Category Archives: Startup
Written By: Daniel Hart
Edited By: Salene Kraemer
From time to time, we have clients buy into a franchise or occasionally want to franchise his or her own business concept.
Franchising is a business model that combines aspects of working for yourself and working for someone else. It is an efficient system for an individual who wants to own/run a business but lacks the experience to do so. Within the United States, there are about 3,000 established franchise brands operating in over 200 different lines of business. A franchise is a legal and commercial relationship between the owner of a trademark, trade name, and business system (franchisor) and an individual or group wishing to use that identification in a business (franchisee). The most common form of franchising is product/trade name franchising in which a franchisor owns the right to a trade name and/or trademark and licenses the rights to use those.
Buying a franchise offers many advantages that is not available to an individual starting a business from scratch. Here are a few examples:
- Proven business system and brand name. Through years of experience and trial and error, franchisors have developed a business system and brand name that are successful.
- Pre-existing business relationships. Many franchises have existing relationships with suppliers, distributers, and advertisers that franchisees can utilize. Entrepreneurs must develop these relationships on their own.
- Quality market research. Typically, a franchisor will perform substantial market research into competition and the demand for the product or service in a specific location before allowing a franchisee to open a franchise there.
Similar to an entrepreneur opening their own business, a franchisee must spend a substantial amount in order to obtain their own franchise.
- First, there is an initial franchise fee, which is a one-time charge assessed to a franchisee in order to use the business concept and trademarks, attend training program, and learn the entire business. Franchise fees can have varying ranges depending on the size of the franchise system. This can range from as low as $2,000 to over $100,000.
- Depending on the specific type of business that you franchise, a variety of additional up-front costs can occur. These costs include rent/construction cost of building new facility, equipment, signage, initial inventory, working capital, and advertising fees.
After these initial costs and fees, a franchisee generally pays the franchisor royalties running around 5 to 8 percent of gross revenue plus contributing funds to a company-wide advertising program.
Many people may ask “why should I pay tens of thousands or hundreds of thousands of dollars before I start and then a royalty percentage every year after that?” For some, the answer is clear. By opening their own franchise of an already successful name-brand business, many can make more money quicker than opening their own business. Also, there is a greater likelihood that long-term return on their investment will be realized.
As with starting any business, it is vital to perform due diligence before investing in a franchise. Here are some examples of basic information you need to discover before committing to a franchise:
- Research growth potential. Simply, you need to make sure that there is a strong-likelihood that you can increase profits and have a successful business. Also, is there a market for your business where your location will be?
- Check consumer and franchise regulators. Check these within your state to see if there are any serious problems with that company. Check with the Better Business Bureau for any complaints against the company.
- Search public court records. Is the company involved in any litigation? If so, determine the nature of the lawsuit. If the nature of the lawsuit involves fraud or regulatory violations, that is a bad sign.
- Request a Franchise Disclosure Statement: By law, this document must be given to all prospective franchisees at least 10 business days before any agreement is signed. A franchise disclosure statement (FDD) contains an extensive description of the company. It includes information such as amount of fees required, any litigation/bankruptcy history, trademark information, advertising program, equipment you are required to purchase, and the contractual obligations of both franchisor and franchisee. If a franchise will not give you a FDD, you probably should not do business with that company.
- Contact other franchisees: The FDD should contain a list of existing and terminated franchisees. Use this list to your advantage. Contact current franchisees in order to gain insight as to whether or not the training was helpful, how well the franchisor responds to your needs, and whether sales/profits met their expectations. Reach out to a couple terminated franchisees as well. Ask why their franchise agreement was terminated. Was it due to lack of business, bad franchisor, or for some other reason? Also, if the list of terminated franchisees is quite lengthy, that might be a sign that that franchise is not doing well.
- Visit a current franchise location: This can give you a lot of information. You can determine whether or not that franchise has a healthy flow of customers. You might get an in-person conversation with a current franchisee and see how the operations are run.
By performing due diligence, you will have a clear picture as to whether or not you will buy a successful franchise and whether or not you will be doing business with a helpful franchisor or not.
Finally, work with a lawyer and accountant when undergoing the franchising process. Lawyers have expertise in performing research and can assist in reviewing and negotiating the franchising contract. An accountant can review any financial reports concerning the franchise and project profitability for the future.
The University of Pittsburgh Institute for Entrepreneurial Excellence Celebrates 20 Years of Empowering Local Entrepreneurs!
Founded in 1993 and run out of the University of Pittsburgh Joseph M. Katz Graduate School of Business, the University of Pittsburgh Institute for Entrepreneurial Excellence (IEE) began with a $300,000 grant and the mission of being the “innovative leader of economic renewal and growth serving enterprising people and businesses in the region.” In pursuit of this mission the IEE utilizes a dynamic approach of programs and services including monthly workshops, customized consulting, social initiatives, educational programs, professionally-led peer forums, and social events.
This dynamic program has led the IEE to grow to $3 million in annual revenue and the annual serving of hundreds of businesses through its seminars, customized consulting, and millions of dollars in raised capital and revenue. Last year alone the IEE served 824 businesses, helped create 39 startups, raised $10.7 million in capital, increased $14.4 million in revenue for clients, and educated more than 1,400 business leaders through 56 programs and seminars. (according to its 2012 Community Impact Report)
The IEE provides its services through its 8 institute centers and programs. These centers/programs consist of Agricultural Entrepreneurship, a 12-month Entrepreneurial Fellows Program, the Family Enterprise Center, the Information Technology Program, PantherlabWorks, the Small Business Development Center, Student Entrepreneurship program in conjunction with Katz School of Business, and the Urban Entrepreneurship Program. For more information about these programs please click here. To take advantage of one or more of these programs an individual or firm must become an IEE member. Membership includes benefits in addition to participation in IEE programs. For more information about membership please see the IEE’s membership brochure or contact the IEE’s membership director Shelley Taylor.
For more information about the IEE please visit their website at http://www.entrepreneur.pitt.edu.
Founded in 2005, the Chatham University: Center for Women Entrepreneurship was founded in 2005 with the mission is to educate, create economic opportunities, and foster entrepreneurial thinking for women entrepreneurs and business managers in all stages of business and students. Through the Center for Women Entrepreneurship (CWE), women entrepreneurs and business managers can take advantage of Chatham University’s resources and its more than 120 years of experience in education.
The CWE’s programs and services include the Small Business Basics Workshop, the Women Business Leaders Breakfast Series, and the Annual Think Big Forum, and consulting services.
The Small Business Basics Workshops are geared towards women interested in starting their own business or expanding their current business. At the workshops, industry experts discuss business planning, financing, bookkeeping, marketing, and legal issues pertaining to small business.
The Women Business Leaders Breakfast Series features prominent regional women business leaders speaking on a variety of progressive business topics. Casual networking and a continental breakfast is followed by interactive presentations on topics essential for women in business such as innovative entrepreneurship, strategic business growth, unique marketing strategies, and logistical business planning.
The Annual Think Big Forum has been hosted by the CWE every year since its founding and has been growing every year. Think Big hosts leading women business leaders and entrepreneurs such as CEOs and other executives from startups and established companies as speakers and panelists.
For more information about the Chatham University: Center for Women Entrepreneurship and its programs please visit http://www.chatham.edu/cwe/.