franchise management test 2

Brokers

the best source of lead generation

They finance most franchises

What does the SBA have to do with franchising?

Franchise Sales Organizations (FSO’s)

acts as a third-party company to help a franchisor sell its franchises

Average Unit Volume

In franchising, this refers to the average annual sales revenue of a franchise unit.
It helps potential franchisees gauge expected earnings and compare franchise brands

SBA (small business administration)

A U.S. government agency that supports franchisees and other small businesses by guaranteeing loans, providing resources, and lowering financial risk for lenders.

504 Loan

Loan from the SA to Finance a Real Estate Building with businesses included

Commercial Building Permits, need cities to approve before you build

Rate per Square Foot

What a commercial lease will cost you in Monthly Rent

CAM (Common Area Maintenance)

Additional charges in a commercial lease for maintaining shared spaces like parking lots, hallways, landscaping, or security that franchisees contribute to

FMV (Fair Market Value)

The reasonable rental value of a franchise space, based on comparable properties in the area. Often used when renegotiating or renewing leases 

Validation Process

Checking out a Franchise by talking to existing Franchisees

Pillars of Quality Control

• Franchisee Selection

• Documented systems

• Training and Support

•  Legal Agreements

FDD Item 1

The Franchisor, and any Parents, Predecessors, and Affiliates - Provides basic information about the franchisor, its parent companies, predecessors, and affiliates so the franchisee knows who they are entering a business relationship with.

Understanding how to franchise, decide if you are franchise material, know thyself, investigation of franchise companies, talk to existing franchisees, meet the franchisor, make a decision

7 steps to find a franchise

Registration States

states that add an extra layer of protection for franchisees beyond what the federal government provides (at the front of FDD)

Advantages for Franchisees

Capital Access, growth speed, risk-sharing

Vicarious Liability

Legal doctrine under which a party can be held liable for the wrongful actions of another party.

15

• Don't Franchise if you cannot get at least a _% ROI

• ⁃   100-200k to start a Franchise

DMA (Designated Marketing Area)

A specific geographic region where franchisees and the franchisor coordinate marketing efforts. Ads and promotions are typically run within the DMA to reach local customers.

LOI (Letter of Intent)

A non-binding agreement outlining the basic terms (rent, square footage, location) for leasing property for a franchise unit before signing a formal lease.

TI Allowances

dollars given by Landlord to help you build your franchise

Triple Net Lease

you must pay you share of Insurance, Taxes and Utilities for the Shopping Center

Option Years

Years that you might pick up in your lease after the initial period

Radius Clause in a Lease

The Landlord restricts another Franchise Location of yours closer than the radius clause in the lease

Loan Broker

can work for a client to attempt to get a business loan from many different banks.

Buffalo Wings and Weck

What did buffalo wings used to be called?

Elements of a License

• (how to decide what a franchise is)

- 1. trademark

2. control

•   3. $1,000 per year

• ⁃   Operations Manual
Key tool for consistency

separate, accept, admit

Steps to Learn form Failure

insta Burger king

Burgerking

Dannys Donuts

Dennys

Open Kettle

Dunkin Donuts

Chicken on the run

Popeyes

Top Hat

Sonic

FDD Item 2

Business Experience - Lists the key executives' background and experience, helping the franchisee assess the leadership's expertise and track record.

FDD Item 3

Litigation - Discloses any past or current legal actions involving the franchisor or its executives that could pose risks to the franchisee.

FDD Item 4

Bankruptcy - Reveals any bankruptcies filed by the franchisor, affiliates, or key executives in the past 10 years, signaling financial stability.

FDD Item 19

Financial Performance Representations - May include information about the average or range of revenues and profits of franchise units, helping franchisees gauge potential earnings (if provided)

3 years in Item 21

How many years of financials are required in an FDD?

Unique Selling Proposition

is the feature or benefit that makes a product, service, or brand stand out from competitors. "Why should customers choose you over others?"

Franchise Brochure

a printed or digital document that provides key information about a franchise opportunity to potential investors.

PVF (Prospectus, Vision, and Franchise)

a structured presentation tool to present the franchise opportunity clearly to prospects.

Development cost, legal cost, marketing cost, people cost, preparation cost

What are the 5 buckets?

item 7, item 19, item 11

the estimated initial investment and all associated fees, financial statements to verify the franchisor's health, the franchise agreement and franchisee's obligations, and details on renewal, termination, and dispute resolution

JT

Brand one (Franchise Service Organization) Helps franchises scale (FSO = outsourcing franchise sales)

Ryan Smith

Skyzone - also loan broker (mostly SBA)

Gary Eastman

Patent, copyright lawyer

SBA 504 loan

is for long-term fixed assets like commercial real estate and heavy equipment

SBA 7A Loan

loan is more flexible for a wider range of general business needs such as working capital, inventory, or business acquisitions

Patent

protects an invention (lightbulb)

Copyright

protects original works of authorship (Book)

trademark

protects brand identifiers like logos and brand names (sign)

Rollovers for Business Startups (ROBS)

plan used to finance a franchise

they fund most franchises

What does FBA have to do with franchising

territory clause

defines the specific geographic area where a franchisee is granted rights to operate, sell products, or provide services

a sale like no other

Despite the abundance of prospects who are chasing after the dream of

business ownership, the franchise sale is:

Capitalization and credit, Work ethic, Personality and fit with your organization

The Big Three

advances

small sales that push your client towards a final decision to invest in a franchise

Franchise Advisory Council

A ___ is most often made up of franchisees who are elected by their

fellow franchisees. ___s typically meet between two and four times per

year, and their bylaws (covering eligibility, voting rights, limitations, etc.)

can vary considerably. But the subjects that are typically discussed rarely

differ: consumer marketing and advertising, new products and services, and

any issues of concern to the franchisees in general

FDD item 5

upfront fees

FDD item 6

ongoing fees

FDD item 7

initial investment

P and L (profit and loss)

Profit and loss

Can only pay interest when you have a loan

The principal comes off the balance sheet

You will go broke if you run a business on P and L

Hockey stick projection

If labor stays the same, you are spending too much

Balance sheet

Principle of loan 

Accounts payable and receivable

Gross sales

short term loan

generally around 12 months or less

Long term loan

usually around 3-30+ years

average receivable days

how long it takes to get your money

$100’s

equipment cost range

$100,000’s

Lease whole improvements cost

$5000

Office equipment

Amortization is non / intangible, Depreciation is tangible

The difference between depreciation and amortization

unit prices*hours -(cost of purchasing products)

Beginning sales=

cash flow

Most important part of projection and business is

Assumptions 

• Receivables - less than 30%

• Payables - at least 30 days

• Average receivable days- 15-20 days, faster than payables

15-20 days

How long should accounts payable be paid

14

registration states

California, minnesota, wisconsin

Easiest to find free Fdds

Gross Sales

Total revenue from all sales before subtracting anything It’s the top-line number: how much money came in from selling products/services.

Net Sales

• Gross Sales minus returns, discounts, and allowances.

• This is the real revenue the business actually keeps from customers.

• More accurate than Gross Sales for measuring performance

multiple of its earnings, EBITDA or net profit.

Price to Sell a Business (Business Valuation Basics)

• A business is typically sold for a

• If a business earns $200,000/year and the industry multiple is 3×: Sale price ≈ $600,000

Assets

what the business owns (cash, equipment, inventory)

Liabilities

what the business owes (loans, payables)

Equity

owner’s value in the business

McDonald's Joint Employer Case

• not considered a joint employer because it didn’t control franchise employees’ day-to-day work

• Brand standards, uniforms, and required software weren’t enough to show employer-level control

Court ruled franchise systems alone don’t create liability

Andrew Alves

• Aussie pet mobile

• Graduated from SDSU

Home improvement, chicken restaurants, health/wellness, and pet care

• are the fastest-growing franchise sectors, each booming due to post-pandemic lifestyle shifts, rising demand, and strong consumer spending.

Where the Boom is really Booming

Peter Cancro

_____ ____ bought Mike’s Subs (single shop) at age 17 and scaled it by keeping a “stay small while growing big” nucleus model, emphasizing hands-on training, community involvement, and replicating the original shop’s culture.

Jersey Mike’s expansion relied on intense operational detail, deep franchisee support, heavy training investments, and a people-first mission (“give and make a difference”), creating consistency across 2,500+ stores.

197 deduction

pay no taxes on the first two million the company nets (or whatever # is from IRS)

talk to 10 franchisees

important step before starting to franchise