Business Franchise

Business plan is a short description of your present or future business. It is like a resume for your company.
The main reason you should have your business plan is to allocate your resources properly. You have to know either you are investing in the right direction.
“The business plan is a necessity. If the person who wants to start a small business can’t put a business plan together, he or she is in trouble,” says Robert Krummer, Jr., chairman of First Business Bank in Los Angeles.
Despite its overwhelming importance for a business (especially for a new one) many companies neglect it. And the main reason for that ignorance is the visible difficulty of its writing. It could be understood as most business plans should include the following information:
1   Introductory part
2   General information
3   Analysis of enterprise condition
4   Marketing
5   Organizing part of project
6   Work cycle
7   Investment project
8   Financial analysis of project.
9   Analytical part
10 Conclusions, recommendations

Are you really sure you know all the answers for the questions above?
Certainly there are easier forms of business plan writing. One of them is suggested by Small Business Administration. It includes the following parts:
              
1. Cover sheet
2. Statement of purpose
3. Table of contents
                I. The Business
               A. Description of business
               B. Marketing
               C. Competition
               D. Operating procedures
               E. Personnel
               F. Business insurance
               II. Financial Data
               A. Loan applications
               B. Capital equipment and supply list
               C. Balance sheet
               D. Breakeven analysis
               E. Pro-forma income projections (profit & loss statements)
               Three-year summary
               Detail by month, first year
               Detail by quarters, second and third years
               Assumptions upon which projections were based
               F. Pro-forma cash flow
          III. Supporting Documents
               Tax returns of principals for last three years Personal financial statement (all banks have these forms)
               For franchised businesses, a copy of franchise contract and all supporting documents provided by the franchisor
               Copy of proposed lease or purchase agreement for building space               
               Copy of licenses and other legal documents
               Copy of resumes of all principals
               Copies of letters of intent from suppliers, etc.

Anyway you have to do it yourself or turn into a consulting company. They are willing to see you there with such kind of order as it is rather expensive service.
There’s one more opportunity to write a business plan. There are different sites suggesting software that assists in business plan writing. Sometimes you could even find a freeware. But in this case you have to investigate the way the software works.
So you have to decide what way of business plan writing is the best opportunity for you.

Usually a prospective businessman thinking about buying a franchise knows the business sphere to work in. In this case to choose the exact franchisor to sign the agreement he needs to check as many as possible different franchise listings. It can be very useful because new franchise opportunities appear almost every week. Every franchisor tries to offer something different, some advantages. Some provide everything for lower initial fee; the others agree to train not only you but your key stuff. The royalty payments also differ as well as franchisees’ compulsory contribution to an advertising fund.

So if you decide to save your time and to choose the first franchisor you came across in the business sphere you wanted to work in, you may miss the better opportunity. Time is money. Here it’s exactly so.

Where to find such listings? There are a lot of them in the Internet and you can also get an access to printed directories. They provide a good list of franchise business opportunities for different spheres: food franchise and retail business, business in Internet and different types of services from consulting to tourism and hotel business.

Rob Bond, publisher of Source Books, asserts that there are currently about 2,300 open franchise business opportunities in North America operating in more than 50 industries, from automotive products and services to travel. More than 25 different Internet sites provide directories of franchise companies. At least six publishers sell print directories. “Bond’s Franchise Guide 2001″ (Source Book Publications, 2001) provides in-depth profiles of the 1,200 or so companies that returned his questionnaire; and “Franchise Opportunities Guide” (International Franchise Association, 2000) cites the 800 franchisers that are members of the trade group International Franchise Association.

It’s necessary to remember that no single directory covers everything. It’s a good idea to read at least one on-line and one off-line listing.

Today I’ve talked to my former classmate who was the franchise owner for at least the last five years or maybe even more (as I don’t know if the franchise we were speaking about was his only one). When he learned that I was editing my personal franchise blog he told me an interesting fact from his business experience. It can be useful while studying a prospective franchise agreement.

So my friend is the owner of a small franchise business related to food industry. When he was choosing the franchisor company to work with he spent a lot of time comparing different franchise agreements. At least he opened a small restaurant and was enough happy as the main company provided everything that had been promised for the initial fee. By the way the fee also was not too high, and as a result my friend had almost no problems with finances for his new business. I need to say that he was an enterprising person with good knowledge of business and marketing. And not only this! He was enough lucky on the one hand, and far-seeing on the other hand to surround himself with good specialists. So the result was even better that promised by the official statistics for that kind of franchise business in that region. He was happy. He managed not only to earn money operating his personal company but also he was doing something for people, he impacted their lives by selling good products they really needed. In a short time he had a lot of clients, and many of them recommended his company to their friends and relatives. It was like a business paradise…

As usual in true life stories then comes a huge BUT.
But as some time have passed he found his business going to shutdown. He really could continue it but the overall situation in that area moved him to make the decision of closing. What has happened with that prospering business?

Unfortunately the business of my friend was destroyed by his franchisor. How could this happen you may ask. Is there any franchisor that is willing to annihilate its milch cow? No, for sure. But the situation could become reality for most franchisees.

One day my friend has found another restaurant of the same franchisor opened not far from his place. The franchisor company has conducted a kind of analysis and found high profitability of business in that region (it was for sure… My friend has slaved away in order to make it so profitable).  And as a result they gave an advice for their next franchisee that he could start his business in a very profitable environment.
As a result my friend has lost a considerable part of his clients who were not devoted to his place so much. He had even lost some of his regular customers. They decided that another restaurant is a product of my friend’s business development. So they have thought that there’s no difference between that two places.

My comment to this story is the following:
Read your franchise contract very carefully. You should examine it on the topic of yours and your franchisor’s business rights. And there should be a statement on the area you are working solely at. You shouldn’t agree to start a business in the area inner competition could destroy your business.

Some economists have noticed the following trend: there is a negative relation between development of the economy of the country in general and development of franchising (as a system) in the same country. They even paid attention that it is a worldwide tendency. When economy faces its peak and there is almost full employment, salary and wages are enough high and interest rates also. Most of people are satisfied with their jobs and are not thinking about business in general and franchise business particularly. But when economy slows down, stock-market return ratios are low, franchising increases its popularity.
 

You may say that this theoretical information is not useful for ordinary franchisors and franchisees. Maybe it’s so but it can be very useful for those just thinking about starting their franchise business.
 

While buying your franchise business you may get additional information from general economic overview. I suggest taking into consideration the following:
1. When economy grows or reaches its peak the situation is close to full employment. It means for you that you can face difficulties trying to hire good specialists for not very high salary. To get the people you want you need to offer them big money (to make them to throw over their current jobs). Are you ready for such an increase of your costs? Or are you ready to give up the qualified employees and substitute them with less qualified stuff? In this situation I can offer to think about the franchise business that requires less personnel in general and less high-qualified personnel particularly.
2. When economy grows interest rates are high. Can you afford an expensive credit? Maybe it is better to think over other sources of financing.
3. When economy grows people buy more, the total demand in the economy is rather high. It means that if you start quickly (before this growth ends) you can get the benefit from this. And franchise business in this case is better than standard one (as I think). When you sign a franchise agreement you get almost a complete set of answers to possible questions in all spheres of your prospective business. You can start almost immediately. But when you start yourself you will need some time to find those answers.
 

When economy faces a recession the things go just the opposite. I hope my thoughts will help you in decision-making.

Welcome to Wonderland! It can absolutely change your point of view and I hope make world better
OK, let’s imagine ourselves in Australia. Koala bears, platypuses and local circumstances cohabit with the lifestyle of United Kingdom and United States… And in 1946 two guys have decided to start a business there. They were going to produce and sell rubber strip matting and mats from transmission belt edges sourced from Dunlop Salvage. Nice idea, don’t you think so?
Anyway they did it and they called their company Clark Matting & Rubber.
They had been working for about 40 years. Nothing special… They earned some money I think.
But the business wasn’t too profitable as in 1982 the company was sold to The Adsteam Group.
The Adsteam Group tried to change the business but failed. So in 1990 they faced more difficulties and they decided to close the Clark Rubber retail operation.
Look, they couldn’t even find a buyer for that business. It was so nice business niche!
 

And now welcome to Wonderland.
In 1994 Chris Malcolm had taken a license of the Clark Rubber brands and decided to try franchise model to this business. The franchise system has absolutely changed the long-winded history of the company. No more time to think over. The pace of company development has increased drastically. In just 1 year there were 25 franchised stores. Five years later, Chris Malcolm purchased the Clark Rubber brands from its owner.
Let’s evaluate the achievements of the company highlighted at their internet site:
1998
Clark Rubber Franchising opens its 50th franchised store
1999
Winner of the Franchise Council of Australia’s Franchise System of the Year Award, Category Entry Capital over $200,000
2002
Highly Commended - ACA Australian Catalogue Award, Home Repairs and Outdoor Catalogue
2003
Chris Malcolm became one of the inaugural inductees in the FCA Hall of Fame
2003
Finalist in the FCA Franchisor Retail and Business Category. (21 - 100 Outlets)
2003
Certificate of Merit - Australian Catalogue Award, Amazing Christmas Catalogue
 

Today, Clark Rubber Franchising has 70 stores throughout Australia and is growing. Retail sales growth percentages have surpassed national averages year after year. Our high quality support services from our Franchise Support Office are constantly being refined and improved, with an intranet system making access to up to date information a breeze.
Clark Rubber recognizes that the success of any franchise system very much depends on the success of its franchisees and is full of praise for the enthusiasm, commitment and contribution made by the Clark Rubber Franchisees that have helped make this great Australian brand the success that it is.
 

Is there anybody going to argue my idea that franchise system could resurrect dead business?

Every loan is not more than a transaction between two parties. The first party is the lender (bank, financial institution, government authority and so on) another is the borrower (person, company, organization or institution). When people speak about obtaining a loan to start or expand a franchise business in most cases they consider the eligibility of their idea or business sphere to get a credit. But this is a two-way road. The franchisee needs to check the eligibility of the loan conditions to finance his/her idea. Today I’m going to write about the conditions of the Small Business Administration loans programs. I’ll tell you what they can provide you (what you have to provide them I described in my previous messages).

While thinking if the SBA programs are suitable for you the first thing to take into consideration is the maximum money you can obtain. The SBA’s 7(a) Loan Program limits the loan amount to a maximum of $2,000,000 dollars. But is doesn’t mean that you will get the Small Business Administration guaranty for the whole sum of loan. SBA’s maximum guaranty is $1,500,000. Thus, if a business managed to get the SBA guaranteed loan for $2,000,000 dollars, the maximum guaranty to the lender will be $1,500,000 or 75 percent.

The next thing is interest rate. It’s necessary to take it into consideration and to compare with other possible loans because interests will increase your company’s fixed costs.
As you can learn from my other articles dedicated to the SBA, this government institution doesn’t provide money itself but provides guaranties. It means that the interest rates are a subject to negotiations as regarding any other loan from commercial institution. But at the same time the Small Business Administration establishes maximums, which are pegged to the Prime Rate. This is one of their instruments of small business support.
In most case the interest rate is fixed (it’s easier to calculate I think) and it depends on the amount of loan and its maturity. Below you can see the table of possible fixed rates.

Loan amount Maturity Interest rate
$50,000 or more less than 7 years Prime Plus 2.25
$50,000 or more more than 7 years Prime Plus 2.75
$25,000 - $50.000 less than 7 years Prime Plus 3.25
$25,000 - $50.000 more than 7 years Prime Plus 3.75
$25,000 or less less than 7 years Prime Plus 4.25
$25,000 or less more than 7 years Prime Plus 4.75

Sometimes financial institutions use variable rate loans. The formula to calculate the interest rate is rather complicated. It uses the fixed rates presented above and rates the federal government pays for loans. It means that this rate is more adjusted to the economic changes like inflation, recourses’ prices, stock market situation and government monetary and fiscal policy. The rate can change not often than monthly and must be consistent (calculated on either monthly, quarterly, semiannually, annually or any other defined, consistent basis). So in the case of variable interest rate the lender and the borrower negotiate the amount of the spread that will be added to the base rate.
It’s also should be mentioned that SBA strictly prohibits the majority of the fees of SBA loan applicants.
And there’s one more thing that should be taken into consideration. It’s the prepayment penalty.
SBA loans that have the maturity 15 years or more and the prepayment amount is over 25 percent of the whole amount and the prepayment is made within the first three years are charged the penalty.
It could be calculated this way: 5% during the first year, 3% during the second year or 1% during the third year after disbursement.
This information is enough to estimate whether you are capable to receive the SBA loan and whether you need it.

Just a few days ago one of the most famous German business magazines – Impulse have conducted a survey. The main idea of this survey was to make an analysis of franchises in Germany and to rank them.
The survey was based on the information of the magazine and according to some experts. The experts are working in franchise sphere as consultants and/or as researchers. The experts were suggested to rank the companies by twelve criteria that were organized in three directions.
They were:

• sustainability of the franchise concept
  
• sustainability of the business idea
  
• dynamics of the franchise idea.
  

The first direction described general characteristics of the franchiser. It was connected with the age of the franchiser organization, the number of business partners of the franchiser, and overall franchiser’s profit and sales.
Under the terms of the second direction the expert were supposed to look the same business from franchisees’ position. Those criteria covered the market position of franchise system, market competition density, the benefits of the idea to potential franchisee and the potential revenue of the franchisee.
And the criteria of the third direction had to estimate the growth of the franchise system in the past and its future plans. The criteria were the past growth of the system, the planned growth to 2008 and the expansion potential for partners.
I bet you know who is the winner. McDonald’s for sure. Who could doubt about it? They really have fantastic system that is almost perfect for the moment…
But the most interesting question is whose system is the second?
You might think it’s Burger King, Tchibo or Obi… But you will be wrong. The second rank has
Fressnapf.
Have you ever heard about this company? No? There’s nothing unusual in it. The company is not widely known outside European Union. It’s not even mentioned in Wikipedia (at least in it English part. Of course there’s an article about it in German ).
But still it’s the largest European specialized retail chain for petfood and pet accessories.
Its founder and managing partner Torsten Toeller had used the idea of pets supermarkets that were rather common in the USA and Canada. The mission and the vision of the company was to sell specialized pet products on a large scale, while keeping prices low. The economy on scale principle has contributed to his tremendous growth in this niche. Fressnapf had become the right company in the right place.
The rapid development of the company should be given company franchisees the credit. They really managed to uphold Torsten Toeller initiatives.
“We’re like a pack of hungry wolves with one pack leader - that’s the idea behind Fressnapf. We all fight it out and everyone gets their fill!” says Torsten Toeller. The market couldn’t defend itself against that troop…
For the moment the system includes almost 270 franchise partners, and the 4000 or so staff employed at over 750 sites not only in Germany but in Austria, Denmark, France, Luxemburg, Belgium, Switzerland, the Netherlands and Italy. The company is working to start in Ireland and Spain.
The main principles that were originally used by Torsten Toeller are the main incentive for company’s success. They are fast growth, standardized processes, effective value added chains,
and the development of own brands.
These principles allowed the company to proceed from a store in Erkelenz, selling petfood and pet accessories to Europe’s leading supplier of pet food and accessories and number 2 German franchise system in just 15 years.
I wish every franchise company could boast of its development that way.

The first legislative act I want to write about will be the Small Business Franchise Act (the SBFA). I’ve read its statements and decided to range them according to their importance (as I think) for small business in general and franchise business particularly.
 
That Small Business Franchise Act was signed in 1999 after it raised heated debate. The proponents believed that the Act was necessary to protect the rights of small franchisees and to create favorable conditions for their development. But opponents insisted that this bill is only a waste of time and tax money as there was the good franchise legislation on the one hand, and the good small business legislation accompanied by different government supporting programs. Anyway the bill passed and I’m going to say some words about its content.
 
The first (not by the order but by its importance according to my opinion) statement of the Act protects the franchisee against unlawful transfer of the business. I think this to be very important because in the most cases franchisee is very dependent on the franchisor’s behavior according to their agreement. I’m not against this dependence but in the case when franchisor decides to sell his business, or to merger the new owner can easily forget about the rights and problems of franchisee (especially if we are speaking about a small business). So the SBFA guaranties that franchisees would be given at least 30 day’s notice of the franchisor’s transfer of ownership to another entity. I want to draw attention to the number of days. To my mind it’s very good that the bill not only makes franchisor to provide the information but also establishes the period of time. It would help franchisee to prove that his rights were violated.
 
The second statement I want to speak about protects the franchisee from unreasonable termination. As I understand this guaranty is rather close to the previous one. It will protect the small company from franchisor’s groundless decisions. According to the bill the main company has to provide a good cause to explain why it doesn’t want to continue business relations with franchisee. At the same time a compulsory 30-day period must be given to the franchisee to cure any defaults. The only thing I need to mention here is that I have a doubt that 30-day period would be enough in some difficult cases (for example in the situation when companies are located in different countries). Anyway according to the Small Business Franchise Act after that period both companies have the rights to turn to the court.
 
The third very important part of the Act ensures procedural fairness in the relations between franchisee and franchisor. It means that the conditions of the Small Business Franchise Act are more important in comparison with the conditions of the agreement between the main company and its small franchisee. Nothing in the agreement can limit or eliminate any of the franchisee’s rights.
 
The number four in that list imposes limited fiduciary duty on the franchisor. In English it will sound like this: “Franchisor must provide financial information about their activity to the franchisor”. Why? Because franchisee’s business results depend on franchisor’s decisions and financial decisions are not an exclusion. But is it fair toward franchisor? Yes, because he will provide a full disclosure of disbursements and a full accounting only for the money received from franchisee. The main company must not provide any co-called secret information, or information about long-term investment in some projects that have no connection with franchise business at all.
 
The fifth important part of the bill is dedicated to relations between the franchisor and the franchisee after the franchise agreement has expired. This regulation protects the rights of both parties. On the one hand, it permits the former franchisee to continue business activity in any sphere and at any location. On the other hand, the bill prohibits using the franchisor’s intellectual property, trademark, or any other commercial or business secrets. Why do I consider this part of the Small Business Franchise Act to be less important than the previous ones? Because I really believe that every clever franchisor will include the same point in the franchise agreement and the Act only provides additional guaranty.
 
OK. I’ve reached the middle of the list of the important regulations in the SBFA. Let’s go forward! In the sixth part I’ll speak about trade relations between the main company and its franchisee. The authors of the bill decided that they needed to guaranty the freedom of any franchisee while buying goods and services for the business purposes. It means that it’s illegal for franchisor to include in the franchise agreement the point saying that franchisee is obliged to purchase raw materials, equipment, other goods and services only from the main company. I like this statement but don’t think this to be so important than the previous ones. I really think that freedom is a good thing but as I understand the franchisor has an incentive to provide beneficial conditions for franchisee to attract him and it’s better to buy from the main company and save some money on transactional costs.
 
The next item of the Act is very sound but a little bit naïve as I think. That’s why I gave it only the seventh place in my list of importance. It speaks about common to all mankind values as honesty, good behavior and good faith. The Small Business Franchise Act insists that every party in the relations has to “act honestly and in good faith with each other and observe reasonable standards of fair dealing in the trade”. But how measure the level of honesty, reasonability or faith? I have no idea…
 
 
 
Three more left… Brace up! The SBFA also says some words about the relationships with government and local authorities. The Act gives the right to an attorney general of any state interfere in the transactions between the franchisor and the franchisee by bringing a civil action on behalf of its residents in an appropriate U.S. District Court. It can happen if the government official believes that that the SBFA is being violated. I put it on the eighth place because I think that the same statement characterizes every legislative act. I mean that to ensure the law is the main role of every government. Am I right?
 
The last two statements are the least important. The first of them determines that small business franchisees have the right to form and to participate in trade associations. And the last statement of the bill acts as a slogan as I think. It establishes that perpetrating a fraud within the franchisor-franchisee relationship is prohibited. It’s not more than a remainder of the statements of the other general business laws.
 
At the end of my comments to the Small Business Franchise Act I want to remind that this list of more or less important regulations of the bill is only my personal point of view. Can anyone introduce his or her list? I will be very happy to hear any grounded ideas.