Business Franchise

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!

I think that it’s time to write a few words about financing your future franchise business. It’s evident that to start your business you’ll need money. You have to cover franchise fee, buy equipment, hire personnel and bear some other costs. The exact sum depends on the type of business and many other factors. But there is at least one thing that remains invariable: you have to look for and to choose the sources of finances.
 

I decided to say a few words about choosing the sources as it seems to me that there are some facts of misunderstanding or even false beliefs in this sphere. I’ll describe the main of them using “pro&con”.
 

Personal savings
Pro:
- this money belongs to you and if something goes wrong you will not have problems with paying back; bad results will not influence your credit history;
-you can start using them immediately (or just after talking over with your family);
-it costs you nothing (except the opportunity cost).
Con:
- in most cases personal savings are not enough to finance even 50% of prospective business;
- there is an opportunity cost of using them (the things that you planned to purchase for that money and the interest you received for them);
-as you don’t borrow money this transaction will not impact your credit reference when your business succeeds.
 

Bank credit
Pro:
-it’s the most common way to finance your business;
-if everything goes OK, you’ll contribute your credit history;
-bank has an incentive to finance only profitable and pay back projects. As a result they insist on business plan development and carefully evaluate it. So you’ll get professional and unbiased opinion concerning you franchise business almost for free.
Con:
-it costs you;
-to get a bank credit it’ll take time.
 

Small Business Association (SBA) credit
It’s close to a bank credit (I’ll write more about this form of financing later)
 

Private venture capital firms’ credits
Pro:
-they even credit the ideas deflected by banks because of high level of risk;
-they can give professional advice concerning not only idea itself but your prospective franchisor.
Con:
-the interest rate usually is much greater comparing to the one given by a commercial bank.;
-it also takes time to get such a credit.
 

Franchisor’s direct financing programs
Before comparing advantages and disadvantages of this way of financing I need to attract your attention to the fact that it’s also one of the advantages of franchising in general. The previous ones are used by any form of small business.
Pro:
- about a third of franchisors provide such programs, loan guarantees or leasing programs. As a potential franchisee you have an access to them but competition is lower in comparison with bank credit and other standard financing variants;
- you’ll have an advantage in securing loans because franchises have the credibility, reputation and experience of an established trademark.
Con:
-you become more dependent on your franchisor;
- it still takes time and you still have to pay an interest.
 

And don’t pay with you personal credit card as the interest rate will be too high. It can eat all you profit…
 

I’m going to continue sharing my opinion about finances in general and franchise finances in particular in next posts.

Signing a franchise agreement can be taken up as ordinary transaction. Franchisor is a seller and franchisee is a buyer. Franchisor is the owner of the product and tries to make his offer as attractive as possible. But an interesting peculiarity of franchise transaction makes it different from the ordinary one. The relations between two sides do not end after the agreement has been signed. Franchisor continues providing training and other kinds of support. So I need to make a short conclusion: franchisor also lays down his demands toward potential partner. And if you want to be an attractive franchisee you need to think this over too.
 

At first I think it’s necessary to distinguish the differences between franchisor’s requirements and the things he wants you to provide before signing the agreement. The first group of factors (requirements) usually includes the following:
1. Money (for sure it’s the first). Franchisor needs at least to cover his expenses.
2.  Credit checks and personal references. He wants to be aware that you have enough business and financial experience not to “cause damage” to his reputation.
3. Relevant background and professional experience. Franchisor understands how important they are to determine your suitability. It means that provided by him training will be enough to start a business and to succeed. By the way background traits are the factors that franchisee has to think over too. It seems for me that it’s too lightly to dive in a business without any professional experience in that business sphere even if it promises high profits.
4. Sometimes franchisor demands some legal requirements and other levels of control. It usually concerns high-cost franchises because in this case franchisor worries more for his reputation as it costs him more…
 

The second group of factors includes question that franchisee has to ask himself. But this has to be done absolutely honestly. I know that some prospective franchisees changed their minds after answering them and saved their efforts and money. These questions may include:
1. What is the total sum of money do I really can and want to invest in that business?
2. What business sphere is right for me?
3. What average profit do I expect to earn per period of time?
4. What about my background? Am I aware in my professional experience or have access to it?
5. Do I have management and accounting skills?
6. Will I need external financing?
7. Can I work in a team?
8. Will this be my primary income, or supplemental?
 

Maybe if you give your honest and well-founded reasoning to your potential franchisor this will lead to some additional services or help from his side. Or even he will think over decreasing some fees… Maybe…

There are a lot of talks on different business approaches in different countries. For instance many say that it’s almost impossible for an American to do business in Japan as there’s absolutely different culture. The employees of such an enterprise will not understand the demands and requirements of their employer. And at the same time they will expect something absolutely strange from the employer. For instance in Japan corporations considered to be the main home of the employee providing him a life-long contract.
That’s the fact. And we have to pay attention these approaches while organizing a franchise.
As a result of national mentality top franchising industries are different in your country and mine.
For instance in the United States franchise system is developing rapidly in services while in Russian Federations there are almost none service franchisers. I wonder what are the most developed franchising industries in Korea? And in Australia? In Nigeria? In your country?
 

Does anyone knows?

McDonald’s is launching the first lunar franchise. At first sight it looks like a joke. Whom to serve on the Moon? How to deliver the food ingredients? Who will work there?… These and many other questions appeared in my mind immediately after I’ve read that information.
 

Certainly, they can’t consider this as a profitable project. As I understand they can’t even think about getting their investment back within the next dozens of years. But as I understand they are thinking about indirect benefits.
 

The first unquestioning benefit is promotion and advertising. That idea is enough interesting and strange for many journalists to write about it. People will discuss it too… At the same time the idea gives rise to positive emotions. Just listen to your emotional reaction when reading the following:
“The famous astronaut is lending the Moon and he has only 2 hours to meet his sweetheart. They meet at the McMoon. The stars are surrounding them. They can see the Earth through the window…A robot in a traditional uniform is serving them… ”
 OR
“A small space ship flies up to the McMoon using the special corridor. Two strange aliens are ordering 4 BigMacs and 2 Colas. It’s a “McMoon drive”…” 
Is it funny? Yes! Fantastic? Sure! But I bet that you’ve smiled while reading this. That’s what I meant while speaking about positive emotions. And what will you say about Ronald McDonald in the rocket?…
 

The second benefit for the company concerns costs. According to the official information, because of the high cost of providing living space and life support technologies, all food preparation, serving, cashier duties and maintenance will be performed by a crew of specially designed robots. And if everything works OK they will start using the same technology in some terrestrial restaurants! As a result this can help saving thousands in annual labor costs (certainly if trade unions will not lobby a law to forbid it).
 

I hope I managed to prove that this idea is not so strange and stupid as it seems from the first sight.

Just an interesting fact – there are so many companies that are using franchising system that many people really consider every huge company a franchiser. I decided to confirm this idea by organizing such a survey. There were just a couple of questions and the main was: “Name the company you would buy a franchise at”. The most interesting results are below.
1. Gazprom (Russian natural gas giant). I even don’t need a franchise license. Just a couple of pipeline meters.
2. McDonalds. You could call it primitive but I have an idea how to organize a business even better than McDonalds do. I gonna add some new traits to the idea that would help me to be competitive.
3. Wal-Mart and you have no need to persuade me that they don’t have franchises. Still I want to.
4. Exxon Mobile. I want to get a little oil well and organize such a franchise.
5. Franchise? Could you explain please what is it?
6. I don’t know. Are there any franchises that don’t require hard work?
7. I WILL NOT ANSWER YOUR STUPID QUESTIONS, YOU, FRANCHISE FRANTIC!
 

Still I should state that the structure of answers mostly represents the common idea on franchising. There are too many food and fast-food restaurants and retail stores. Unfortunately I haven’t found the ideas that will be interesting to launch immediately.
So the main conclusion is that if you want to buy a franchise you have to think carefully on the industries and ideas. No one could help you more than you do.

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.

In my previous article I discussed only consulting in the Internet sphere. But at the same time some companies sell franchises to provide general consulting or training using the Internet technologies and special systems of distance learning. It may cover all spheres of consulting: medical, psychological, economic, legal and any other. Some companies specialize on one direction, the others try to combine many. But in general the main idea remains the same – they teach and consult people through the Net.
 Why should you buy their business? In most cases the main reason to become a franchisee is the software provided by franchisor. Usually it’s much cheaper to get it from the main company than to develop yourself because the development costs are divided between many franchisees. Also franchisor provides the already tested system. So, you can start consulting or training immediately.
 

Also I want to say few words about one more hidden benefit. As you understand franchise package includes compulsory training. Training in some professional sphere! Usually in also includes ongoing training too. So, it seems that you can get professional knowledge and business at the same time (as if you attend the college for free….)
  As for me it’s one of the business ideas or opportunities when you exactly understand what you get.
 And what about weaknesses? To my mind they are the same as I mentioned in the pervious article.

So, I decided to continue the Internet franchising topic using the example of the most (as I think) well-known company in the sphere of web-consulting. I mean the WSI  or (as they call themselves) #1 Internet and Technology Services Franchise.
 And what do they mean by Internet and Technology Services?
The first thing I need to speak about is their target market and the problems they are trying to solve. WSI helps small and middle-size private companies to use the Internet resources as efficient as possible. Does it mean that many of them are using the Internet inefficiently? Unfortunately, yes. Global network provides a lot of opportunities to decrease costs and to increase sales at the same time. It allows to increase productivity and to improve the communication with the clients, suppliers and partners. It opens a wide variety of different marketing instruments (not only just web page registered in Google…).
But for most middle and small-size companies my previous paragraph brings nothing more than a disappointment. They understand that do not have enough experience in e-business and Internet technologies and have no time to study it.
 

So, WSI decided to present solutions that assists these businesses. They’ve created proven and patent pending Business Systems and established an outstanding Franchise System to reach as many small and middle-size companies as it’s possible!
 What do you need to know before making a decision if the become a WSI franchisee? I hope the following summary can be helpful.
 

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Number of current franchisees: 1,000 franchisees in 87 countries around the world. More than 1500 offices of the company.
Franchise fee: $49,700 USD
Founded: 1995
Franchising Since: 1997
Estimated total cost of franchise: As the franchise is a home office based enterprise, costs on top of the initial fee are small. I can even say that it’s equal to franchise fee, not more.
Territories Available: There are franchises available both nationally and worldwide.
Royalty fee: 10%
 The main idea:
As new Internet technologies appear and will continue to appear, as a trained and certified WSI Internet Consultant, franchisee is positioned to assist businesses in capitalizing on these new possibilities.
WSI franchise program includes compulsory training of all potential franchisees to become Professional Internet Consultants, allowing them to act as a one-stop shop of internet solutions for small and middle-size businesses. Consultants help boost firms’ internet profits by offering a variety of web-based services, while still being able to work from the comfort of their own home.
As they say
“WSI liken their Internet Consultants to ‘architects’, who assess their clients’ business needs using WSI’s Lifecycle System. Each client is then provided with a tailor-made internet solution, which aims to both reduce business overheads and increase revenues.
Once the internet solution has been formulated, it is then independently built at one of WSI’s Global Production Centres, located in a low-cost, high-tech area such as India or Australia. The clients are then delivered a results-orientated, technologically advanced internet solution at an economical cost”.
To train the company also uses the Internet technology called e-learning or on-line education. It provides additional benefits to the potential franchisee as this variant is much cheaper (no transportation costs, you can choose better time and stay with your family).
 

Following current support:
WSI uses developed by themselves Client Support System. It can provide franchisees with an on-going stream of reoccurring revenue from each client. The company also helps franchisees by offering an on-going support program that is custom-made to meet the unique needs of each new franchisee.
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 As for me, I think that I’d buy the franchise license. Why not yet? Maybe because I still see a very serious competition in that field. Certainly, the WSI company has a well-known brand and a wonderful advertising campaign, but…
Small business owners are trying to save every dollar and pound. And there are too many freelancers in the consulting sphere (undergraduate and graduate students and even former employee of WSI franchisees) that can provide that services for lower costs. I agree that in most cases WSI-trained companies using good software and technologies will perform better quality. But I’m still afraid…. Can anybody overpersuade me?

Ok, I’m back to continue writing about Internet and computer franchise opportunities. Last time I was so busy that I managed to write only about the first – providing web-services. So, now I’m going forth.
 2. On-site computer services will be the next idea to write about. The franchisee has to hire a specialist(s) in the technical sphere. Usually it’s not necessary to have prior experience in computer repair because franchisor will provide all the training. For example, Geeks On Call® Company says:
“Everything starts with “Geek University,” which is an in-depth, weeklong training program”
 

The benefits: the market of home and office computers is rather big and it’s growing; franchisor provides training and some other useful stuff for start-up (business plan, results of marketing research and so on); you can reach small business owners and households large service-centers are not interested in.

The potential losses: the competition in the industry is very tight; every technical specialist with even little experience in computer-repairing can provide the same services himself anв for lower cost (as he doesn’t have to pay royalty and other payments to franchisor).
 (to be continued)