Business Franchise

Internet business or e-business as many professional call it is rather modern trend in the world economy. Many people believe that it’s only a nifty and we will see the failure of that businesses soon. The others truly believe that it’s a panacea and every company has to move it’s business to the web.
 Anyway I’m not going to discuss this topic (or maybe not now). I want to present my ideas about franchise business though the Net and in the Net.
 

The first thing I want to write about is the following. Internet is not a new sphere of business but it’s only an instrument. To make my thought clearer I want to use the example of a phone. A phone is an instrument to call somebody or somewhere. For example, if you need to call in an ambulance it makes you no different whether to use mobile, radio or a public call box. They are only instruments to reach the doctor! The same can be said about the Internet – it’s only an instrument to improve your casual activity. You can use a post office of e-mail. You can go to casino or play poker online… You can sell you products through the shop or set-up the Internet-shop… The same happens in the sphere of franchising. Franchisor can advertise his business in the business pages of newspapers, on TV or on the Internet. As I understand it has no difference at all.
 My second thought is about franchising of Internet-based and computer-based business. As I understand it will include ATM, computer, Internet, ISP, web design, wireless, home electronics, web hosting and other technology related franchises and business opportunities. So, as you can see it’s not just selling through the Net but much wider. I decided to write few words about some franchise ideas that fit the definition of Internet-based and computer-based franchise.
 

1. Providing web services. Franchisee is usually operates as a consultant in the one or some of the following spheres (not the complete list certainly):
Website Design
E-Commerce Solutions
Application Development
Content Management
Search Marketing
Web Advertising
Site Hosting & Technical Support
  The benefits: as a franchisee you do not need to have special web-knowledge – the franchisor will do all the job; you operate in one of the fastest growing industries in the world; you can meet small business companies in your region (very small ones).
The potential losses: the competition in the industry is very tight and you may have not enough education to win it.
 (to be continued)

“We are not so rich to buy cheap things,” the proverb says. Is it right about buying a franchise? Maybe… But before choosing between the high-cost and low-cost franchise in the same industry, I suggest you to think over the following information.
 

When you buy the low-cost franchise, the franchisor will never provide the same start-up assistance, training, advice or preferences as if you were investing in the high-cost franchise. So, one of the first questions you have to answer to yourself is to decide what assistance you REALLY need.  If you are a complete novice at this business, I think that it would be better to get a bit more (and to pay more too). But if you are only expanding your rather successful business, the information and assistance (that every franchisor must provide) may be absolutely enough for you.
 

So, it means that you have to know what help you’ll get for sure according to legislation. All the rest depends on franchisor’s willingness.

According to the FTC, franchisors must provide:

1. One copy of the Uniform Franchise Offering Circular. You’ll get it in at least 10 days before you sign the agreement
   
2. One copy of the franchise agreement, other contracts and franchisor’s financial statements with estimates of initial start-up costs (operation capital, equipment, construction and rent costs and so on)
   
3. At least one week of practical training for you and your manager in a parent company
   
4. Operational manual
   
5. Ongoing support
   
6. Guidelines on audits and assignment procedures
   
7. Other criteria for assignments, such as ownership rights and rights to sell the franchise
   
8. Initial fees, royalty and other costs information
   

At the same time your potential franchisor may provide some additional help. You need to take into consideration that this usually increases your payments. This additional assistance may include:

1. A marketing plan, promotional materials and site selection assistance
   
2. Adequate insurance for fire, inventory, burglary, workers’ compensation, accident and health, occupancy and general liability
   
3. A known trademark or service mark, or advertising to make it known
   
4. Guidelines on purchasing inventory and equipment, restrictions on goods sold and terms of agreement and renewal
   

The last word about “must” or “should”: remember that in different states and countries the franchise legislation is different. Spend some time to check your rights as a franchisee. And maybe you will change the proverb for yourself: “We are not so rich to buy high-cost franchising and to pay for the help that we don’t need!”

I really believe in this. Sometimes I can’t even understand why people buy this or that franchise license. The brand is not very popular; the agreement conditions are not so attractive…
 

So, I decided to start a new category (or even two – ‘It’s right for me’ and ‘It’s wrong for me’) in my blog. I’m going to imagine as if I were a future franchisee and as if I were in the process of choosing the one to buy.  Certainly, it’s not more than my personal opinion. But if not me, who will present my opinion in my personal blog?..

While searching the web I met a lot of advices how to choose the best franchise. So, I decided to create a test that can be helpful during the franchise choosing process. I ask you to be charitable… and your comments are highly appreciated.
 The rules of the test:
-try to be as honest as possible;
-you have to answer all the questions;
-each answer ranges from 1 to 10 points;
-for every question I provide an explanation of the lowest and the highest variants but you can choose any in between.
 

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 QUESTIONS:
A. Does the Franchise meet your own personal and financial objectives?
1 point for – absolutely no;
10 points for – perfectly.
 

B. Does the Franchise represent the industry or business sphere that you like?
1 point for – you were never interested in that sphere;
10 points for – this was your lifelong ambition.
 C. What do you think about the franchisor’s company and/or people?
1 point for – you know little about the company and the people or you do not trust them;
10 points for – you trust the company and the people and you believe they have enough knowledge, expertise, financial resources, and commitment to develop and improve a business.
 

D. What is your attitude to products and services offered by your possible franchise?
1 point for – you never tried the products yourself and you think it’s strange why people spend money for them;
10 points for – you like that products yourself and you are sure that they will be demanded by consumers during the life of the franchise.
 E. Are you satisfied with what will you get for you franchise fee and royalty payments?
1 point for – you feel that franchise fee and royalty payments are too high and you are sure that you can spend that money much better yourself;
10 points for – you see that franchisor is ready to provide programs, guidance, and other forms of assistance which you are persuaded and all that programs are worth the money you pay to the franchisor.
 

F. Is franchisee protected from legal side?
1 point for – the agreement protects the franchisor’s rights but says nothing or very little about franchisee;
10 points for – your lawyer states that franchise agreement covers all the possible situations in your future business.
 G. Have franchisor provided you a disclosure?
1 point for – not at all or it contains the information that you can’t believe;
10 points for – you are completely satisfied with the disclosure.
 

EXPLANATION
0-30 – this Franchise is not right for you;
31-50 – you may continue thinking about this business but I suggest you to ask for advice and to study it better;
51-70 – you can do the next step toward buying this Franchise.
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 I ask everybody to evaluate my ‘Franchise test’ and send me comments. Thank you in advance!

Studying the differences in franchise legislation in different countries (I’ll write about it a bit later) I found rather interesting article. It was published by The Toronto Star, Mar. 14, 2006.
 I suggest all prospective franchisees to read this story. Certainly, you can say that the legislation in Canada and in the USA differs and in the USA each franchisor is obliged to present a disclosure. But I think that you’ll earn a lot from this sad story anyway.
  My conclusion:
1. Everybody thinking about buying a franchise has to ask for advice. And advisor has to be an independent person. Not a franchise salesman and commissioned consultants!!! Otherwise you will get an advice caused by their financial incentives.
 2. Invest your time in investigation of the financial and legal aspects of your future business. This will save you more money and health later.

Economists say that there are 4 main sources to get personal income. They are:
-income from work or salary and wages;
-income from providing services (like private dentists, lawyers, brokers and so on);
-income from business;
-income from wealth or investment.
Each of these variants has advantages and disadvantages at the same time. But many financial consultants agree that a person can get much more money from business and investment. As I think that’s the main reason why many people decide to start their own business without any preliminary education or experience. And the same reason pushes them to buy a franchise license as they often hear and read that it’s the easiest way to start-up.
At the same time prospective entrepreneurs checking franchise opportunities will easily meet the statistics which shows that franchisees seem to operate much better in comparison to stand-alone small businesses. So, I studied this question a bit and decided to write a few words.  It seems to me that there could be some hidden reefs while interpreting the numbers on average franchise activity.
The main reef is the way of collecting the information. In most cases it is a survey! Not tax or bank information but just survey! This means that there is the group that the survey is trying to identify, and the franchises that have left the business or resold it are excluded from the survey because it’s almost impossible to reach them…
Just think about this. Franchise Associations are sending questionnaires only to existing franchisees. And as they still exist it means that they operate successfully. And vice versa… those who lost their business and their money are excluded from the survey. So, the results of such survey are better than real figures. And only the franchisees who became bankrupt but couldn’t get rid of their franchises will worsen the picture.
So, thinking about buying the franchise it’s necessary to remember that when you start you business it’s only your decision. Nobody has an incentive to brighten up your future. But the franchisor gets money directly from you, it’s his business. So, he has an incentive to promote his franchise…

Does franchisor want to spread his brand and ideas though out the country or ever more? Yes! But the main reason for most of them is earning additional money. Why not? He spent his time, money and invented the system of business that earns money for him. He tested it and he’s ready to help others to do the same but for less money and time. To my mind it’s fair. But it’s necessary to remember that different people and different companies evaluate their experience differently. 

So, franchisee costs vary. Not all of them go to franchisor. I can even say that good franchisor will try his best to make some of these costs lower (for example, helping to buy on a wholesale-basis). 

In general they include all or some of the following items: 

1. Initial franchise fee. In most cases it’s non-refundable 

2. Marketing expenses that include fees to promote opening 

3. Royalties, often calculated as a percentage of total revenue, gross or net profit. It can happen that franchisee has to pay royalties even if he’s unprofitable 

4. Operating licenses (when necessary), insurance and legal fees. Thinking about this franchisor has to take into consideration not only cost of the license but time to get it. 

5. Training costs. Franchisors usually include training in their package, but it’s good assume some costs 

6. How much inventory is enough for successful activity, and what must franchisee buy from the franchisor? 

7. Expenses for renting, building or equipping the facility 

8. Employee salaries including administrative personnel and accountant 

To be prudent and to get more realistic picture, I think it’s OK to add from 10 percent to 20 percent. 

There are some countries (like some former Soviet Union republics) where still there is no legislation about franchise. But even there You will meet McDonald’s restaurants. Certainly they do not use the word “franchising” during the registration. Usually it’s organized as joint venture but all the other characteristics remain the same.
 At one business seminar I’ve heard a question: can anybody cook the hamburger better and tastier than McDonald’s? Most of people said that they not only can but the cook better hamburgers. But then the trainer asked the second question. Can you create a business system that will operate as efficient as McDonald’s? The silence has been established….
 

You can criticize their food, you can dislike their traditions… But being honest to yourself you will agree that their business system – the franchising system –is one of the best since 1955.
  Create such a system for you business and you’ll become enough rich for the rest of your life. And students will study the history of you company!
 By the way, McDonald’s has more than 30,000 franchisees. And you?

iSold it (as they say) is #1 eBay seller. They managed to combine traditional and on-line drop-off selling business. You can bring them the things for sale and they will do all the rest – picture, list on eBay, control and after selling they will send you a check.
If you plan to join the iSold It Franchise Network you need to think over the following information.
Advantages:
-         Use national brand (there are more than 900 companies in the chain), wide advertising and public relations;
-         Use special (tested) software
-         Get help from real estate brokers;
-         Easier get SBA loan as the company was approved by the Franchise Registry program.
Costs:
-         $85,500 for a fully operational store, plus working capital;
-         Minimum 1,200 to 1,500 square feet;
-         Minimum 15 feet of frontage;
-         Located in a highly visible strip center;
-         Co-tenants include grocery and national chains;
-         Easily accessible with parking at the storefront.
Under the iSold it Franchise Program a franchisee also has to pay a monthly royalty 4% of the total sales (not gross or net profit). It means that there can be a situation when you have no profit at all but will still pay 4% from the price of every unit sold.

The eBay company continues to change the common point of view on Internet-business. At first they showed us that everything could be sold on the Web – goods, services, whole businesses and even the rights (for example, the right to give a name for a baby). Then they showed us that this can be a profitable business not only for themselves but for everybody who wants to spend time bidding. And now they introduce a franchise mechanism for those who wants to continue building the business with eBay.
  EBay franchise is more commonly called Ebay Drop Off Stores. The main idea lies in allowing ordinary people to drop off items to be sold on eBay on a consignment basis. Why don’t they do this themselves? Because some have no enough knowledge in computers and Internet, some have no digital camera or they are too busy for this. Usually they agree to pay a commission in the 30% - 50% range.
 But what are the benefits for professional sellers or producers? Why would they pay a commission instead of hiring a person or doing themselves? There are several reasons for this.
1. The procedure of selling on eBay takes time. It usually includes taking photos, posting the listing, responding to messages, collecting money, packing the item or items and shipping them. So, every businessman has to make a decision whether to outsource this service or not. The same happens when you need a lawyer – you can hire one or more or you can turn to a special company only when you need help
2. Professional eBay sellers know how to sell, they have experience and usually they have references that help them to get higher prices on eBay.