costs at Business Franchise

One of the most important stages of your decision if to become a franchisee is the information you can get from other current or former franchisee. You need to know that it’s very candid source of information about franchisor, market, competition, and even profitability (if franchise owner would be so kind to share that information with you).
 
So, I suggest you to create the list of as many as possible franchise owners. Then you should choose the ones you are going to contact. Try to create a representative sampling – to choose franchisees using different criteria. Choose big and small companies, successful and loosing their net worth, working in big cities and small towns and so on. This will help you to collect more reliable and trustworthy facts about you prospective business.
 
After the list of your potential respondents is ready you need to create another list - the list of questions to get answered. I found these questions while searching the Net (unfortunately I didn’t save the URL):
 
How long they operated?
What were their total investments?
Were there hidden costs?
How long before they earned a reasonable income?
Are they satisfied with the franchisor?
What were their backgrounds?
Were the training and ongoing support satisfactory?
Was the advertising program satisfactory?
Did the franchisor meet contractual obligations?
Would they invest again?
Would they recommend the investment?
 
And by the way please remember that you are getting the information from the people but not from the documents. Do not forget about emotional factors. Sometimes former franchisees can present things worse than they really are. And sometimes current franchisees will brighten up their business. Be on the alert!

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.

Starting your business while singing a franchise agreement has many advantages over starting a company yourself. It is easier, it takes less time and you can get help and support from more experienced partner (the main company). But not so many people decide to buy a franchise license. I think that one of the main reasons for this is initial fee that a potential franchisee needs to pay to franchisor.
Today I want to say a few words expressing my opinion regarding why the franchise fee is so high. My observations are based on the following statistics given by the leaders of some franchises:
“Ron Eriksen, the vice president of market development for the Baby’s Room USA Inc., Elmhurst, Ill., provides the following facts: last year the company sends out 775 four-color brochures by Priority Mail costs $14. Only 6 percent of those recipients sent back a preliminary application form; 1.8 percent of the 775 became new Baby’s Room franchisees”.
My calculations and comments:
It means that the company spent $10,850 only for colorful brochures and received only 14 new franchisees (775 requests multiplied by 1.8 percent). So only to get the money back the Baby’s Room USA Inc. has to increase the franchise fee by $775. Is it fair? Maybe franchisee will say no because nobody wants to pay for the others who decided not to become franchisees of that company. But it’s absolutely fair from franchisors point of view.

“Steven Romaniello, president and chief operating officer of US Franchise Systems Inc., in Atlanta, says that his hotel company spends $50,000 on promotion and recruitment efforts for each franchisee who eventually buys a Days Inn, Microtel or Hawthorn Suites franchise”.
No comments needed. Even if franchisor decides to cover a part of this sum himself (let’s say 50 percent) the other part has to be included into the initial fee. The other part will be received by franchisor later in the form of royalty payments. By the way this can explain why sometimes royalty is greater than the cost of current support provided to franchisee: franchisor tries to cover some earlier expenditures.
Greg Longe, president of the Molly Maid and Mr. Handyman franchise systems in Ann Arbor, Mich., says, “Our Internet leads are way up this year, but all that means is that we have to do a lot more work to generate a solid candidate. Most of the people we’re hearing from aren’t qualified to run our concept.”
My comments:
When he says “a lot more work to generate a solid candidate” he speaks about people who will do this work. Company needs to hire qualified manager (or even managers) to deal to convert at least some of the leads to new franchisees. Company bears the costs of salary, Internet and phone communications, and many others dedicated to manager’s work. And as every cost it will increase the final price. In our case it will increase the initial fee in the start-up period or royalty during the operational period.

And initial fee includes not only advertising and recruitment costs. In most cases the main company provides training for the chief manager or key personnel of new franchisee. To do this they need to pay to trainers, to buy some stuff (like materials, paper and so on)…
Thinking about all that things I came to the conclusion that low initial franchise fee can be a bad sign (not “is” but “can be”). Certainly it depends on business sphere and region or country. But at least it’s a point to think over one more time whether to sing a franchise agreement with a company that sells its idea for the price that doesn’t cover the costs. It may seem strange…

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.

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.

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.

Another interesting program of the Small Business Administration (SBA) is called the CDC/504 loan program where “CDC” stands for the Certified Development Company. The Certified Development Company is a private nonprofit organization with the main purpose to contribute to the economic development of its community. The organization works with the SBA and privately-owned lending institutions (commercial banks and other financial organizations) to provide financing to small businesses. There are about 270 CDCs in the USA. Each CDC is responsible for a specific geographic area.
 
The main features of the loan are the following:
a) it’s a long-tern loan;
b) the interest rate is fixed during the whole period;
c) there is a limited number of purposes: to acquire real estate,  machinery or equipment for expansion or modernization;
d) in most cases the loan is secured with a senior lien (when provided by privately-owned lender) or with a junior lien (when a loan secured from a CDC and with a full SBA-guaranteed debenture);
e) the borrower has to invest himself not less then 10%.
 
How much a company can get according to this program? It depends on the purposes and job creation factor:
 
1. You will get up to $4,000,000 if you are qualified as a “Small Manufacturer”. A company is considered as small manufacture if its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS); and all of its production facilities are located in the United States.
 
2. You will get up to $2,000,000 if your company’s activity meets at least one of the following public policy goals:
a) Business district revitalization (a strange goal as I think; different people will vary in opinion while explaining the sense of “revitalization”; I can even say that every new company revitalize a business in a district… I don’t like that factor, as it’s not clear to my opinion);
b) Expansion of exports (this factor is a wonderful public goal; every student can explain why export is important for the economy of the district and for the whole country; but one doubt appears in my mind – how will new small business company prove that they are going to expand the export; such statements are based on the international marketing research but small business company – especially a new one – has no money, specialists and other resources to get such research even for one product and for one country… But still I like that factor because it’s economically correct);
c) Expansion of minority business development (Government tries to kill two birds with one stone – to help small business and minority… I like this because it can save some budget money!);
d) Rural development (my comments are the same as to the previous factor);
e) Increasing productivity and competitiveness (oh… one more factor that would be very difficult to prove; especially competitiveness; certainly if you buy a new technology and modern equipment it WILL increase the productivity of the company; but the costs will rise and so on… I’m not sure about this factor);
f) Restructuring because of federally mandated standards or policies (it’s clear and I support this);
g) Changes necessitated by federal budget cutbacks (I like this; when new business creates new jobs in the region or solve some urgent economic or social problems it worth of receiving some support from the Government);
h) Expansion of small business concerns owned and controlled by veterans, especially service-disabled veterans (it’s easy to prove and it’s very noble goal; such people need to know that they can do something for the society, not only society for them; they have a special need to be useful; I really support that goal)
i) Expansion of small business concerns owned and controlled by women (as a woman myself I like this goal… but feminists can say that the Government offend women by this goal: why do they say that women need more help than men…)
 
3. You will get up to $1,500,000 if your project meets the job creation criteria or a community development goal. Generally, your business must create or retain one job for every $50,000 provided by the SBA.

I hope to finish commenting franchise survey carried out by Franchise Recruiters Ltd. (FRL) today. If you read till the end you’ll know if I manage to do it. Check my previous article to know the beginning.
 
The next idea expressed by top franchise leaders was dedicated to old and branded franchise systems. In order to remain in a good position they have to prove that they are worth of it. Nothing can guarantee them a success in today’s fast-changing world. To hold their loyal customers they need to revamp, rehabilitate and regenerate their business systems. The respondents pay attention to the fact that most of the franchisors are concentrated on their first ideas rather than looking ahead an opening new products and technologies. It’s clear that they will face a rigorous competition.
As it’s mentioned it’s very important to adopt franchise business to demographic trends. Changes in today’s lifestyle and demographics help the development of the following business spheres:
-adult and senior day care,
-health care,
-home care,
-beauty, skin, aging treatments, and spas,
-different forms of entertainment.
 
My comments:
The survey shows the contradiction between main strategies of consumers’ behavior. These strategies are widely used in marketing while speaking about market segmentation. It’s evident that there are different types of people buying the same product. Each group of buyers has different reasons for purchase. The ones are driven by fad, fashion, and mood. They usually want to try something new. The others are very traditional and don’t change their tastes so fast. So if franchisor wants to develop his business he needs either choose the one group or to satisfy both.
The industries mentioned by respondents are rather predictable. There can be a lot of reasons why people become more self-oriented (exactly “self” not family- or community-oriented). Maybe this happens because of decreased role of Christianity and other constructive religions in the society in general. The advertising also influences the modern mentality saying that YOU are worth of this or that. Anyway the picture is very clear. People don’t want to take care of their parents and children themselves. Career plays the biggest role in dreams and aspirations. So the winning strategy is to provide people with more free time and with additional career opportunities (like better education on the one hand and better appearance on the other).
 
All the previous statements were dedicated to franchisors. But what about franchisees? The survey respondents decided not to avoid them. In the answers they pay attention to the fact that today prospective franchisees are “better capitalized, have better management experience, better education, and are increasingly diverse investors”. Also it was noticed that more and more seniors are coming into franchise business. They do not want rely only on government and social security. But most of them are not so aware in their talents to invent good and enough modern business idea themselves. The survey provides the following statistical information about older Americans: “the number of workers age 55 and above rose to nearly 24 million in 2004, up from 22 million in 2003, and from 20.7 million the year before. At the same time, the government is forecasting a significant labor shortage nearing the end of this decade. Franchisors tell us they want and need seniors as a reliable work force for years to come”.
 
In the same survey we found interesting information about so-called third party, not a franchisor and not a franchisee… For example, respondents notice that investors are considering franchise sphere to become rather interesting deal. They even called this a “new golden goose”. Why? Because of very short start-up period in many spheres. Think of it! Franchisor provides with a training program that lasts for 2 weeks. During the same time it’s possible for a franchisee to make all other necessary arrangements and he is ready to start! The only thing that can slow him down is money. So for both of them – investor and prospective franchisee – the goals are coinciding. They can start earning money very soon. TIME! It explains the investors’ interest toward franchise sphere, as I think.
 
Another third party is employees. Both franchisors and franchisees understand that employees contribute the biggest part to the company’s costs (directly and indirectly) and as a result to the company’s profit. When I say direct impact I certainly mean salary and corresponding expenses. As an example of indirect impact I will mention training expenses for every new employee.
At the same time for many businesses employees’ productivity influences the results most of all. That is why survey respondents expressed the opinion that franchisors of the next years will pay a lot of attention to different forms of health care insurance to their chain’s hourly employees. Also they will help to establish relations with banks opening accounts and contacting with financial institutions.
 
My comments:
I like this. When I’ve read this information I was thinking about inventing a high school program (or even senior school) to help franchisors and franchises to provide teenagers with the necessary information and to prepare them to their future jobs in that sphere… It can be based on “learning by doing” ideas and include a lot of practice…
 
And finally the last tendency was related to management. The top US franchise leaders believe that the previous years’ tendency will continue and more managers will be motivated not by strict annual bonus payments but by some reward programs depending on the results. As I understand that tendency is not a franchising innovation but overall trend in business.
 
Ok… I’m done with this survey. Will I get any comments on my comments?..

***If you read my blog for the first time I need to notify that it’s the second part of my comments for the Franchise Recruiters Ltd. survey. If you are interested in the beginning check the post before the previous.
 

So the next tendency in franchise business pointed by respondents (top 100 franchise leaders) is that franchise chains will have to increase the range of their goods and services. Some will even decide to combine goods and services from different franchise systems. They will fuse the channels and attract new buyers saving their time. They will operate under the slogan: “You can get everything in one place”. As an example they mentioned stores that sell ice cream and fresh flowers, coffee and offer top selling music CD’s, and video rental brands, cell phones and accessories.
 

As for me I like that idea from both points of view. As a consumer I prefer to park my car once and to do all the shopping, hairstyle, and so on at once. If to speak about business benefits the main advantage is that they can choose the best goods, services, technologies and practices from every franchise idea and decrease costs. Economists call this economy of scale (the situation when a company’s average costs decrease while company grows).
 

The next feature of modern franchise business according to the concerned survey is so-called “self-service” opportunity. The central place is given to kiosk technology which becomes ubiquitous for retailing products, packaged food, hotel reservations, and franchisor branded gift cash cards. It’s rather convenient for both sides. Consumers can get their favorite branded chocolate or order a ticket near parking lots, outside and inside big stores, gas stations, and malls. And certainly through the Internet… Franchisor can send his/her product to any part of the country. This strategy also saves salary costs as kiosk  doesn’t need to be trained, to get social security, and can work 24 hours 7 days and will never be late because “of terrible headache on Monday”… The only disadvantage of kiosk technology as I think is its inability to operate as a human. The artificial intelligence is too expensive today. But I will not be surprised to see a chocolate and drinks kiosk that will have its own opinion and advice me what to buy and how to get to the point of destination better.

OK… too much of a good thing is good for nothing. More tendencies you will see in the next post.

Every year Franchise Recruiters Ltd. (FRL) conducts a study and analysis of the tendencies of franchise business. Unfortunately I managed to get access only to the materials for the year 2005 but I hope they will allow making some interesting conclusions. As I think the main tendencies and relations remained the same for thus year too.
 
The procedure of survey was rather usual. The main data were collected while asking questions about the current situation and business forecast. But unlike International Franchise Association FRL interviewed 100 of the top U.S. franchise executives. On the one hand it increases the statistical error of the survey as they asked only leaders. But on the other hand I think the information can be useful at least because the leaders understand the market and the business, they have enough experience to predict what factors will benefit or hurt them. Why? Because they are the leaders…
 
So the first thing to say about concerns general growth. Top U.S. franchise executives predict 6% growth in net new unit development. What do they mean by “net”? They subtract closing companies from new ones. It means that number of new franchisees will grow even more than by 6%. If to compare this to the growth of GDP as the main economic indicator the interesting thoughts come to my mind. The U.S. gross domestic product growth was projected to be 3.3% in 2005; it’s two times lower than franchise number growth and also lower than the same indicator in 2004. My comments:
- growth in number of franchises is not caused by high revenue expectations of prospective franchisees; maybe they think franchise way of starting a business to be more attractive or easier in comparison with the standard one; it becomes more evident against a background of slowing of the economy in general;
- growth in number of franchises will increase the level of competition, especially in such traditional franchise industries as food and retail sales. As a result the market can see the decrease of prices (better variant for consumers) or decrease in quality (in order to provide at least any profit to companies). Anyway I think that at least in traditional franchise industries new companies can get much less profit than they assume.
 
The respondents also mentioned some other negative factors that can influence business development:
-slower overall economic retail expansion;
-relatively high energy prices;
-real estate tribulations;
-shipping cost surcharges
-and rising interest rates.
Also they mentioned prices as a very important factor. People are already hurt by increased oil prices and are not ready to inflation in any other industry.
My comments:
Franchisors (based on franchisees requirements and their own researches) have to think a lot about the ways to decrease the other costs and to increase the productivity. Maybe they need to examine the following variants:
-introduce new technologies (better equipment, informational and electronic systems, new materials, etc.);
-look for new suppliers of equipment and materials (check the opportunities provided by countries with cheaper labor force);
-outsource the less competitive parts of their business and so on.
At the same time they really need to shift the main accent toward attracting consumers. As I see it would be very difficult to hold the winning position without interesting advertising campaigns, better package, additional services, and improving public position and company reputation. It is the responsibility of almost every franchisor: the time will never forgive that delay, and another franchisor in the same industry will get the benefits of 6% growth I wrote about in the beginning of that post…
 
I’m going to continue commenting that survey later as it contains many other interesting facts and forecasts. But for this moment I wish to make a short conclusion. The situation in a franchise sphere is very controversial. On the one hand we see that more people believe in franchising as a way to start their business. On the other hand we understand that they will face an extraordinary competition supported by other negative factors. I suppose that in a short period of time it will result in a greater differentiation among franchisors. Those using new methods in business will take a bigger part of the pie. The others who rely only on traditional instruments and approaches will loose their positions.

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