capital at Business Franchise

Karl Marx is dead. The inventor of communism is lying in a grave at London Highgate cemetery. But the ideas he has presented to the society are still alive and prosperous. Moreover they are taking their place today. We are turning to them today. If it is hard to you to believe me you have to read Funky Business by Kjel A. Nordstrem and Jonas Ridderstrale. You will know a lot about modern economic trends and Karl Marx. They are speaking about the value of workers and especially about the value of their brains and ideas.
They were clever guys – Karl Marx, Friedrich Engels, Vladimir Lenin, Mao, Che Gevara and all other communist leaders. They were nations’ leaders. And they knew the clue idea that people not the capital are the most important production resource.
And they knew the power of unions. It seems to me that even today we are not realizing the importance and power of united people. But those guys knew.
El pueblo unido jamas sera vencido! That is the Spanish expression that means “United people will never be defeated”. It became famous during the Cuba revolution. It’s the beginning of revolution hymn. And it had become very popular in sixties. Comandante Che was definitely right. Synergetic effect is the key.
2 + 2 = 7.
The system is much more than the sum of its elements.
And united people can reach unbelievable achievements. That is the thing that brings success to revolutions.
And that is the thing that brings success to franchises. That is an American way to unite people.
Do you need examples? I have them.
Let’s examine Holiday Inn. Good franchise system I think. Holiday Inn was recognized in 2001 by Franchise Times as a Top 100 Franchise Chain. So the system is good enough.
This chain of hotels was organized in 1952 by homebuilder Kemmons Wilson to provide inexpensive family accommodation for travelers within the USA. Its franchise system allowed Holiday Inn to grow up dramatically. By 1958 there were 50 Inns across the USA, 100 by 1959, 500 by 1964, and the 1000th Holiday Inn opened in San Antonio, Texas in 1968. The chain dominated the motel market, leveraged its innovative Holidex reservation system, put considerable financial pressure on traditional hotels, and set the standard for its competitors like Ramada Inns, Travelodge, Howard Johnson’s, and Days Inn. By 1972, when Wilson was featured on the cover of Time Magazine, there were over 1,400 Holiday Inn hotels worldwide.
Many think that the main reason of that irrepressible raise of Holiday Inn is its original creed that the properties should be standardized, clean, predictable, family-friendly, and readily accessible to road travelers. But I know one more important reason. It is the unity of the chain.
In 1955 just in three year from setting up that business Kemmons Wilson created an organization of Holiday Inn franchisees, which were charged with reviewing issues important to the Holiday Inn Hotel system. One year later it had been transformed into National Association of Holiday Inns. In 1959, it changed its name to the International Association of Holiday Inns to reflect the geographic expansion of our membership. Today, it is known as International Association of Holiday Inns Owners’ Association (IAHI).
The creation of that organization has driven Holiday Inn to its tremendous spurt.
Today the IAHI represents the interests of nearly 3,000 owners and operators of InterContinental Hotels Group (IHG) hotel brands, including:

• Crowne Plaza Hotels and Resorts
  
• Holiday Inn Hotels and Resorts
  
• Holiday Inn Express
• Staybridge Suites
• Candlewood Suites

The mission of the IAHI, as it stated on their site, is to operate an association of hotel owners and operators that create a multi-level forum for exchange of information, ideas and best practices between franchisees and IHG company executives. As a result of this process owners and operators will enhance the value of their license agreement and IHG executives will gain insight to better achieve company goals. 
The International Association of Holiday Inns Owners’ Association is focused on 3 main objectives to help promote members’ long-term interests:

• Increasing hotel revenues and market share growth.
  
• Achieving earnings before interests and taxes, operating profit, and return on investment that surpasses the competitive set for each brand.
  
• Creating long-term brand and hotel asset value through excellent brands, quality operations, superior marketing, and team member development.
  

The International Association of Holiday Inns Owners’ Association also effectively represents members’ interests to the broader hotel industry on legislative issues, along with vendors and other resources, helping to achieve the objectives outlined above.
 The organization that shares the experience, promotes franchisees, teaches them is the key factor of Holiday Inn’s success. It makes entrepreneurs feel comfortable within the franchise system. It provides a kind of support to franchisees even if it has to lobby their interests through franchisor. As a result people are willing to invest large amounts of money (Holiday Inn franchisee’s total investment differs from 1 to 10 million dollars) in this business providing it by an extremely quick development.

While searching the Internet for interesting information about franchising to share with the readers of my blog I found an outstanding idea that had been realized by the company called Entrepreneur’s Source. They managed to create their franchise business helping others to start-up and operate franchise businesses. I understood that I had to write about it.

The business system created by Entrepreneur’s Source can be divided into 2 parts (as I understood from the information in their web site). On the one hand they work with the companies that already have their business systems. The company offers its clients to expand their operations through creating a franchise system for their business. I really liked the way they present the idea. They explain that they are not consultants but coachers for their clients. They say that every person tries to decrease or avoid risk. It’s natural. And they promise their clients to help to decrease a business risk. Based on their experience the Entrepreneur’s Source is going to train their customers how to swim in a seethed and sudden water of business-sea. They use the idea of coaching comparing their service with the process of teaching to read. On their web site they ask a question: Did You Teach Yourself to Read?
As a sports coach develops an individual training program for each sportsman, Entrepreneur’s Source develop a franchise program for the clients taking into consideration all individual peculiarities. Their package of services includes:
1. Feasibility assessment. Analytics of Entrepreneur’s Source determine if business is franchisable in general.
2. Business plan. They create a document answering marketing, production, and organizational and financial questions concerning prospective franchise business.
3. Raising capital. They help in creation documents and calculations necessary to obtain an external financing.
4. Regulatory compliance. They check if the franchise system and all documents (including disclosure and agreements) meet all the legislative requirements.
5. Marketing & advertising. Well-developed promotion program is a key feature of any franchise system.
6. Lead generation and candidate qualification.
7. Expansion plans
8. And much more …

On the other hand Entrepreneur’s Source deals with those thinking to start-up their business. And they attract prospective franchisees not only for the franchisors mentioned above but also for themselves. Yes, before they decided to earn money while helping others to start-up franchise business (as franchisor or franchisee) they created such system for their own company. And it gave them the experience on how to qualify candidates in order to choose appropriate ones. Now they use the following scheme: they don’t use contract employees to run their satellite offices, but open each new office as a franchised business. The royalty payment is 25%, and Entrepreneur’s Source franchisees pay it from every placement fee – the money received from franchisor when the company places a candidate.

As for me I really liked this idea. The only negative thing in this business is concerned the money that prospective or existing franchisor has to pay to this consulting company. I haven’t found the exact information on the company’s web site, but the other sources say that your franchisor pays them a commission, typically 30% to 75% of the franchise fee. Certainly it is a trade-off. You can set-up your business system yourself or turn to professionals. In the latter case it will cost you and your potential franchisees, as you’ll have to increase the initial fee to cover the consulting costs.

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.

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?

Usually people finance their franchise business from different sources. Applying to the SBA (Small Business Administration – one of the main government agencies supporting small business) you can avoid that rule. They finance or guaranty only if the prospective owner also invests his personal money.
 So this rule limits the opportunity to get a credit financing on the one hand. But on the other hand it helps the prospective franchisee to choose what expenses to cover himself and what to finance on a credit basis. Let’s distinguish the eligible and non-eligible purposes according to the SBA.
 

“Good” purposes
1. Capital investment
Capital investment is rather broad concept and can include (but not only) the following:
-to purchase land or buildings,
-to cover new construction as well as expansion or conversion of existing facilities;
-to acquire equipment, machinery, furniture, fixtures, supplies, or materials for construction;
2. Operational financing
Operational financing is used for current business purposes like buying raw materials and inventory, paying of accounts payable, seasonal financing, contract performance, construction financing, export production, and for financing against existing inventory and receivable under special conditions and so on.
3. Buying somebody’s business (no comments)
  “Bad” purposes
1. Financial transactions
Like in the situation with capital investment this purpose is very broad one and may include:
- refinancing existing debt (especially in the situation when company had no sources to pay it back and these sources don’t appear after refinancing);
- financing change in ownership or part of the ownership;
- repaying delinquent state or federal withholding taxes or other funds that should be held in trust or escrow.
2. Non sound business purpose (for the SBA)
 The last thing to say: even if your business meets all of these criteria it doesn’t guaranty that you will get the money. Unfortunately…

The first thing to think about is type of business. When they say “TYPE of BUSINESS” they mean a lot of different factors.
On the one hand they say that almost every small business company can apply for the SBA loan. On the other they carefully evaluate the company’s current and prospective activity. The general evaluation criteria include:
-to be the US resident;
-to get financial resources from other sources too, including personal savings;
-to operate for profit (the SBA does not work with charitable, religious, or other non-profit or eleemosynary institutions, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives)
 
What about franchises? They are eligible but only if franchisee makes financial decisions independently (the situation when franchisor deals with accounting and financial management is the first sign that franchisee will not get financing or guaranty from the SBA).
 
Speaking about business sphere I need to say that they can be divided into 3 groups:
I. Completely eligible (those not included into groups II and III)
 
II. Eligible with some limitations or restrictions
1. Businesses in agricultural sphere and farms. They can get financing and guaranty from the SBA but government wants them to turn to the Farm Service Agency (FSA) and check their financing and supporting programs first. It’s rather logical, I think…
2. Business in fishing sphere. It’s the same situation as in agricultural sphere. Government wants them to contact their specialized organization first - the National Marine Fisheries Service (NMFS), a part of the Department of Commerce.
3. Businesses in medical sphere (hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories, convalescent and nursing homes). They are eligible if they have a proper medical license from the appropriate government agency.
 
III. Not eligible business.
There are some business spheres that are not supported by government programs in general and by the SBA program in particular. But I need to say that in my mind they are not associated with franchise business (maybe except some spheres in gambling…). They are:
1. Any form of illegal business (no comments)
2. Real estate investment. As I understand it doesn’t mean that government dislike that form of business or consider it something worthless. It’s rather reasonable as investment business consider real estate as a something short-term, as the object of business, but not capital or factor of production. And it conflicts with the main idea of small-business loan programs of the SBA – to help buying long-term assets to be used in production of goods or providing services.
3. The same relations exist toward other speculating activities (firms getting profits from fluctuations in price rather than through the normal course of trade). Also I can state that such types of business is too risky for the government as I think…
4. The companies that do not produce goods or provide services (companies dealing with money – financial institutions, banks, insurance companies on the one hand and gambling companies like casinos on the other). I think that they can easily survive without government support …
 
What else do you need to consider in order to become eligible for the SBA programs except types of business? You need to present for what purposes you are going to use that money. Read my next article to learn what purposes are OK and what are not…

Some time ago I promised to write about financing your franchise business. I think that today is a good day to start. My first “finance article” will be dedicated to small companies because:
-I like small business as they produce goods and provide services that big companies don’t even consider;
-for small business it’s much more difficult to find money and also to find the information about where to find it and how to apply; they don’t have a separate department dealing with credits and refinance in their structure. As a result small business owners with less than 10 people stuff very often have no time to look for the most attractive variant of financing.

Here in this article I’m going to speak about credit, finance and refinance opportunities provided by SBA (Small Business Administration). Certainly the first thing to be mentioned is that SBA is not a bank or financial institution. Their goals expand much wider than financial sphere. And in many cases they don’t give credits but provide guarantees for loans made by private and public financial institutions, government organizations and local authorities.

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SBA is a guarantor of loans. As a franchisee you may need it to increase your reputation in franchisor’s or lender’s opinion. If you need it would be right to apply for THE BASIC 7(a) LOAN PROGRAM
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Basic 7(a) Loan Guaranty
According to this program small companies (both new and existing) can get a guaranty from the official government organization to increase their eligibility to get loans. It means that there can be some situations when you apply for a credit but bank or other financial institution doesn’t want to finance your business for some reasons. Why can this happen? Maybe the banker doesn’t believe in your business idea or your professional skills to realize it. Maybe you don’t provide good collateral from bank’s point of view… Anyway they don’t say NEVER but need something extra to change their negative decision.
The procedure is rather simple. Small-business company turns to SBA, and they guaranty the loan given by commercial lending institutions. It’s important to say that even after that guarantee bank or financial institution is not obliged to give you a loan. But most American banks do, and there are some financial institutions that lend money to small business only under SBA guaranty. 

It’s a very flexible program as SBA will guarantee to loan for a wide number of business purposes. As they say you can get financing for:
-working or operational capital (it’s very essential for retail business to purchase the initial range of products);
-machinery, equipment, furniture and fixtures (usually the largest part of start-up capital);
land and building including purchase, renovation and new construction (as I think this one is not so important as you can get a loan through normal lending channels because real estate is a good collateral and most banks and financial institutions agree to finance them);
-leasehold improvements (not very important as it’s a usual practice when franchisor provides this, but it not than you can apply for this too);
-and debt refinancing (under special conditions).

The loan maturity differs for different purposes. For example, the maturity of the loan for working capital is up to 10 years, but generally up to 25 years for money spent to purchase  real estate.
(to be continued)

Ok… Few more words about declining a business idea. I’ve already mentioned very important factors: demand for good or service, possibility to win the competition, capital requirements and economic results, and risks. The last I want to speak about are the following:
A) problems with raw materials;
B) ecological problems;
c) public opinion.

For most industries and businesses raw materials play a big role. They represent costs and influence price of a product. Of course, for services they are not so important but still you need to think about them:
-where you plan to buy them;
-who are your main and alternative suppliers;
-is the price for each item stable or it fluctuates;
-is there a deficit material and is it easy to find a substitute and so on.
The main thing about materials is that your customers are not interested in your problems with them. Buyers want cheap products and that’s all… And if you can’t satisfy them you’ll loose your business.

Ecological movement is growing in strength. You need to evaluate your business idea from the following conditions:
-will my business pollute the air, water, and so on;
-is there any risk of accident that can do harm to the ecological situation in the town or city, or region.
While evaluating a business idea it’s necessary to remember that ecologists and environmentalists live among your prospective buyers. They can either improve or worsen your reputation.

Public opinion is the last but not the least in that list . It’s clean that it influences demand greatly. I’m not going to explain such an easy thing but will give only and example. In early 90s the market economy came to the former communist countries. At the same time most people had not enough education and business way of thinking. But everybody wanted to live better and to earn money. Many people were involved in network marketing and….. many of them lost money. Why? There were many reasons and I don’t want to discuss them in this article. The main thing I want to bring to notice that till today many famous network companies (already successful in US or UK) face the problems to overcome the public opinion that states: “Network business is not a business but a skullduggery”.

I hope I proved that it’s necessary to evaluate your business ideas before even thinking about investment. And thank you for your patience while reading all of my thoughts!

So, in the previous post I expressed my opinion about necessity to evaluate the idea before starting a business even if you were buying a franchise. Many people forget about it. They think that if the franchise chain has many franchisees and they operate with profit the new business also will be a success. But as there no identical children there are no identical markets and businesses. Information from other franchisees is useful but not sufficient to make such an important decision.

Last post was dedicated to market demand as a factor influencing franchise idea. Now I want to speak about the others.

The second thing to evaluate is competitiveness of goods and services your business is going to sell. You need to study the market competition as serious as possible. Visit the shops or restaurants of competitors – both franchise and non-franchise. Listen to what people are saying about their products. As a result of your survey you need to become sure that you product has real advantages over theirs. If not - I suggest you not to buy this franchise for this market. Think about other idea or maybe other region.
What advantages can be considered as real and competitive? Certainly, there are a lot of them. Here I’ve listed the main:
-price;
-discounts and possibility to get them;
-quality;
-technical and economic operation factors;
-prestige of a trademark;
-convenience of packing;

-guarantee period and conditions;
-post-sale support and services;
-reliability;
-payment terms;
-credit conditions;
-advertising and other promotion activities;
-delivery services and so on.

The next factors require some economic calculations. I mean that you need to decline an idea if capital investment is too high and/or economic efficiency is too low. I plan to dedicate a special article to economic efficiency in future. Here I’ll only say that you need to be sure that future profit will cover initial investment in not more than 5 years (in general) and your personal income has to be greater than interest you could get for your personal savings.

Also the idea must be considered as unfavorable because of high risk factors. Thinking about risks you need to take all of them together and consider their probability.

Ooh! Only three more factors remained… I need to have a break… and will continue in the next post.

Franchising was developing rather fast during the last decades. Why does this happen? As most tendencies in the global economy this one is not exclusion: somebody gets benefits from it. Today I decided to write a shot summary of benefits and potential losses faced by franchisor, franchisee and their clients.
 

Benefits for a franchisor:
1. Opportunity of fast expansion of target market, growth of sales;
2. Entering new territories and regions (or even countries);
3.  Opportunity to decrease or even eliminate some types of costs: costs for vertical administration, hidden costs caused by difficulties in large company management;
4. Lower capital investment;
5. Government control over the franchise agreement;
6. Promotion of a company itself, its trademark and brand; growth of company’s recognizability among clients; increase of confidence in company’s quality and range of goods and services;
7. Getting money from selling licenses and receiving royalties;
8. Profit from leasing real estate and equipment to franchisee;
9. Profit from giving credits to franchisee;
10. Decreasing costs while operating on whole-sale basis and decreasing turnover period.
 

Potential loses of a franchisor:
1. Getting less profit from franchisee’s enterprise in comparison with own enterprise;
2. Franchisee can influence the franchisor’s reputation. This is a risk factor;
3. In many cases it’s difficult to control the accuracy and reliability of financial reports of franchisee;
4. It’s difficult to find a reliable franchisee with good business and financial background;
5. While providing training for the franchisee, franchisor creates a potential competitor for himself.
 

Benefits for a franchisee:
1. Opportunity to start his own business with the minimum initial capital and with the professional support from an experienced franchisor;
2. According to franchisor’s program franchisee can have access to credit resources;
3.  Getting all possible benefits from franchisor’s brand, trademark and reputation; the same about marketing campaigns and PR activity (it’s very important that you get these benefits immediately after sighing the franchise agreement);
4. Opportunity to get access to the results of different surveys, research and development activity of franchisor for a minimum fee;
5. Opportunity to start business without any professional background because of well-prepared and already tested training program provided by franchisor (but it’s rather risky as such franchisee can loose in competition with more qualified businessman);
6. Guarantee of stable relations with suppliers;
7. Opportunity to purchase some equipment from franchisor on a leasing basis or for a depreciated cost.
 

Potential loses of a franchisee:
1. Franchisee has less independence; he can’t be “his own boss” as franchisor controls many spheres of the business;
2. Franchisee depends on the reputation of franchisor; problems in the main company will influence the whole chain;
3. As franchisee pays royalty and other fees to franchisor the costs increase and franchisee can become uncompetitive in comparison to independent small and medium-size companies;
4.  Franchisor can sell his business and a new owner can be less professional, the total policy of the company may change and so on; it’s a risk factor;
5. Franchisor can miss some essential changes and improvements in technique, market conditions and others factors that influence general activity of the company; it will influence the whole chain: every franchisee can loose his competitiveness.
 

Benefits for a consumer:
1. In most cases goods and services sold by every company in a franchise chain have the same quality and provide the same infrastructure; it’s rather convenient (especially when you need to travel a lot) as you don’t need to adopt your life style to new city or even country;
2. If the particular franchisee closes his business consumer can easily turn to the main company; franchisor usually provides the list of the other closest offices;
3. The franchisee’s quality is usually higher comparing to independent companies; this happens because of strict control from the franchisor’s side.
 

Potential loses of a consumer:
1. Franchising in general can decrease the competition in the market; this leads to higher prices and lower range of goods or services;
2. The professional education and experience of the particular franchisee can be less than necessary but it’s impossible to know this as every company in the chain uses the same trademark, marketing strategy and etc.  

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