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Thinking of Purchasing a Franchise?

Restaurants. Child-centered activities. Trash Hauling. Clothing Consignment Shops. There are several different types of franchising opportunities available for the budding or serial entrepreneur. But the question is…how do I get started?

Ted Pfeifer, VP of Retail, with Landmark Commercial Realty, Inc. was a Franchise Manager for KFC so he is very familiar with the process. When at KFC, he was the “corporate guy” for the franchisor (KFC). He reviewed new locations of a franchisee (operator).

Ted comments on the process here:

“When you have selected the type of franchise you wish to pursue, have the resources, and commitment to buy the franchise and have carefully gone through your finances, operating expenses, budget, personnel issues, etc., and still wish to proceed, your next step is obtaining a franchise agreement. This spells out what the franchisor will provide as to training, services, etc. The franchise agreement is then signed. And assuming you need a store, where do you put it?”

“When I reviewed franchisee submitted locations, I made sure their choices for a site followed the basic needs for a site which included location, size of space or land, layout, traffic count, and retail or restaurant competition. And at the same time, I asked the franchisee about his or her work history, their ability to put in the hours needed to launch and run the new company and their liquidity and financing options. But the final choice and risk remains with the franchisee, not the franchisor.”

He adds, “The franchisor will never “approve” the franchisee location. They will have “no objections” at best. The franchisor will also not be involved with the cost of the franchisee location. “The franchisor will give suggestions on a cost range to be within, but it is the franchisee that pays the rent or the purchase price for the location, not the franchisor.”

Ted strongly suggests that first and foremost you should work with a retail broker, who specializes in tenant representation for assistance. That broker will represent you and have your best interests in mind. They can suggest location areas, types of properties that fit your concept which makes the process easier and less stressful. “Be sure you find an experienced commercial broker!”

“Once the criteria is met and a list of locations has been determined by you in conjunction with a commercial real estate broker, your next step is arranging a site tour and to drive the locations.”

“Once you choose your top choice, usually the franchisor will review the site for location area, size of property and building, and basic other requirements. If acceptable, they will state they have no objections to the location and you may proceed.”

Ted adds that at this point the final step is near as the franchisee will commence lease or purchase discussions with the landlord or seller, as well as presenting the site specifics to the franchisor will take place. “If the franchisor turns down the site – the deal is dead. But, if the franchisor has no objections to the site or sites, then the franchisee has the green light to buy or lease the location, renovate or build and then, finally, open for business.”

The franchisee needs to also remember about royalty fees. “They are a big extra cost above just starting your own operation.” Ted states that royalty fees will take a percentage of all your sales, much as a sales tax would do. The range of these fees can be low as 2% or as high as 10%. It should be considered like rent.

Regarding the degree of franchisor support, it varies greatly. “Of course no franchisor wants a failed franchise, but at minimum most have programs to train on how the business functions, offer accounting tools to use, provide marketing assistance and help with web page design.”

As with all new businesses, if you have experience in that type of industry of the franchise you are seeking – that helps tremendously. “A new business and operating it requires a learning curve, money and a lot of time, as it is not unusual to work an 80 hour work week or more, especially in the beginning. And obtain all of the professional help and advice you can afford to get.”

Ted adds that rewards can be great, but purchasing a franchise is not for the faint at heart – particularly a brand new franchisee.