Introduction So what do you do with the rest of your life? Nick Balsmeier graduated from college determined to raise his family in his hometown. Now that he was in his mid-twenties, Nick and his wife planned to start a family. Nick grew up in a community where close knit families of several generations stayed together. The problem was figuring out how to do that. Because it was near two colleges, competition for jobs was stiff in Nick's hometown. Lately, Nick had been wondering if there was more to life than an office job and a steady paycheck. Starting a business was appealing but there were so many choices and risks. Then there was the issue of money. Nick knew his access to financing was limited. What kinds of opportunities were available for an entrepreneur on a budget? That's when the answer hit him: Franchising. But what kind of franchise would succeed in his hometown? What would it cost to buy the rights to a franchise and start up? Nick was lucky to have the backing of his family. His dad was willing to hand Nick his retirement money to start a business but that just added to the pressure. It was time to make some decisions. Background Nick's hometown was growing and expanding. It was a trade center for resort communities and towns in a hundred mile radius. In recent years a number of big box retailers and restaurants moved into town. Fifty miles down the road in one direction was a university town and twenty miles in the other direction was another university that recently transformed from a two year to a four year college. Nick's hometown attracted students and shoppers from a wide geographic area. Another plus was the growing and thriving professional community. The local area supported a major government research lab, a respected regional hospital and other professional businesses. Looking around at the kind of businesses he admired, Nick realized franchising was a way to start. It was still risky, but a franchise offered a proven concept and a community of other owners with experience and ideas. Nick needed to figure out the right kind of franchise for his hometown. There was abundant information online on franchising, including information about startup costs. The startup costs for some franchises ran into the millions. Others were names he didn't recognize. Nick thought some franchises had uncertain demand in his hometown for the products or services they sold. Nick figured he could narrow his choices by eliminating franchises that were too expensive. He also dropped franchises from his list if they were already located in his town or offered a product or service he wasn't sure would succeed. The Franchising Decision Nick was convinced owning a franchise offered real advantages getting started as an entrepreneur. He could join a community of owners and operators of similar businesses. Most franchises typically had online forums a franchise owner could join to share knowledge and experiences. Franchises also provided rules and restrictions based on past experiences of franchisees. Instead of reinventing the wheel Nick could hit the ground running with a proven concept. The challenge now was to identify the right franchising opportunity. Late one night as Nick was driving down the road he pulled out his cell phone to spend some time visiting with his brother. It was critical that Nick make some decisions and narrow his choices. It all happened very quickly when Nick's brother asked, What about a Pita Pit? Nick's brother liked the restaurant. Pita Pit franchises were often in college towns and that is where Nick's brother first saw the restaurant concept. Nick and his brother both liked Pita Pit's food. Instead of traditional sandwich breads, meats and fillings were wrapped in a pita. It was healthy, filling food that seemed to recognize a growing trend in the dining public. The pita wraps catered to the individual tastes of customers who could create custom creations. Nick asked his brother, Why not buy a franchise for something we know and like? If we like Pita Pit food, it is likely others will feel the same way as well. The concept was new to Nick's hometown and he knew it was on the list of affordable alternatives. Better yet, corporate headquarters was located in the same state as Nick so he thought he might be able to visit and find out more about the company. A review of information on the Internet indicated Pita Pit's startup costs at $219K well within Nick's budget. Nick liked the idea of opening a Pita Pit and decided to research this opportunity. The more he found out about Pita Pit, the better he liked the idea of buying a franchise. Nick's initial information came from the Internet starting with www.pitapitusa.com, the company's site. After that he talked to the company's corporate headquarters and got the names of other franchise owners he could contact. Nick talked with other Pita Pit franchisees in nearby towns who gave him a general idea about costs and expenses. Based on these conversations and other information gathered, Nick developed the numbers for the spreadsheet in Table 1. Rent and utility expenses were based on actual costs for space in Nick's hometown. All the other costs were based on franchise costs or estimates from the experience of current owners. One concern was that other stores mostly located in college towns stayed open to feed hungry students after a night out. Nick's hometown didn't have a college but he thought the concept might work anyway with the lunch and dinner crowd. Another key issue would be location. How could he identify the best spot for a restaurant and how much would it cost? Nick had never leased space or bought real estate before so it seemed he might need to get some legal help while he explored these options. Nick also remembered from his college classes the legal forms of business ownership which included the sole proprietorship, partnership and corporation. Maybe an attorney could help him figure out which of these three would work best. Nick also wondered if there were other professionals he needed to talk to. Taxes for businesses could be complex and an accountant with franchise experience could help. Nick's hometown had a thriving shopping area with a mall and several big box retailers nearby and there was space available from a failed business. One concern was the close proximity of a fast food restaurant and some dine-in chains but none of them offered food similar to Pita Pit. Nick thought carefully as he developed the information in Table 1. The rent and mortgage were numbers Nick was certain about after he talked to the realtor marketing the property for the Pita Pit. Nick spent considerable time talking to other franchise owners who gave him a range for the expenses. Nick was conservative in estimating expenses. He was also conservative estimating revenues. It was hard to feel confident about the estimates for a new venture but Nick used the information from other owners and selected more conservative numbers. Nick thought there might be some unexpected expenses that he missed so he included a category titled other expenses in Table 1. Nick knew he needed to be paid a salary and the $4,000 a month for the manager's salary represented his wages and benefit expenses. Nick knew what other stores were doing but wasn't sure about his own costs and potential sales. Making a decision now would mean he could likely start operations in September. He wasn't sure if this was a good month to begin a business, but he thought most people in town might be back from vacation, busy with school and sports and might stop by while they were out shopping. Nick wondered about his projections but thought they looked reasonable based on the information he had, including those provided by other owners. The franchise seemed like a great way to start a business but there were still risks and uncertainties. Buying a franchise was a little like buying a business but without the built in base of customers or clients. Nick wondered if he had missed any expenses or if his estimates were reasonable. He wondered whether or not he'd overlooked anything important as he developed his spreadsheet or planned his start up. Nick also wondered if he fully understood the advantages and disadvantages of franchising as a way to start his business. He knew it was important to consider all the issues and get this critical decision right. It wasn't just his family's livelihood at stake. Since his dad was financing his startup with his retirement savings, Nick thought he had better get things right. What are the steps an entrepreneur can take when starting a business venture? Explain how they are the same or different than buying a franchise? List and describe the issues and entrepreneurs like Nick should evaluate as part of his decision process. Based on the financial statements Nick generated, will his franchise be profitable? What other factors should he consider? Should Nick buy the franchise? Introduction So what do you do with the rest of your life? Nick Balsmeier graduated from college determined to raise his family in his hometown. Now that he was in his mid-twenties, Nick and his wife planned to start a family. Nick grew up in a community where close knit families of several generations stayed together. The problem was figuring out how to do that. Because it was near two colleges, competition for jobs was stiff in Nick's hometown. Lately, Nick had been wondering if there was more to life than an office job and a steady paycheck. Starting a business was appealing but there were so many choices and risks. Then there was the issue of money. Nick knew his access to financing was limited. What kinds of opportunities were available for an entrepreneur on a budget? That's when the answer hit him: Franchising. But what kind of franchise would succeed in his hometown? What would it cost to buy the rights to a franchise and start up? Nick was lucky to have the backing of his family. His dad was willing to hand Nick his retirement money to start a business but that just added to the pressure. It was time to make some decisions. Background Nick's hometown was growing and expanding. It was a trade center for resort communities and towns in a hundred mile radius. In recent years a number of big box retailers and restaurants moved into town. Fifty miles down the road in one direction was a university town and twenty miles in the other direction was another university that recently transformed from a two year to a four year college. Nick's hometown attracted students and shoppers from a wide geographic area. Another plus was the growing and thriving professional community. The local area supported a major government research lab, a respected regional hospital and other professional businesses. Looking around at the kind of businesses he admired, Nick realized franchising was a way to start. It was still risky, but a franchise offered a proven concept and a community of other owners with experience and ideas. Nick needed to figure out the right kind of franchise for his hometown. There was abundant information online on franchising, including information about startup costs. The startup costs for some franchises ran into the millions. Others were names he didn't recognize. Nick thought some franchises had uncertain demand in his hometown for the products or services they sold. Nick figured he could narrow his choices by eliminating franchises that were too expensive. He also dropped franchises from his list if they were already located in his town or offered a product or service he wasn't sure would succeed. The Franchising Decision Nick was convinced owning a franchise offered real advantages getting started as an entrepreneur. He could join a community of owners and operators of similar businesses. Most franchises typically had online forums a franchise owner could join to share knowledge and experiences. Franchises also provided rules and restrictions based on past experiences of franchisees. Instead of reinventing the wheel Nick could hit the ground running with a proven concept. The challenge now was to identify the right franchising opportunity. Late one night as Nick was driving down the road he pulled out his cell phone to spend some time visiting with his brother. It was critical that Nick make some decisions and narrow his choices. It all happened very quickly when Nick's brother asked, What about a Pita Pit? Nick's brother liked the restaurant. Pita Pit franchises were often in college towns and that is where Nick's brother first saw the restaurant concept. Nick and his brother both liked Pita Pit's food. Instead of traditional sandwich breads, meats and fillings were wrapped in a pita. It was healthy, filling food that seemed to recognize a growing trend in the dining public. The pita wraps catered to the individual tastes of customers who could create custom creations. Nick asked his brother, Why not buy a franchise for something we know and like? If we like Pita Pit food, it is likely others will feel the same way as well. The concept was new to Nick's hometown and he knew it was on the list of affordable alternatives. Better yet, corporate headquarters was located in the same state as Nick so he thought he might be able to visit and find out more about the company. A review of information on the Internet indicated Pita Pit's startup costs at $219K well within Nick's budget. Nick liked the idea of opening a Pita Pit and decided to research this opportunity. The more he found out about Pita Pit, the better he liked the idea of buying a franchise. Nick's initial information came from the Internet starting with www.pitapitusa.com, the company's site. After that he talked to the company's corporate headquarters and got the names of other franchise owners he could contact. Nick talked with other Pita Pit franchisees in nearby towns who gave him a general idea about costs and expenses. Based on these conversations and other information gathered, Nick developed the numbers for the spreadsheet in Table 1. Rent and utility expenses were based on actual costs for space in Nick's hometown. All the other costs were based on franchise costs or estimates from the experience of current owners. One concern was that other stores mostly located in college towns stayed open to feed hungry students after a night out. Nick's hometown didn't have a college but he thought the concept might work anyway with the lunch and dinner crowd. Another key issue would be location. How could he identify the best spot for a restaurant and how much would it cost? Nick had never leased space or bought real estate before so it seemed he might need to get some legal help while he explored these options. Nick also remembered from his college classes the legal forms of business ownership which included the sole proprietorship, partnership and corporation. Maybe an attorney could help him figure out which of these three would work best. Nick also wondered if there were other professionals he needed to talk to. Taxes for businesses could be complex and an accountant with franchise experience could help. Nick's hometown had a thriving shopping area with a mall and several big box retailers nearby and there was space available from a failed business. One concern was the close proximity of a fast food restaurant and some dine-in chains but none of them offered food similar to Pita Pit. Nick thought carefully as he developed the information in Table 1. The rent and mortgage were numbers Nick was certain about after he talked to the realtor marketing the property for the Pita Pit. Nick spent considerable time talking to other franchise owners who gave him a range for the expenses. Nick was conservative in estimating expenses. He was also conservative estimating revenues. It was hard to feel confident about the estimates for a new venture but Nick used the information from other owners and selected more conservative numbers. Nick thought there might be some unexpected expenses that he missed so he included a category titled other expenses in Table 1. Nick knew he needed to be paid a salary and the $4,000 a month for the manager's salary represented his wages and benefit expenses. Nick knew what other stores were doing but wasn't sure about his own costs and potential sales. Making a decision now would mean he could likely start operations in September. He wasn't sure if this was a good month to begin a business, but he thought most people in town might be back from vacation, busy with school and sports and might stop by while they were out shopping. Nick wondered about his projections but thought they looked reasonable based on the information he had, including those provided by other owners. The franchise seemed like a great way to start a business but there were still risks and uncertainties. Buying a franchise was a little like buying a business but without the built in base of customers or clients. Nick wondered if he had missed any expenses or if his estimates were reasonable. He wondered whether or not he'd overlooked anything important as he developed his spreadsheet or planned his start up. Nick also wondered if he fully understood the advantages and disadvantages of franchising as a way to start his business. He knew it was important to consider all the issues and get this critical decision right. It wasn't just his family's livelihood at stake. Since his dad was financing his startup with his retirement savings, Nick thought he had better get things right. What are the steps an entrepreneur can take when starting a business venture? Explain how they are the same or different than buying a franchise? List and describe the issues and entrepreneurs like Nick should evaluate as part of his decision process. Based on the financial statements Nick generated, will his franchise be profitable? What other factors should he consider? Should Nick buy the franchise