concerns as you, but simply from a different
perspective. Whereas you are fearful that the concept
doesn't have franchisees for you to check with, the franchisor
is faced with overcoming the same problem, i.e., "how
do I sell franchises if I don't have some already established
as references?" Well, it is not an easy problem to
overcome, but you will find new franchisors perhaps willing
to provide some incentives in order to get started, and
those same incentives, if strong enough, may induce you
to buy with the feeling that you are getting a break while
entering on the proverbial "ground floor." And
candidly, there is nothing wrong with that. One common
incentive offered by new franchisors is a discounted franchise
fee to gain a seed group of franchisees. You save some
up front money and the franchisor begins building their
network. In addition, because the franchisor is painfully
aware that their future success depends, in part, on the
success of its franchisees, you, as one of the first in,
will most likely receive much more attention than those
who succeed you. Now, what could be better for you than
an incentive to join plus an increase in the amount of
start-up support you receive?
Second, due diligence is a necessity,
whether the franchisor has none or a hundred units in
place. Yet, few people take the time to complete such
an exercise. In the case of a start-up it is true that
you cannot check with franchisees who are already in the
system, but there are other things you can check on. If
you immerse yourself in the franchisor's core, or company
owned unit, you can experience the business firsthand
and observe customer satisfaction, the presence of an
operations and marketing plan, etc. That's really the
same kind of information you would be looking for in talking
to franchisees.
Third, franchising is about relationships
and as one of first, if not the first one into the network,
you have a great opportunity to establish a strong tie
with the franchisor and become one of the "cadre"
in the system. All manner of extra benefits can come from
that position beyond the franchisor's obligations as spelled
out in the FDD. For example, you will probably be asked
to assume a leadership role in the franchisee network.
You may be asked to first test new products, services
or profit centers. You may be offered new strategic programs
such as area developments.
Fourth, when it comes down to making
your decision, you must finally ask yourself, do I really
like the personality of the franchisor, do I trust this
person at a guy level, and do I really like the kind of
business that they operate? Now, I would suggest that
a buyer looking into a well established system ask the
same questions, but you perhaps will have the advantage
of seeing the franchisor from a more realistic perspective
in the beginning, as they will most likely still be deeply
involved with the core business and you will see them
working at the trade and concept they propose to help
you establish.
Bottom line, if I liked the person
and the concept, and then studied their business and saw
first hand, why and how it operated successfully, I would
do it.
I hope this helps.
Nick
Here's input from franchise attorney Jeff
Haff.
Aaron,
A franchise with only one operating
location obviously lacks some of the value generally associated
with franchising -- group buying, name recognition, common
advertising.
What you are looking at is more akin to a partnership.
You better be comfortable with the franchisor and confident
that they will do what is necessary to help you succeed
and to build the system.
Since you are thinking about "getting in on the ground
floor" you should try to negotiate some favorable
terms for yourself. These terms could possibly include
an area development agreement or an extensive "exclusive
territory" where no other store could be located.
You could ask for royalty concessions (for example, until
we make a profit we pay a reduced royalty).
Otherwise, I generally agree with Nick's analysis.
Jeff Haff
Input from franchise attorney
Warren Lewis
Aaron
On what basis do you believe the franchise is a "great
investment"? If you have a good basis for that
belief, if you and your wife would enjoy operating the
franchise, and if you have a good feeling about the franchisor,
seriously consider investing in the franchise. If
all of these conditions do not exist, pass on the opportunity.
In terms of evaluating the franchise as an investment,
since the franchisor has only one location, you should
be relying, at least in part, on independently-sourced
information about potential sales, costs and profits,
such as information from a trade association (the National
Restaurant Association, for example), an unaffiliated
operator in the industry, or an accountant or consultant
familiar with the industry. If you are relying on
sales, cost or profit information in Item 19 of the franchisor's
offering circular, that information is helpful, but it
is of limited value, since it is based on only one location.
You can use it, but you should be careful to investigate
whether the franchisor's location has unique advantages
that your potential location might not have. If
you are relying on sales, cost or profit information from
the franchisor that is not in Item 19 of its
offering circular, beware. While the information
might be accurate, it may have been given to you in violation
of the law, and therefore, is highly suspect.
Warren Lewis
Nick,
My husband and I have owned our own construction company
in San Diego for the past 20 years. We are burnt out with
construction and we would like to purchase a franchise
business. How do we find the best franchise in our area
that will be profitable?
Hello Cori,
If you are burned out with construction
and in need of a new concept to focus on, then franchising
could be a great option, but obviously you need direction
which will come from speaking to various franchisors that
interest you, and then comparing their comments to those
made by local franchisees operating those concepts to
see how they are faring with their businesses. It's still
hard work though starting up a new venture, as I am sure
you can well imagine.
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