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Then Join a Franchise System

Some prospective business owners may ask, “Why should I invest in a franchise business when I can open my own independent business in the same industry?” The implication is that the first time business owner can do just as good a job opening their independent business as the franchise system does in opening its new outlets. And, since an independent business doesn’t pay royalties the novice independent business owner will put more money in their own pocket.

If we check the data, this turns out not to be true in almost all cases. Actual data shows that in those industries in which franchise systems operate, franchised establishments produce 60% more revenue than independent establishments. Do you want 60% more revenue in your new business?

There are many, many factors that work together to give these results. Let’s look at just two of these factors today. Franchised business establishments end up hiring about 30% more employees than independent business establishments. More importantly, each of the franchise employees produces about 24% more revenue per employee than employees of independent business establishments. These two factors multiplied together (1.30 more employees x 1.24 more revenue/employee = 1.60 more revenue) gives the 60% higher revenue.

The franchise employees are more productive than the independent business employees. Again, there are many, many factors that work together to make this so. Among them typically are better recruiting programs, better training programs, better operating systems and economies of scale.

But does all this put more money in the first time business owner’s pocket? That is the key question. In addition to franchise businesses having higher revenue they also tend to have lower expenses expressed as a percentage of revenue. One of the biggest expense line items in many industries is labor. Labor is frequently expressed as a percentage of revenue in a profit and loss statement.

Since franchised business have more productive employees their cost of labor expressed as a percentage of revenue is much lower than independent businesses. For those who like math, a 24% increase in revenue per employee translates to a 19% reduction in cost of labor as a percentage of revenue. Would you like a 19% labor reduction to go with your 60% higher revenue? And, would you like an apple pie to go with your cheeseburger?

A well-run franchise system will help reduce the cost of every other line item expense on the P & L Statement as well. As a percentage of revenue, the franchised establishment will have lower cost of goods, lower overhead cost, lower selling, general & administrative (SG & A) costs, lower cost of debt service (assuming a first time independent business owner can even get financing) than the independent business owner trying to compete with them.

These are some of the reasons why astute business owners choose to wisely invest in a well-run franchise system. With higher revenue and lower costs, after paying a royalty, they end up with more money in their own pocket.

The author, Kent Craven, is the longest tenured office owner in FranNet. FranNet has worked with SCORE Chapters nationwide since 1987 to help educate prospective business owners about franchising. Contact him at or by phone at 602 224-9333 ext. – 2.

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The process of investigating and evaluating a franchised business can be confusing even to otherwise experienced business people. Below are six steps, each of which could be divided into additional steps, which serve as a simple guideline for prospective business owners. However, no amount of research or planning will guarantee the success of any venture. There will always exist, however narrow, that bottomless chasm called failure. At some point you must have faith that you can leap across that chasm and begin the adventure of business ownership.

Step 1
Review in detail all of the franchise sales materials (brochures, videotapes, news releases, industry trade group literature) while concurrently making a list of questions. Because of the regulatory nature of the franchise industry, promotional materials tend to offer more questions than answers. No details are too trivial, no question inane. After all, it’s your money and your life.

Step 2
Discuss your questions from Step 1 with the franchise sales representative. Try to determine if the personality of the business and the nature of the owner’s daily responsibilities match your desires. There is no need to worry about numbers at this point. If your personalities do not match, then terminate your investigation.

Step 3
Request a copy of their Franchise Disclosure Document (FDD). This document is required by regulations of the Federal Trade Commission (FTC) for all franchise companies. It is a full disclosure document that outlines in detail the investment required and the responsibilities of both the franchisor and franchisee. Along with other information, it will contain a list of existing franchisees that you may contact and a sample franchise agreement.

Step 4
Contact several existing franchisees. You determine which ones to contact. Most of these business owners were recently in your position. Most freely extend the same courtesy and information to you as others did for them. These are the people of whom you can ask the nuts and bolts, dollars and cents questions regarding starting and operating their particular franchised business.

Step 5
The first four steps are for gathering information. Now it is time to organize that information into a comprehensive business plan for your proposed territory. This process may be iterative with Steps 2, 3 and 4 until every last piece of needed information has been gathered. You will couple your knowledge of the local territory with the knowledge gained from franchisor and existing franchisees to create a detailed pro forma. A useful business plan will not only give you an idea of the potential of the territory but also outline the steps required to reach that potential.

Step 6
If the business matches your personality and the pro forma matches your financial resources and requirements, then it is time to finalize your franchise agreement. Every thing in business is negotiable. Try for the best deal possible. Lock in certain start up costs such as insurance quotes, lease rates, etc. Consult with an accountant regarding the tax consequences of different business structures. Have an attorney familiar with franchise law review the final documents. If every thing is in order, take a slow, deep breath and… sign the check!

The author, Kent Craven, is the longest tenured office owner in FranNet. FranNet has worked with SCORE Chapters nationwide since 1987 to help educate prospective business owners about franchising. Contact him at or by phone at 602 224-9333 ext. – 2.

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SO now you’re glad that you missed out on the Krispy Kreme franchise opportunity and In-N-Out Burgers still doesn’t franchise its stores. You know that today’s business climate is ripe for franchise opportunities. Just how can you find the next “Hot” franchise opportunity and get in on the ground floor? “I know it when I see it.” says Kent Craven, Chief Executive at Phoenix based FranNet of Arizona.

He explains that once you understand the macroeconomic and demographic characteristics that create the right situation for a “Hot” franchise opportunity, most astute business people can also recognize these opportunities. “Most people know what a needle looks like, the hard part is knowing where in the haystack to start looking.”

Craven continues, “It’s relatively easy for sophisticated business people to evaluate opportunities once they know at which ones to look. The more important part is to know which ones to look at in the first place.” Craven’s firm has some help looking through haystacks. It is a member of North America’s largest group of franchise consultants with nearly 70 offices and 120 consultants, each looking through their local haystacks.

According to the International Franchise Association, the Washington, DC based, non-profit trade organization, there are over 4,000 different franchise business systems offering franchise opportunities in America. According to Craven not all franchise companies are created equal. “You need to know how franchising really works in order to evaluate different franchise systems operating in the same marketplace.”

Research by Professor Scott Shane, while at the Georgia Institute of Technology, shows that fully seventy-five percent of new franchise systems go out of business within ten years. Other research commissioned by the Small Business Administration shows that the offspring of the surviving parent companies, that is the individual franchised outlets, experience about a 90% survival rate in the long term. That is about 500% better survival rate than independent small businesses.

“Hot” franchises tend to be early in the life cycle curve hence there may be more inherent risk. But Craven assures, “Once you know what to look for it’s pretty easy to pick a winner.” Register for the Workshop and see for yourself.

The author, Kent Craven, is the longest tenured office owner in FranNet. FranNet has worked with SCORE Chapters nationwide since 1987 to help educate prospective business owners about franchising. Contact him at or by phone at 602 224-9333 ext. – 2.