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Analyzing the Potential Business Proposition

Analysing a Potential Business Proposition-1
After careful review of the FDD, you should be able to evaluate the business proposition, and whether or not the franchise will help you meet your financial and future goals. There are several major areas you must consider in deciding if the business proposition is the right one for you. One very direct way is to talk to other franchisees about their experience running the business and dealing with the franchisor.
If some of the items in these lists seem repetitive from the FDD review it is because they are. By this point, you should know the answers to a lot these questions after you, your lawyer and an accountant have reviewed the franchisor’s conditions for the franchise offering. Think of these items as a checklist before you get into negotiations or sign the Franchise Agreement.
Assessing franchise fees and business costs.1. Financials
  • What is the total cost of establishing the franchise operation and what is included in that cost?
  • How much working capital do you need to start out?
  • What additional costs might be incurred besides the costs of establishing the business?
  • What, if any, financing arrangements from the franchisor are available to you?
  • Is there a deposit required, and is it refundable if the venture does not go forward?
  • How often will the franchisee have to replace equipment?
  • What gross margin is expected from the business?
  • What are the expenses associated with the business?
  • What is the projection for when you will break even?
  • Are there accounts available you can review to confirm these projections?
2. Fees
  • What is the initial fee?
  • Are there ongoing fees and how are they calculated?
  • Do you have to pay for marketing/advertising, and if so, how much?
  • Does the franchisor mark up products sold to franchisees and what protections are in place against unfair price increases?
  • Does the franchisor take a commission from supplier goods sold to the franchisee?
  • Are there minimum ongoing fees or purchase of goods required of the franchisee?
3. Getting Started
  • Who is responsible for finding the location?
  • What is the franchisor’s procedure for preparing the franchisee to start operations?
  • How long can you expect it to take from signing the agreement to actual business start-up?
  • What initial services does the franchisor provide?
  • What initial and ongoing training are provided? Does your staff get training from the franchisor?
  • What costs are associated with training?
4. Operating the business
  • Is there an Operations Manual to guide you, and if so, how often is it updated?
  • What hours will the business operate?
  • How will accounting and record-keeping be managed?
  • Are there any restrictions on the products sold by the franchisee?
  • What, if any, national advertising and promotions does the franchisor provide?
  • Will the franchisee receive any help for local advertising? Is point-of-sale and promotional literature provided? Do you have to pay for these, and how much?
  • Who are the head office team and field support staff? How can you reach them?
  • What systems are in place for the franchisee to communicate with the franchisor?
If you know the answers to these questions, then you should be ready to make an informed decision about signing the Franchise Agreement. You should have a good understanding of how much you are actually investing, an accurate estimate of the costs of running the business, and the amount of revenue the business should produce.  This is a business proposition and you should have a clear picture of when you should expect a profit and how much you can make.

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