legislation at Business Franchise

Businessmen write business plans for different purposes. I want to turn attention of my beloved readers that the size, structure and contents of the document can differ in compliance with the purposes. So, why do people write business plans?

-to evaluate the effectiveness of their prospective business or project;

-for potential investors and partners;

-to apply for a loan;

-to apply for a government preferences;

- they need to have a business plan according to the legislation of the country.

Let me characterize every purpose by turn.

It’s a very good idea to do some calculations and evaluations before you start a business or a project. Sometimes people underestimate the necessity of business plan “for myself”. They say: I’ll do it later, after my business reaches its capacity. Or: I don’t want to waste time for papers; I’ll better start making money. Or even: I’ve planned everything in my mind; why should I spend time for paper work. But it’s a big mistake when new business or project starts without preliminary planning. Why? Because when you do the calculations you summarize all the facts and can see the whole picture. You’ll better see all the threats and opportunities. You will see the prospective profit: maybe it’s too small for you? You will get not approximate (like $10,000-$20,000) but real amount of initial and current investment.

But the main reason why new business or project has to start with a completed business plan is hidden in the following: after you start a company you will be able to catch the moment when things go not as you plan. If you get less you’ll see it before it turns to real trouble. If the things go better you can instantly start thinking about other project and earn more money with your extra profit!

When you write a business plan for your potential investors and partners you need to take into consideration the main statement: THEY CAN’T READ YOUR THOUGHTS! What does it mean? If you want to prevent problems and misunderstanding in future present as many aspects of your business as possible in the business plan. Remember: things that are completely clear for you are not the same for all the people on the Earth. Write about conditions and terms of supply, methods of salary calculation, way you choose the materials and equipment. Spending time this way can help to avoid many problems with investors and partners in future.

Also you need to remember that the main purpose of investor is profit. Unlike creditors investors are not seriously interested in collateral and payback period. They want you to show so-called ROI (return on investment) – in rate they’ll get on their investment per months or per other period of time.

When you create a business plan to get an external financing in the form of a loan or credit you need to show that your business will be enough successful cover both interest and loan itself. Creditors are not interested about the life and results of your business after the payback period but they will be very happy to see a good collateral.

If your business plan is presented to government authorities while you are trying to get some guarantees or preferences you need not only to show the financial results of the business. Tell them about the additional taxes they’ll receive, about new jobs created, about any other positive influence your company will have on the community. And don’t forget to write about the ecological site of your business (it’s an advantage when you business improves the ecological situation in the region in any way).

The first legislative act I want to write about will be the Small Business Franchise Act (the SBFA). I’ve read its statements and decided to range them according to their importance (as I think) for small business in general and franchise business particularly.
 
That Small Business Franchise Act was signed in 1999 after it raised heated debate. The proponents believed that the Act was necessary to protect the rights of small franchisees and to create favorable conditions for their development. But opponents insisted that this bill is only a waste of time and tax money as there was the good franchise legislation on the one hand, and the good small business legislation accompanied by different government supporting programs. Anyway the bill passed and I’m going to say some words about its content.
 
The first (not by the order but by its importance according to my opinion) statement of the Act protects the franchisee against unlawful transfer of the business. I think this to be very important because in the most cases franchisee is very dependent on the franchisor’s behavior according to their agreement. I’m not against this dependence but in the case when franchisor decides to sell his business, or to merger the new owner can easily forget about the rights and problems of franchisee (especially if we are speaking about a small business). So the SBFA guaranties that franchisees would be given at least 30 day’s notice of the franchisor’s transfer of ownership to another entity. I want to draw attention to the number of days. To my mind it’s very good that the bill not only makes franchisor to provide the information but also establishes the period of time. It would help franchisee to prove that his rights were violated.
 
The second statement I want to speak about protects the franchisee from unreasonable termination. As I understand this guaranty is rather close to the previous one. It will protect the small company from franchisor’s groundless decisions. According to the bill the main company has to provide a good cause to explain why it doesn’t want to continue business relations with franchisee. At the same time a compulsory 30-day period must be given to the franchisee to cure any defaults. The only thing I need to mention here is that I have a doubt that 30-day period would be enough in some difficult cases (for example in the situation when companies are located in different countries). Anyway according to the Small Business Franchise Act after that period both companies have the rights to turn to the court.
 
The third very important part of the Act ensures procedural fairness in the relations between franchisee and franchisor. It means that the conditions of the Small Business Franchise Act are more important in comparison with the conditions of the agreement between the main company and its small franchisee. Nothing in the agreement can limit or eliminate any of the franchisee’s rights.
 
The number four in that list imposes limited fiduciary duty on the franchisor. In English it will sound like this: “Franchisor must provide financial information about their activity to the franchisor”. Why? Because franchisee’s business results depend on franchisor’s decisions and financial decisions are not an exclusion. But is it fair toward franchisor? Yes, because he will provide a full disclosure of disbursements and a full accounting only for the money received from franchisee. The main company must not provide any co-called secret information, or information about long-term investment in some projects that have no connection with franchise business at all.
 
The fifth important part of the bill is dedicated to relations between the franchisor and the franchisee after the franchise agreement has expired. This regulation protects the rights of both parties. On the one hand, it permits the former franchisee to continue business activity in any sphere and at any location. On the other hand, the bill prohibits using the franchisor’s intellectual property, trademark, or any other commercial or business secrets. Why do I consider this part of the Small Business Franchise Act to be less important than the previous ones? Because I really believe that every clever franchisor will include the same point in the franchise agreement and the Act only provides additional guaranty.
 
OK. I’ve reached the middle of the list of the important regulations in the SBFA. Let’s go forward! In the sixth part I’ll speak about trade relations between the main company and its franchisee. The authors of the bill decided that they needed to guaranty the freedom of any franchisee while buying goods and services for the business purposes. It means that it’s illegal for franchisor to include in the franchise agreement the point saying that franchisee is obliged to purchase raw materials, equipment, other goods and services only from the main company. I like this statement but don’t think this to be so important than the previous ones. I really think that freedom is a good thing but as I understand the franchisor has an incentive to provide beneficial conditions for franchisee to attract him and it’s better to buy from the main company and save some money on transactional costs.
 
The next item of the Act is very sound but a little bit naïve as I think. That’s why I gave it only the seventh place in my list of importance. It speaks about common to all mankind values as honesty, good behavior and good faith. The Small Business Franchise Act insists that every party in the relations has to “act honestly and in good faith with each other and observe reasonable standards of fair dealing in the trade”. But how measure the level of honesty, reasonability or faith? I have no idea…
 
 
 
Three more left… Brace up! The SBFA also says some words about the relationships with government and local authorities. The Act gives the right to an attorney general of any state interfere in the transactions between the franchisor and the franchisee by bringing a civil action on behalf of its residents in an appropriate U.S. District Court. It can happen if the government official believes that that the SBFA is being violated. I put it on the eighth place because I think that the same statement characterizes every legislative act. I mean that to ensure the law is the main role of every government. Am I right?
 
The last two statements are the least important. The first of them determines that small business franchisees have the right to form and to participate in trade associations. And the last statement of the bill acts as a slogan as I think. It establishes that perpetrating a fraud within the franchisor-franchisee relationship is prohibited. It’s not more than a remainder of the statements of the other general business laws.
 
At the end of my comments to the Small Business Franchise Act I want to remind that this list of more or less important regulations of the bill is only my personal point of view. Can anyone introduce his or her list? I will be very happy to hear any grounded ideas.

When I started my blog more than two months ago I wanted to discuss a franchise as one of the most developed form of business in the United States. But I never knew that it is SO DEVELOPED!
I found an interesting statistics that proves this.

• A new Franchised Business opens somewhere in the United States every 8 minutes.
  
• 75 industries use franchising to distribute goods and services to consumers.
  
• Franchised Businesses provide goods and services worth $624.6 billion per year in the United States (2001)
  
• There are 767,483 franchised business establishments in the United States (2001).
  
• Franchised Businesses provide over 18,000,000 jobs in the United States (2004 estimate)
  
• In the United States more than 40% of all retail sales come through franchising.
  

After realizing that facts I’m even more surprised thinking about countries (many of less developed countries and former Soviet Union republics) that even have no franchise legislation and that don’t develop that business… I have no idea why this can happen…

I’m continuing describing the 7(a) Loan Guaranty by the SBA. By the way the strange name of the program is not really so strange. It comes from the legislation, the section 7(a) of the Small Business Act.
 
One of the most important things to learn about this program is guaranty itself. Who provides it? When? Are there any limitations?
1. The SBA doesn’t guaranty the full amount of 7(a) loans. The lender and the SBA share the risk that the borrower will not be able to repay the loan in full. The SBA takes the responsibility to cover the loan payments in the case of payment default. The guaranty doesn’t include imprudent decisions made by the lender or misrepresentation by the borrower.
2. The SBA provides the guaranty that is only available to the lender. It means that according to this program, the borrower remains obligated for the full loan amount due either to the bank or to the government. The program assures the lender that in the event the borrower does not repay his or her obligation and a payment default occurs, the government will reimburse the lender for its loss (up to the percentage of the SBA’s guaranty fixed in the loan agreement).
3. The SBA doesn’t provide guaranties to all small business companies. The applying company needs to understand that the Agency will check both eligibility and being creditworthy. Also they will determine if the company can prove the willingness and ability to pay its debts and whether it abided by the laws of its community. I’ll write more about the factors of eligibility later but here I need to say that any prospective borrower has to understand that the SBA takes into consideration that for some reasons commercial banks and other financial institutions are not willing to lend you money. If means that something is not so good in your idea, or you personal credit history, or something else. Maybe you may think how to improve the situation yourself at first?…
 
(to be continued)

Yesterday I wrote an article about sources of financing for a franchisee. And an interesting thought came to my mind. I was thinking about some associations and unions and their role in economic development.
 

Just think about it a bit. Small business companies have very little power to influence the legislation of the US or any other country. Even when they understand the necessity of some changes or improvements they are too small, too busy and don’t have enough money to protect their rights. As a result, 2-5 big companies have all the possibilities to lobby legislation favorable for them. They can put into operation new tariff or promote necessary educational program.
 

The only way out for small and medium-size companies is to become organized. And we can see this in almost every country in the world. The activity of different Small Business Associations and Unions of Entrepreneurs is a great power that can be one of the guarantees that protect competition.
 

But what about franchising? Yesterday I realized that franchisee can get the benefit of lobby twice! On the one hand as a representative of small business, and on the other as a representative of Franchise Association.
 

It seems for me that I found an additional benefit of franchising!

The idea of combining franchising and e-auctions is divided into to possible businesses, as I think.
 On the one hand, the company can provide services of Internet auctions bidding. I wrote about it a bit earlier when I told about eBay franchises. Really, not many people are enough familiar with the procedures of selling and buying goods through the Net. They can overcharge or sell for too low price. Ordinary people usually don’t have many good references and this can decrease the possibility to get all possible advantages of e-auction…
So, this kind of franchise business is developing now and it concerns not only eBay auction but any other – cars (like Copart),  web-design and software development services (like Elance) and so on.
 

On the other hand, big e-auctions start selling franchises themselves. Here we are not speaking about consulting or assistance services. Usually, the system works the following way. Franchisee gets the necessary software to start the auction himself. Why people will use this small one instead of the main? The main reason is territory or specialization on particular kind of products. But territory is the main reason. Franchisee has the opportunity to meet the needs (and legislation) of particular state or country. And if to speak about different countries the main advantage will be using of native language.
 So, I think that franchising + e-auction = good business opportunity.

“We are not so rich to buy cheap things,” the proverb says. Is it right about buying a franchise? Maybe… But before choosing between the high-cost and low-cost franchise in the same industry, I suggest you to think over the following information.
 

When you buy the low-cost franchise, the franchisor will never provide the same start-up assistance, training, advice or preferences as if you were investing in the high-cost franchise. So, one of the first questions you have to answer to yourself is to decide what assistance you REALLY need.  If you are a complete novice at this business, I think that it would be better to get a bit more (and to pay more too). But if you are only expanding your rather successful business, the information and assistance (that every franchisor must provide) may be absolutely enough for you.
 

So, it means that you have to know what help you’ll get for sure according to legislation. All the rest depends on franchisor’s willingness.

According to the FTC, franchisors must provide:

1. One copy of the Uniform Franchise Offering Circular. You’ll get it in at least 10 days before you sign the agreement
   
2. One copy of the franchise agreement, other contracts and franchisor’s financial statements with estimates of initial start-up costs (operation capital, equipment, construction and rent costs and so on)
   
3. At least one week of practical training for you and your manager in a parent company
   
4. Operational manual
   
5. Ongoing support
   
6. Guidelines on audits and assignment procedures
   
7. Other criteria for assignments, such as ownership rights and rights to sell the franchise
   
8. Initial fees, royalty and other costs information
   

At the same time your potential franchisor may provide some additional help. You need to take into consideration that this usually increases your payments. This additional assistance may include:

1. A marketing plan, promotional materials and site selection assistance
   
2. Adequate insurance for fire, inventory, burglary, workers’ compensation, accident and health, occupancy and general liability
   
3. A known trademark or service mark, or advertising to make it known
   
4. Guidelines on purchasing inventory and equipment, restrictions on goods sold and terms of agreement and renewal
   

The last word about “must” or “should”: remember that in different states and countries the franchise legislation is different. Spend some time to check your rights as a franchisee. And maybe you will change the proverb for yourself: “We are not so rich to buy high-cost franchising and to pay for the help that we don’t need!”

Studying the differences in franchise legislation in different countries (I’ll write about it a bit later) I found rather interesting article. It was published by The Toronto Star, Mar. 14, 2006.
 I suggest all prospective franchisees to read this story. Certainly, you can say that the legislation in Canada and in the USA differs and in the USA each franchisor is obliged to present a disclosure. But I think that you’ll earn a lot from this sad story anyway.
  My conclusion:
1. Everybody thinking about buying a franchise has to ask for advice. And advisor has to be an independent person. Not a franchise salesman and commissioned consultants!!! Otherwise you will get an advice caused by their financial incentives.
 2. Invest your time in investigation of the financial and legal aspects of your future business. This will save you more money and health later.

There are some countries (like some former Soviet Union republics) where still there is no legislation about franchise. But even there You will meet McDonald’s restaurants. Certainly they do not use the word “franchising” during the registration. Usually it’s organized as joint venture but all the other characteristics remain the same.
 At one business seminar I’ve heard a question: can anybody cook the hamburger better and tastier than McDonald’s? Most of people said that they not only can but the cook better hamburgers. But then the trainer asked the second question. Can you create a business system that will operate as efficient as McDonald’s? The silence has been established….
 

You can criticize their food, you can dislike their traditions… But being honest to yourself you will agree that their business system – the franchising system –is one of the best since 1955.
  Create such a system for you business and you’ll become enough rich for the rest of your life. And students will study the history of you company!
 By the way, McDonald’s has more than 30,000 franchisees. And you?

As franchise is more often used by sole proprietors or small companies the entry fee has to be rather low. Certainly, the word “low” has absolutely different meaning for different people (especially when they live in different countries). The fee acceptable for Northern Americans can become too high for Southern Americans. But in general studying the entry capital needed to become the franchise owner I found the following facts:
 

1. Most of franchisors establish the initial fee at the level of $30,000 and less.
 

2. It’s rather easy to find a good variant for $15,000-$20,000 in the appropriate sphere. You only need to spend a bit more time looking for it.
 

3. Low-cost variants usually require much less (or even no) additional initial capital as their business is service-oriented and in many cases home-based. As a result such kind of business doesn’t require money for land, expensive technological equipment and other physical stuff. Examples? Cleaning and personal services, retail and food sales, software sales, automotive and beauty-related retailers, travel or delivery agencies and so on.
 

4. But low entry fee can have (not necessary) some hidden problems. It can happen that you’ll buy only an idea or so-called “business opportunity” not a franchise in a perfect meaning of this concept. According to the legislation franchisors have to provide more support and services than a business opportunity. It means that paying less at the initial stage you may face some extra costs later. What will you prefer? Any way you face some opportunity cost…
 

To be continued…

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