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Franchising/Franchise Investment Success Factors

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Question
Hello  

It's often said that the level of investment in a franchise business does not have a direct relation to the success and profitability of the franchisee. If the personality match and fit alone are mostly responsible for this then why go for franchise concepts that come with big price tags? Or small-medium price tags?

What aspects does the investment level affect the choice of the franchise concept independent of the "match"?

Answer
As a Franchise Attorney with 35 years of experience evaluating franchise investments and actually owing and operating a very successful franchise myself, I offer the following.

Personality match and fit by themselves are not related to success or profitability. The metrics of the business model must satisfy financial analysis. Generally speaking, a service business has much greater profit margins, lower investment and a lot less headaches. For example, when I bought my franchise back in 2002, it was a service business - interior door replacement in residential homes. Even after paying the franchisor its 6% royalty and 3% ad fund, I still had almost a 25% profit margin. Total investment to reach the break even point was just a bit under $100k. That included everything - leasing and build out of a 7,000 sq. foot warehouse-showroom, paying 3 employees and a licensed contractor, buying a box van, tools, etc. Hit break even 6 weeks after doing our first job. When I sold almost a year later in 2003, using our best profit month of about $14k, I was hitting (on an annual basis) the same numbers that a McDonalds did at the time. Even then a McD was almost $1 million investment, employing about 100 minimum wage teenagers who constantly quit or don't show up, working 7 days a week, etc. My franchise was a tenth the investment, normal Monday thru Friday 9A-5P hours, and 4 total employees.

Very important to hire the right person to evaluate a potential franchise. Even franchise attorneys focus almost exclusively on the legalese of the contract, which is less than 10% of the franchise equation. Most don't have an undergraduate business degree, let alone an MBA and therefore don't do things like analysis of business metrics, financials, management, etc.

I generally recommend staying far away from anything having to do with a food operation. It's high investment, high risk and low (if any) profit margins. But even bright people can be extremely stupid when it comes to buying franchises. I represented two different franchise buyers who came to me after the fact, when they were locked into 10-year commercial leases with personal guarantees and had invested over $600k, each, in a food franchise that never made money. Every month they had to come up with between $10k and $15k of working capital to keep things afloat. One didn't think an attorney or other consultant was worth the up front money. The other used an attorney who, despite huge red flags I would have found, just tweaked a couple of contract provisions. What sense does that make when the business model is seriously flawed? Answer: none. Both cases were ultimately settled to the satisfaction of both clients, but that took some time and work to accomplish.

Best of luck,

Kevin B. Murphy, B.S., M.B.A., J.D.
Franchise Attorney & Franchise Expert
Director of Operations - Mr. Franchise
FRANCHISE FOUNDATIONS APC
http://www.franchisefoundations.com

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Franchise Attorney Franchise Expert MBA - Kevin B. Murphy - Mr. Franchise & Former Franchise Owner

Expertise

Franchise Attorney, MBA Franchise Expert, author and instructor with 2-plus decades of franchise industry experience, including ownership of a successful franchise. I answer all business format franchise questions, how to franchise a business, issues about ongoing franchise relationships, buying a franchise, evaluating franchise investments, franchising vs. licensing (franchise vs. license), franchise disputes, franchise operations manuals, franchise expert advice in franchise lawsuits and franchise litigation, franchise agreements, FDD Franchise Disclosure Documents and intellectual property. I don't answer questions about franchises in the automotive and petroleum industries. I have drafted, reviewed and negotiated over 500 franchise disclosure documents, advised hundreds of franchise buyers and franchise companies as well as started and operated a franchise from scratch - a background not duplicated by any other franchise expert. My in-the-trenches franchise ownership and resale experiences gave me valuable insights to share with potential franchise buyers and existing as well as emerging franchise companies.

Experience

Known in the industry as Mr. Franchise, I owned, operated and sold a very successful franchise in the home improvement industry. I help individuals and companies enter and prosper in the franchise industry, have drafted, reviewed and negotiated over 500 FDD's (Franchise Disclosure Documents) and have experience filing franchise registrations in all franchise registration states such as California, Illinois, New York, etc. I am very familiar with the McDonalds franchise program, have developed a cost-savings franchise budget for companies that want to learn how to franchise a business, and pioneered a unique FDD Evaluator program for those considering a franchise investment.

Publications
Author of over 40 franchise articles, including four books on franchising and one book on trade secrets.

Avoiding Legal Pitfalls In Franchise Marketing
2009, Franchise Foundations Press

Franchise Sales Control
2009, Franchise Foundations Press

Effective Franchise Marketing
2009, Franchise Foundations Press

Implementing A Franchise Disclosure Compliance Program
2009, Franchise Foundations Press

Protecting Trade Secrets
2002, Franchise Foundations Press

Also authored foreword and edited various chapters of the following book:

The Franchise Handbook: A Complete Guide to All Aspects of Buying, Selling or Investing in a Franchise
2006, Atlantic Publishing Company


Education/Credentials

B.S. Business Administration (Finance), University of San Francisco,

Juris Doctorate (J.D.) of Law, University of San Francisco School of Law,

Active member of the State Bar of California

Master of Business Administration (M.B.A.) - International Business, San Francisco State University,

Approved Provider of MCLE by the State Bar of California, 1993 to present
Teaching franchise, licensing and intellectual property courses to attorneys in topics like franchise feasibility, international franchising, franchise marketing, franchise planning, franchise kits and others.

Awards and Honors
Selected as the premier U.S. franchise expert by the World Intellectual Property Organization (WIPO), an agency of the United Nations, in Geneva, Switzerland to speak at Singapore’s World Conference about franchising in Asian countries and developing uniform franchise regulations based on the U.S. franchise laws and regulatory model, September, 2007, hosted jointly by WIPO and the Intellectual Property Office of Singapore (IPOS).

Snapshot of Recent Franchise Expert Litigation Cases:

Nagrampa v. MailCoups Inc. and The American Arbitration Association - United States Court of Appeals for the Ninth Circuit (Argued and Submitted En Banc). Summary: provided franchise expert strategy and consulting in a case that established new franchise law by invalidating the standard arbitration provision in a California franchise agreement on the grounds it was unconscionable.

Swansons Cleaners, et al. (Superior Court jury trial). Summary: provided franchise expert consulting that re-focused the legal issues and discovered new causes of action. Testified at deposition and trial for a franchisee in its claims against the franchise company. Result: jury verdict in favor of the franchisee for $1.6 million in punitive damages and $634,000 in contract, etc. damages.

For more information, visit the Franchise Foundations website

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