If you are a franchisee selling your franchise, you have a few things you need to do, in order to be prepared:
1. Get your franchise agreement ready.
2. Organize your business and financial records.
3. Obtain copies of all your commercial leases.
4. Prepare a non-disclosure agreement.
5. Review your insurance requirements.
A pyramid scheme (a/k/a franchise fraud) is an investment fraud scheme in which someone is offered a distributorship or franchise to market a particular product. This involves a fee to become part of the business. The real profit is earned by the sale of new distributorships and not by the sale of the products. Typically, the scheme is sold by telling new subscribers that they can remake their original investment by selling distributorships to two or more people, and so on. Soon, the lower levels of the pyramid are unable to find more people to buy into the scheme, and the scheme collapses. (Source: FBI )
A Ponzi scheme is an investment scam in which a company claims to be paying investors “profits.” However, the business is only bringing in money from getting other investors. For example, Company Z solicits investors A, B, C, who each pay in $1. The company then solicits investors D, E, and F who each pay $1. Company uses D, E, and F’s investments to note on A, B and C’s accounts that they have earned a “profit.” Company then solicits G, H and I, taking their money, and using it to show a “profit” for the accounts on D, E, and F. The cycle continues until people try to withdraw their investments, or until the company can no longer obtain fresh victims. Typically, no real investments are ever made. Another variation is that investments are made, but losses are ‘covered’ by fraudulently making income statements and covering the losses with the new investor’s money.
There is no set formula for payments from a franchisee to a franchisor. The most common payments are the franchise fee, which is set out in the UFOC/FDD document. This is a fee charged to participate in the franchise, and it is typically a one time start up fee. Additional fees include royalty payments (typically a monthly percentage of gross sales), shared advertising costs and continuing training costs. A thorough review of the franchise agreement is recommended.
The first step is to map out how you are going to franchise the business. You need to be concerned about the produces you sell, how you sell them, and the places you will be selling them. You then have to address logistics: how will the products be distributed and sold? How will you sell the franchised system to franchisee? You will also need detailed financial statements, and other materials about the business for your offering circular. Many of these issues should be identified prior to drafting the franchisee agreement. Also, you will need to comply with various state and federal disclosure rules.
That depends on the kind of business you have. Does your business rely solely on your know-how and expertise? Or can you make a model of your business that can run without your constant supervision? If your business model lends itself to being easily being cloned, such that you can train individuals how to run the business with minimal supervision, then the business might be one that can be franchised. In order to attract franchisees, the business should either be established, or have a unique concept or product that will give it a competitive advantage.
A franchise is a useful tool to grow a business where the owners have a profitable business model that can be easily replicated but you do not have the time, energy or capital to open new locations. The franchise model allows business owners to grow the business and the brand with less capital compared to opening individual locations. Additionally, franchises, if structured properly, should attract motivated individuals who will have substantial time and money invested into the franchise (and hopefully try to make the franchise profitable.)
An FDD is the updated term for UFOC. An FDD is a list of disclosures that a franchisor is required to disclose to potential franchisees regarding the franchise offering, start up costs and a summary of important terms contained in the franchise agreement. Like a UFOC, an FDD is required in all fifty states. However, some states require additional disclosures.
A UFOC is a Uniform Franchise Offering Circular. This is a set of disclosures that companies selling franchises must give to potential buyers in advance. The disclosures include a synopsis of the franchise agreement, financial information about the business and its owners along with several other useful items to assist potential buyers. On top of the federally required disclosures, many states also require franchisors to supply additional information.
Wednesday, February 22, 11:14 pm