Home Based Franchise Start-Up Kit

Start your dream home based franchise business

• What is a Home Based Franchise?
• Self-Assessment: Finding the Right Match
• The UFOC

• Costs
• Getting Financing
• Earning Projections
• Your Business Plan

What is a Home Based Franchise Business Opportunity?

When you hear the word 'franchise', you may immediately think of companies like McDonalds TM or Starbucks TM. But there are also hundreds of franchise opportunities that you can purchase and operate from your own home. If you want to work from home and have a home-business, you may want to consider a home-based franchise business opportunity.

When buying into a home franchise, you are getting a business model with a track-record of success. The concept, structure, and operations were founded and developed by a parent company, and they have already been tested many times. For someone interested in owning a home-business, purchasing a home-franchise is lower risk and simpler to start than trying to launch a completely new and unique business. The idea and operation techniques are what you purchase, and most often the parent franchise company will give you a lot of support to help make your home-business a success.

Self-Assessment: Finding the Right Home Based Franchise Business Opportunity for You

There are many home-based franchises out there, and they vary a great deal. How do you find the one that is right for you - one that matches your own particular skill set, experiences, finances, dreams and interests? What do you want to find in a home-franchise? Will working from home be the right life choice for you? Getting clear on these questions early on will make the process of finding the right home-based business opportunity easier.

If you want to explore this topic in more detail, visit the Home Business Frontiers Self-Assessment Center. You will explore:

• Will a home-franchise business opportunity work for you?
• Are you 'Franchisee' material?
• Matching an industry and a home-based franchise with your personal skills, experience and goals.
• Getting to know your financial situation and capacity.

The UFOC

You won't go far into the exploration of purchasing a home-franchise business opportunity before you encounter the UFOC -- Uniform Franchise Offering Circular. It is an extremely important document, because it tells you just about everything you will need to know about the parent franchise company. You will definitely want to become familiar with the UFOC if you are interested in purchasing a home-based franchise.

First off, UFOC stands for Uniform Franchise Offering Circular. It is required by the Federal Trade Commission (FTC) under the Franchise Rule, for Franchisors to provide this disclosure document at least ten business days prior to signing any contract or paying any money to the Franchisor. The Franchise Rule was established in order to protect consumers by giving them critical information before an agreement is in place, or money is spent. When reading the UFOC, take note of any questions you have, and get clarity on these before investing.

In the following states, Franchisors must file their UFOC and meet additional disclosure requirements before they can sell their franchise in that state:

California
Hawaii
Illinois
Indiana
Maryland
Michigan
Minnesota
New York
North Dakota
Oregon (disclosure only)
Rhode Island
South Dakota
Virginia
Washington
Wisconsin

To help familiarize you with the details of the UFOC, here is a brief outline of its 23 necessary components:

1. The Franchisor, Its predecessors, and Affiliates

This item of the disclosure document will include background information about the current Franchisor, the current executives, as well as the predecessors, and affiliates. It includes a description of the business, corporate and trade names, and the primary address.

2. Business Experience

This section gives employment history for executives, partners, and trustees. Take note of the relevant experience in managing a franchise system, as well as length of time with this company in particular. If a marketing representative or franchise broker is active with the franchise, you will find information about them as well.

3. Litigation

This item discloses the litigation history of the Franchisor, or any of its executives. Litigation could include conviction of felonies such as fraud, violations of franchise law, any state or federal violations, and civil action law suits.

4. Bankruptcy

This section discloses any bankruptcy history of the Franchisor or any of its executives. If they have filed for bankruptcy in the last 15 years, information must be disclosed.

5. Initial Franchise Fee

This states the franchise fee and any other fees the Franchisee will need to pay prior to commencing the operation of the franchise. This may include things like costs for initial inventory, equipment, signs, or rentals. This section also details the terms of payment and the franchisor's refund policy.

6. Additional or Potential Fees

This section lists all the fees the Franchisee will have to pay that are unique to a particular home-based franchise. This could include advertising payments, business licensees, product or service costs, renewal fees, royalty payments, business promotions, training fees, insurance, accounting and legal fees, employee salaries and benefits, and any other fees associated with the home-based frachise.

7. Initial Investment

This is an estimate that includes all anticipated start-up costs required for a particular home-based franchise business opportunity. When considering the start-up costs and initial investment for your new home business, remember to include all personal and living expenses that you will need for up to 2 years. It often takes a minimum of several months to get your new home-based business off the ground and profitable.

8. Obligations of the Franchisee to purchase from designated sources

If the Franchisee is required purchase goods or services from a specific source, it will be detailed in this section. If the franchisor receives income as a result, that information must be disclosed.

9. Obligations of the Franchisee

This section lists your obligations as a new owner of a home-based franchise. It includes compliance with standards, site selection, purchases and leases, records, reports, inspections, customer service requirements, renewals, appearance requirements, training, advertising, and insurance requirements.

10. Financing

If the Franchisor offers financing to the Franchisee, it is detailed here.

11. Obligations of the Franchisor

This section lists obligations of the Franchisor both initially and on-going. It includes topics like advertising, training programs, the operations manual, support prior to opening as well as ongoing, marketing assistance, and computer service.

12. Territory

This section describes any restrictions and/or rights regarding location and territory for a Franchisee.

13. Trademarks and Proprietary Information

This section details how trademarks can be used and what patents and/or copyrights exist. It also may include information on logos, service marks, trade names, and commercial symbols.

14. Patents and Copyrights

This section describes patents, copyrights, and trade secrets unique to a particular home-based franchise.

15. Participatory Obligation

This section states if it is required for the Franchisee to be a part of operating the business, and to what extent. For example, some home-franchise owners prefer to purchase a franchise and hire employees to operate it. The 'Participatory Obligation' section of the UFOC will tell the Franchisee what level of participation is required if they want to purchase the home-franchise business opportunity.

16. Restrictions on goods and services offered by the franchisee

Any limits or exclusions regarding goods and services offered by the franchisee will be detailed in this section.

17. Renewal, Termination and Transfer

This section explains the length of contract, the process of renewal, the conditions in which the Franchisor may terminate the franchise, and when you could sell or transfer the franchise.

18. Public Figures and Advertising

This section describes if there is compensation owed to any public figure (like a celebrity or famous athlete) for endorsement of a home-franchise or its product. This section also includes information on advertising costs and programs. It is a good idea to investigate whether or not Franchisees have any control over how advertising is managed and what percentage of your advertising fees go to national promotions and programs local to your area. You will also want to learn if you are allowed to initiate any of your own advertising efforts separate from those of the Franchisor.

19. Earnings Claims

This section will give detailed documentation to substantiate an estimate of what you might make if you operate a franchise. It is not required, and if offered, must legally provide data to back up its claims.

20. List of Outlets

This section provides information about how many franchise units are operating or were operating in the last three years. It details who is operating them, and how to contact those Franchisees. It also includes history of terminations, transfers, and the contact information for any Franchisee who has left the franchise system within the past year. All of this is very valuable information to help you determine how successful other franchise outlets are. Speaking with other current or former Franchisees is the easiest way to determine the success and validity of a franchise system.

Take time to contact and interview several other home-franchise owners before making the decision to purchase a particular home franchise business opportunity. It is a good idea to speak with owners nearby as well as far away. And try to contact both current and former owners. Broad research and lots of questions will only help your process and decision.

21. Financial Statements

This section includes financial statements from the franchise for the previous three years such as stockholder's equity, cash flow, balance sheets, and operations expenditures. It is a good idea to hire a lawyer or accountant to help you sort through these statements and determine whether or not it appears the franchise has a steady growth and financially supports the franchise system sufficiently.

22. Contracts/Franchise Agreement

This section includes copies of any and all contracts and/or agreements the Franchisee will be asked to sign.

23. Acknowledgment

And lastly, there is a section where the Franchisee signs to acknowledge having received the disclosure document.

The UFOC is an extensive and important document, and some people may find it intimidating. Nonetheless, we highly recommend that you take the time to read and understand it thoroughly. We also recommend working with a lawyer and/or accountant to help you understand all legal and financial aspects of the UFOC.

Home Business Opportunity Financial Basics

Costs

So, you want to work, and you are thinking of purchasing a franchise as a home-based business. Perhaps you have looked through the Home Business Frontiers list of home-franchise business opportunities and requested information from a few that match your interests. Do they match your budget, too? How do you really know how much starting up a home-franchise will cost? There are many factors to consider.

First off, most franchise opportunities have a franchise fee. This is the cost of your ticket into the franchise system, access into an established business model and a recognized name. It often includes things like: the franchise operations manual, initial training, rights to use trademarks (name, logo, signage...), ongoing support, and more.

However, most often, the franchise fee does not include other required costs such as inventory, signs, and supplies. There are also often advertising and royalty fees (usually based on a percentage of sales) with payment expected on a regular basis. These fees help to maintain the franchise system.

It is important to carefully read the UFOC to calculate total initial costs. It is a good idea to calculate how much it costs to run the business for a year, and be sure to include your own living expenses for one to two years.

Getting Financing

When thinking about the capital you will need to invest in a home-business franchise opportunity, remember to research widely and be open to creative solutions. If you want to work at home through your own home-based business, chances are you can find a way to make it happen.

There are many resources to consider when looking for start-up investment money. Here are some to start with:

• Banks -- With your well thought out business plan, many local and/or national banks will be very interested in giving you a loan.
• The Franchise itself -- Many Franchisors offer qualified prospective Franchisees a financing plan to help you launch your own home-based franchise.
• Family and Friends -- There is nothing wrong with asking those you know to help raise start up money. Be clear about what equity they will get in return (or about a payback plan), and have an understanding about what will happen in the unfortunate scenario that your home business does not succeed. Keep in mind, even though you are accepting their financial help, you do not have to accept their advice. Financing your home business does not necessarily mean helping to run your home business.
• SBA loans (Small Business Association) -- If you meet SBA criteria, loans are often easier to receive than those from other banks. And there are often special loans for women or for minorities.
• Partner Up -- If you spread the word that you are interested in taking advantage of a home-business opportunity, you may come across someone in your community who has the necessary capital but is less interested in the day to day operations of running a business. Be sure to consult a lawyer and legally draw up the arrangement of the partnership.

Also, in researching a home-based franchise business opportunity, you may learn that some Franchisors require you to have a minimum amount of liquid capital. Liquid capital is essentially cash, or assets which can be readily converted into cash (as opposed to a long-term asset like real estate). Liquid Capital is also known as liquid assets, quick assets, and realizable assets. The amount required by a particular Franchisor can vary a great deal -- anywhere from $0 to $200,000 - and it comprises your primary investment into the franchise.

Earning Projections

Before going too deeply into the process of purchasing a home-franchise, gather information to develop a realistic projection of how much money you can earn. Some franchises will offer you an estimated earnings claim, and by law, it must be backed up by significant documentation.

In looking at earnings claims, be sure to pay close attention to average income. This can be inflated by a couple of very highly profiting Franchisees, and not representative of what most Franchisees are making. Also, while you might be impressed by some franchises with high revenue, remember that the gross revenue number must always be viewed in relation to expenses to get a true sense of profit. Make sure that all 'costs of doing business' are accounted for. These include things like rent, advertising, employee wages, insurance, supplies, inventory (and many other expenses incurred through running a home-business). Franchisees with more experience may turn a higher profit, and geographic factors might also have an effect on profitability.

As a final note when reviewing earning potential, talk to several current and former Franchisees to get as clear a sense as possible regarding potential earnings. Find out what their total investment was, and if there were any other hidden costs. Discover how long it took them to earn a reasonable income. Take what you learn and view it in relation to your own specific goals, background. and the proposed territory that your home-business will serve. Together, this information will help you evaluate your potential earnings.

Your Home Based Business Plan

A business plan is a good idea when starting any business. And if you are buying a home-based franchise, it is not only a good idea, but it may even be required by the franchisor.

Creating your business plan is a great chance to get clear on your goals, to research and map out how your business will be operated, its chances of success, and what to do if the unexpected happens. A business plan will be a critical element of any financing application because it will also include how and when you will repay borrowed money.

There are some basic questions you can ask yourself as you begin to formulate your business plan:

• What service or product will your business provide?
• What need does this service or product meet?
• Who are the potential customers for your product or service?
• How will you reach them?
• Where will you get the financial resources to commence your home-business opportunity?
• How will the business operate?

As you are gathering data and answering these questions, organize them into these four categories:
1) A description of the home-business
2) Marketing
3) Finances
4) Management

This will help stage the information before you formalize it into a business plan format.

A typical business plan is somewhere around 20 pages (although it can be as long as 100 or as little as one).

Here is an outline of the elements that the United States Small Business Administration (SBA) suggests a business plan include:

• Cover Sheet
• Statement of Purpose
• Table of Contents

A. The Home-Business

• Description of Business
• Marketing
• Competition
• Operating procedures
• Personnel
• Business Insurance

1. Loan Applications
2. Capital equipment and supply list
3. Balance Sheet
4. Breakeven analysis
5. Pro-forma income projections (profit and loss statements)
   • A three-year summary
   • For the first year, a detail by month
   • For the second and third years, a detail by quarters
   • Include the assumptions upon which the projections were made
6. Pro-forma cash flow

C. Supporting Documents

• A copy of franchise contract and all supporting documents provided by the Franchisor (for franchised businesses)
• A copy of proposed lease or purchase agreement for building space (not required for home based businesses)
• A copy of licenses and other legal documents
• A copy of resumes of all principals
• Copies of letters of intent from suppliers

While the gathering all of this information may seem daunting, you will save yourself time and avoid mistakes later by thinking it through ahead of time. There are many resources out there to help you create a detailed and thorough business plan. To learn more about a new home business opportunity, see our Resource Center.