THE AAFD ROAD MAP TO SELECTING A FRANCHISE

THE AAFD ROAD MAP TO SELECTING A FRANCHISE

Written and produced by the Staff Of the American Association of Franchisees & Dealers Our thanks and appreciation to the many current and prospective franchisees whose experiences, insights, and "learning experiences" contributed to the making of this publication. 2013 Edition This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. From a Declaration of the Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers. 2

Welcome! You are reading this booklet because you're interested in buying a franchised business. Some of you already have a fair amount of business experience and are merely seeking useful resources for your selection process. Others of you, however, may find yourselves newcomers to the small business world and are eager not only for resources, but a plan to help you conduct your selection process. In preparing this booklet, we have attempted to provide both a suggested "road map" for your selection and a variety of resources we think will be helpful to you in your decision-making. It is not intended as a comprehensive survey of all resources available about buying and owning a franchised business, but is intended to point you in the right direction and get you started. Remember, you are considering investing your hard earned money (or borrowed capital) as well as your financial future and dreams in a new franchised business. The time and money you "invest" now, with in-depth research and investigation, together with legal and financial guidance from experienced professionals, may well save you many unpleasant and costly hours in future litigation and/or financial ruin. It is the desire of the AAFD to see that your plans for selecting a franchised business are realized in such a way that you open the door to success. We invite you to let the AAFD assist you with its many resources. Our best to you for a successful selection! The Staff of the AAFD P. O. Box 10158 Palm Desert, CA 92255-1058 (619) 209-3775 Toll Free: 800-733-9858 Fax: (866) 855-1988 E-mail: Benefits@AAFD.org www.aafd.org 3

BUILDING YOUR, SUCCESS TEAM Frequently we hear people say they want to "save money" in their selection process by doing it themselves, or using a friend or family member instead of using qualified counselors. Failure to obtain experienced counsel, your own "success team", can be "penny wise and pound foolish." Cutting corners in your franchise selection process is not a very good idea. Given the level of your potential investment, including site acquisition, buildout, fees and commissions, make allowance for a reasonable budget for expert advice. Typically, a budget of 2-5% of your total investment is sufficient to afford a competent "success team" to steer you through the selection process. The AAFD can help lower your costs with special member discounts and pricing from many fine professionals. Building your success team won't guarantee your success, but our experience shows it will save you from the "penny wise, pound foolish" trap. Your Success Team: You, as an educated buyer of the franchise, are the most important part of the "team." An experienced franchise attorney who understands franchise agreements and can review your offering circular and assist you in the establishment of your business. An experienced financial consultant or accountant who understands franchise business and can review your offering circular with a view to projecting the profit potential and risk of your opportunities, and can assist you in setting up proper financial control systems. The AAFD for referrals to these and other experienced professionals, through our exclusive Franchisee LegaLine SM, FinanciaLine SM and experienced consultants. These services are tailored to prospective and current franchisees. All AAFD affiliated service providers offer substantial discounts to our members. The AAFD is your ally, always seeking to provide those services which will assist you in being successful. 4

HEALTHY WEALTHY & WISE Some of you reading this booklet will be old hands on business matters, and these questions will merely serve as touch stones as you move through your selection process. For others of you, however, you may have intuitively understood the need for these questions, but were uncertain how to focus your exploration. Once again, these few questions are intended to guide and prompt you into further personal investigation, or what franchise experts call due diligence. Consider a Personality Profile Assessment to assist you in assessing your business and personal interests, skills, strengths, and weaknesses. Do I have the requisite business skills to qualify me for an investment of this nature? How much money do I have available to spend, and can I afford the financial risk of buying a franchised business? How much money will it take to fully fund the purchase of a franchised business, including start up costs and working capital for your first year business? How can I find and qualify for financial funding? What kind of support is really provided from the franchisor? If my franchised business fails, what are my rights and what are the consequences for my long-term financial health? Does the franchisor recognize and work with an independent franchisee association that represents the interests of the franchise owners. Does my franchisor collectively bargain with its franchisees, and what is my franchisor s reputation for fairness and support for its franchise system? Has the franchisor earned the AAFD s Fair Franchising Seal? 5

THE AAFD S 8 THINGS TO LOOK FOR IN A FRANCHISE 1. Select a franchising company that is primarily interested in distributing quality products and services to ultimate consumers. Although this rule may seem obvious, many (if not most) franchising companies are primarily interested in selling franchises and are less concerned with the quality of the products and services they are theoretically in business to sell. 2. Your franchising company should be dedicated to franchising as its primary mechanism of product and service distribution. Be wary of franchisors with a large number of company-owned stores, or who retain the right to distribute its products through other channels such as supermarkets or discount stores. TIP: Only Select A Franchise that Meets ALL 8 Criteria! 3. Your franchising company should produce and market quality goods and services for which there is an established market demand. The value of franchising emanates from the value of the franchisor. Too many prospective franchisees cannot qualify for a widely-recognized franchise and settle for a lesser known system thinking the franchise concept is more important than the product and trade name. 4. If you are seeking an established market, be sure to select a franchisor with a well accepted trademark. 5. Evaluate your franchisor's business plan and marketing system. A well-established, well-designed marketing system will provide substantial and complete training and overall franchisee support at a reasonable cost, and ideally included as part of your franchise fees. 6. Your franchisor should have good relationships with its franchisees. Likewise, the franchisees should have a strong franchisee organization which has negotiating leverage with the franchising company. A franchisor that does not permit its franchisees to organize is a sure sign of trouble ahead. Strong franchisee associations, on the other hand, will pave the way to successful and cooperative franchising systems. 7. Only deal with franchising companies that provide sales and earnings data which demonstrate an attractive return on your investment. Do not believe franchisors who claim they are forbidden by law to provide earning projections and evidence of actual performance. To the contrary, all state and federal laws regulating franchising encourage franchisors to provide earnings claims to prospective franchisees. 8. Select a franchisor that supports the AAFD's Fair Franchising Standards and respects the Franchisee Bill of Rights of the AAFD. 6

EDUCATING YOURSELF This is the homework of buying a franchise. Franchisors want you to buy their franchise and their materials are structured with this goal in mind. The more you learn about franchising and the franchise selection process, the more successful you will be at understanding what the franchisor is really offering you. We highly recommend the following sources of information about franchising and franchise opportunities: The Franchise Fraud: How to Protect Yourself Before & After You Invest, by AAFD Chairman Robert Purvin, AAFD member price available. Buying a Franchise: The Better Business Bureau Insider s Guide to Success, The Better Business Bureau TIP: Learning what to ask and what to look for is Critical. How Much Can I Make? by Rob Bond, Sourcebook Publications, 2009, AAFD Member Price Available Franchising 101, The Association of Small Business Development Centers Buying a Franchise: A Consumer Guide, published by the U.S. Federal Trade Commission. Available at www.ftc.gov. New in 2013!The AAFD s unique Franchise Self Evaluation Tool. Our Evaluation Tool enables you to easily grade a specific franchise opportunity against the AAFD's Eight Criteria for Buying a Franchise, the Franchisee Bill of Rights, and to enable a side-by-side comparison of various opportunities you are considering. Now FREE with your AAFD membership. Franchise Opportunity Directories: New in 2013! The AAFD Franchise Business Sales Directory, Powered by BizBuySell.com. A national directory of existing franchised business for sale, and franchisors seeking new franchisees. Bond s Franchise Guide, by R.E. Bond; Sourcebook Publications, AAFD Member price available The Franchise Handbook, available by subscription or can be purchased at your local newsstand or book store. Franchise Times Magazine Franchise Times SuperBook of Franchise Opportunities. 7

INFO ON THE WEB American Association of Franchisees & Dealers www.aafd.org New in 2013! The AAFD Franchise Business Sales Directory, Powered by BizBuySell.com. A national directory of existing franchised business for sale, and franchisors seeking new franchisees. US Federal Trade Commission www.ftc.gov/bcp/consumer.shtm Cal-EASI database of franchise filings: http://134.186.208.228/caleasi/pub/exsearch.htm The following commercial websites have useful information, but some may sell advertising to franchisors: TIP: The Internet is great source of information for prospective franchisees. Literally scores of websites offer valuable information to investors. Here are a few that we have looked at for you. www.eauth.com www.franchisebusinessreview.com www.franchisehelp.com www.fransurvey.com www.franchisetimes.com www.franchisehandbook.com www.franchiseknowhow.com www.franchise-update.com www.franchise.org www.ufocs.com 8

Your Center for Total Quality Franchising! HOW THE AAFD CAN HELP Franchisee InfoLine: 800-733-9858 For information on the following: The AAFD s Fair Franchising Standards: The AAFD has led the way in defining fair and balanced franchising standards for a Total Quality Franchising relationship. The AAFD standards have been negotiated between franchisor and franchisee interests to protect you and the success of your franchising experience. New in 2013, the AAFD is introducing a unique Franchise Self Evaluation Tool. Our Evaluation Tool enables you to easily grade a specific franchise opportunity against the AAFD's Eight Criteria for Buying a Franchise, the Franchisee Bill of Rights, and to enable a side-by-side comparison of various opportunities you are considering. Now FREE with your AAFD membership. AAFD Accredited Franchisors: Choose a franchisor that has earned the AAFD Fair Franchising Seal, and have confidence that your franchisor respects the AAFD s Fair Franchising Standards, and has earned the respect of its franchisee population. New in 2013! The AAFD Franchise Business Sales Directory, Powered by BizBuySell.com. A national directory of existing franchised business for sale, and franchisors seeking new franchisees. AAFD Member Discounts: All service provider professionals offer special discounts to AAFD members. SM Franchisee LegaLine : AAFD member referrals to a network of experienced franchise attorneys can provide a "Franchise Opportunity Review." Franchisee FinanciaLine : AAFD member referrals to a network of experienced accountants, CPA's, and other financial services professionals. The AAFD Suppliers Network: AAFD member referrals to a network of consultants and businesses offering virtually everything you buy in your franchised business. The AAFD Purchasing Group is member owned and managed to serve your needs. SM Workshops & Seminars: The AAFD has many resources to develop individual workshops and seminars tailored to your needs. The AAFD maintains an active Speakers Bureau, and frequently collaborates with the SBA Small Business Development Centers to provide local programs on franchising. Presenters on a wide range of subjects can be easily arranged. Contact the AAFD for details. For more information please visit us online at www.aafd.org 9

OTHER SOURCES OF INFORMATION Magazine articles in: Franchise Times Magazine, Entrepreneur, Kiplinger Personal Finance, Money Guide to Small Business and others. Talk to your local Small Business Development Center about resources and opportunities in your area, or the region in which you wish to establish a franchise. Franchise companies that are publicly traded have information readily available through Federal and state securities laws. Classes on franchising may be available at local colleges or adult continuing education centers. SCORE -- a network of retired business executives -- in your area. Talk to your neighborhood franchisees... learn what their experiences have been. Contact the Franchisee association for your prospective franchise, if any. Brokers and consultants specializing in franchise sales; BUT REMEMBER, These are often sales people! Trade shows: for a sampling of what's available. But don't take your checkbook - do not buy without completing your investigation and careful evaluation! 10

NARROWING THE CHOICES Critical Questions! 1. Does the franchisor you are considering recognize an Independent Franchisee Association and collectively bargain with its franchisees? 2. What is the prospective franchisor's reputation for fairness and support for its franchise system? 3. Buy a notebook for each franchise you are contacting and always take notes. 4. Make a permanent file for each franchisor you're investigating and keep all the information you gather, in your notebook. You'll accumulate a lot of information! 5. Contact prospective franchisors to find out what their application procedure is. Request a Uniform Franchise Offering Circular for each franchise system of interest to you. 6. Do not pay any money before receiving any circular you request: By law the franchisor should not charge any fees until you have reviewed your offering circular for 10 days. 7. Make a record of ALL conversations with each franchisor: include date, time, person talked to, promises, questions and answers. 8. Retain this information for future discussions with your attorney and accountant 9. Use the AAFD's "8 Things to Look for in Selecting a Franchise" and "The Franchisee Bill of Rights" to aid you in your review and negotiations. (see pages 8 & 13). And don t forget... New in 2013, the AAFD Franchise Self Evaluation Tool is now FREE with your AAFD membership. 11

EVALUATE YOUR SELECTION Doing Your Due Diligence 1. Due diligence means research, research, and more research! 2. Due diligence means examining the offering circular closely. All research you've previously done is invaluable in knowing what to look for and what questions to ask. 3. Research start up costs, suppliers; summary of all the franchisor agrees to provide including training; site or territorial rights; business and financial investigation of the franchise and its owners, your competitors, etc. 4. Make a record of ALL conversations with the franchisor including date, time, and person talked to, promises, questions and their answers 5. Franchisors are required by law to disclose any litigation: ask and research. 6. Use your "success team," including an AAFD referral to a LegaLine lawyer and FinanciaLine accountant for an "Opportunity Review," i.e., to review the offering circular with you. 7. Give both your accountant and attorney a copy of your notes (keep originals for your files). 8. And don t forget... New in 2013, the AAFD Franchise Self Evaluation Tool is now FREE with your AAFD membership. 12

CAUTIONS Critical Caution! Do not sign any agreement without having it reviewed by your attorney and accountant. Do not pay for any circular you request. Promises made by a franchisor may not be binding unless included in the final franchise agreement. Record ALL conversations with each franchisor -- include date, time, person talked to, promises, questions and their answers. The UFOC does not mean the government has reviewed and/or approved your franchise. Do not be pressured into signing an agreement: It's in the salesman's interest to create a sense of urgency that may not be real. Remember: Trade shows and franchise brokers are in business to sell franchises. Talk to lots of franchisees including those the franchisor doesn't recommend or who have recently left the system. Include some in similar geographic areas, some who've been in business 3-12 months, and some who've gone through a renewal cycle and have been in the system for many years. The Franchisor must give names of all franchisees who left the system in the past 3-5 years. Never underestimate the start-up costs of getting into the franchise. Make sure you have enough funds to carry you until the business makes a profit. Don't assume that because a franchisor is a member of the International Franchise Association (IFA), it is a "reputable" franchisor. 13

The Franchisee Bill of Rights The Franchisees of America, representing the best of the American entrepreneurial spirit, hereby proclaim this Franchisees Bill of Rights As the minimum requirements of a fair and equitable franchise system: The right to equity in the franchised business, including the right to meaningful market protection. The right to engage in a trade or business, including the right to a post-termination right to compete. The right to the franchisor s loyalty, good faith and fair dealing, and due care in the performance of the franchisor s duties, and a fiduciary relationship where one has been promised or created by conduct. The right to trademark protection. The right to full disclosure from the franchisor, including the right to earnings data available to the franchisor which is relevant to the franchisee s decision to enter or remain in the franchise relationship. The right to initial and ongoing training and support. The right to competitive sourcing of inventory, product, service and supplies. The right to reasonable restraints upon the franchisor s ability to require changes within the franchise system. The right to marketing assistance. The right to associate with other franchisees. The right to representation and access to the franchisor. The right to local dispute resolution and protection under the laws and the courts of the franchisee s jurisdiction. A reasonable right to renew the franchise. The reciprocal right to terminate the franchise agreement for reasonable and just cause, and the right not to face termination, unless for cause. The American Association of Franchisees and Dealers House of Delegates adopted and promulgated the Franchisee Bill of Rights on June 6, 1996, and works to promote awareness and acceptance of these rights among the franchising community and the general public.