Business Franchise

If you’ve already decided to buy a franchise (not to think about some kind of new business invented by yourself) you are going to make some calculations. And the first thing is your potential income or profit.
  It’s evident that your future profit depends at least on 3 things:
1. Type or sphere of business.
2. Your activity (right and wrong decisions).
3. Your franchisor (what he is going to do in order to help you earning money).
 Certainly, you will easily get this information in six months after starting-up. But what to do now? Can you get at least approximate information? Franchisors are not demanded to make earnings claims. If they do, that claims have to be reasonable and well-founded. If your intuition suggests nothing (especially when it’s your first franchise in life or you previously had bad experience) I think the following criteria can be useful while evaluating earnings claims
1. At first look at the other franchisees. Are there many of them or only few small ones? If nobody wants to buy this franchise maybe they have the reasons you don’t know….
2. Look at the franchisees’ income but not only read the sums but also make your own calculations. Don’t make your decision using average numbers. Look at the typical franchisee because one but very successful company can increase the average income dramatically. But its success can be something uncommon (maybe not more than luck). The same thing has to be taken into consideration about companies with very low income. If there are few of them but they earn too little it will influence the average. Have I said that You have to look at a typical company?
3. Consider net profits not gross profits or total revenue. Every economist can prove you that these indicators have very little in common.
4. Remember that income differs depending on territory and the country.
5.  Franchisees are different by skills, previous experience and know-how. All this can impact earnings. Have I said that You have to look at a typical company?

If you believe in people’s honesty this message will be of no interest for you. All my thoughts about protecting the rights of franchisor can even irritate you. For the rest I’m going to provide some analysis on weaknesses and treats for franchisor. I hope it’ll be interesting for many and useful at least for anybody.
 

Statement #1.
The most vulnerable are franchisors working in café and restaurant business. At the start-up period franchisor provides franchisee with almost everything: information on what equipment to use and where to buy it, commercial secrets and recipes. He helps to purchase the equipment and to decorate the hall. Can franchisor do less? Seems no… Otherwise a new café or restaurant will not be a part of a chain.
After agreement or license expires the former franchisee can easily change the name and some nuances in style (just the colors of walls or window curtains) and continue to work using the same equipment with the same qualified and trained personnel. And the most important fact is that they can continue serving the same loyal customers.
It works especially for small towns that are far from the city of franchisor’s headquarters. Former franchisee can easily study the local market, improve some details or adopt them to the local traditions. In most cases customers even will not mention changes in the name or colors. And everybody will be satisfied with lower prices caused by possibility not to pay royalty or other fees to franchisor.
What can be way out for poor franchisor? The first step is to take out a patent or author’s rights for all parts of technological process and recipes. At the same time a good help can be wide and well-developed advertising campaign and brand promotion. The last can create additional benefits for franchisee and he will extend the agreement.
 

Statement #2.
Sometimes franchisors do not pay much attention while developing their franchise proposal and agreement. Why? Because when you sell you first franchise license you usually sell it to a person you know (friends, neighbors, customers and so on). And you trust them. But when your business develops sometimes you may forget to make changes in the agreement for a “complete alien”.
The way out? Not to be so credulous and unsuspecting. You NEED to hire a lawyer.
 

 Statement #3.
Franchise in the sphere of production can be protected more easily. In that kind of  business franchisor usually supplies some special or even unique ingredients or components. As a classic example I can mention Coca–Cola, Pepsi, Schweppes. Their partners get concentrates but have no idea what they are made from.
But you have to remember that this will work only if your recipe or technology of production is really unique. In other case your franchisee will easily get your secret and bye-bye.
 

 Statement #4.
Cooperation with franchisor has to be beneficial for franchisee not only at the first stage (when they sign a contract) and during many future years. And franchisor has to think about this the whole time. He can provide a favorable credit to franchisee to buy the equipment, can agree to postpone the payment for materials and other stuff , can provide additional services and so on.
 

Statement #5.
You can consider yourself a protected franchisor if your franchisees sell your unique products. It happens in the sphere of fashion and design and others when your franchisee is not more than a seller or distributor. 
I can state that you are in desirable position.
 

Do I have more statements? Yes… And you? I’m waiting for your comments…

I’ve found an interesting material named “All new type of franchise allows franchisees to operate with minimal restrictions” (http://www.prweb.com/releases/2006/5/prweb378926.htm). The author states that we will see the birth of a new world of franchising. He calls this “freedom franchises” as they don’t include all or some of the traditional limitations (geographical, marketing and so on) and some payments (fees and royalties).
 

As for me it sounds too good. It’s like a free lunch… The opportunity cost may be hidden in unpopularity of this or that business idea, necessity to attract a substantial capital, high other payments or even low future profit.
 

I hope I’m wrong….

Is it possible to use the franchisor’s vision and/or technology without any payment on the one hand and without any punishment on the other? Do we need to pay any more for knowledge that is not very useful as it’s not unique? I think that every franchisee thought about this at least once in his business life.
  Everybody knows that stealing is a sin. But what’s the reason for buying useless information? Information itself is a strange product. Once learned it looses it’s unique value. Will anybody being in his right mind pay for the same university course just after passing the exam? No! And that’s why all franchisors all over the world face the same problem – how to make all the members of the chain to pay for the license every year but not once they got the whole package of the information including technological and business processes, recipes, training and etc.
 What do franchisors do to maintain a stable connection between them and franchisee?
What legal protection do both sides have?
What business spheres provide better protection for each of them?
I’m going to study this problem in the nearest future and share my thoughts here. And I hope to get the opinion of those who are or were directly relevant to that problem.

As franchise is more often used by sole proprietors or small companies the entry fee has to be rather low. Certainly, the word “low” has absolutely different meaning for different people (especially when they live in different countries). The fee acceptable for Northern Americans can become too high for Southern Americans. But in general studying the entry capital needed to become the franchise owner I found the following facts:
 

1. Most of franchisors establish the initial fee at the level of $30,000 and less.
 

2. It’s rather easy to find a good variant for $15,000-$20,000 in the appropriate sphere. You only need to spend a bit more time looking for it.
 

3. Low-cost variants usually require much less (or even no) additional initial capital as their business is service-oriented and in many cases home-based. As a result such kind of business doesn’t require money for land, expensive technological equipment and other physical stuff. Examples? Cleaning and personal services, retail and food sales, software sales, automotive and beauty-related retailers, travel or delivery agencies and so on.
 

4. But low entry fee can have (not necessary) some hidden problems. It can happen that you’ll buy only an idea or so-called “business opportunity” not a franchise in a perfect meaning of this concept. According to the legislation franchisors have to provide more support and services than a business opportunity. It means that paying less at the initial stage you may face some extra costs later. What will you prefer? Any way you face some opportunity cost…
 

To be continued…