franchisees 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!

There is a legal document that any franchisee must be supplied with before the signing of the Franchise Agreement. The Federal Trade Commission (FTC) has made such a regulation in order to provide franchisees with material information about operation of franchise system. UFOC is urged to help franchisees understand and analyze franchisor’s intentions.
The Uniform Franchise Offering Circular must be presented to franchisee 10 days before the signing of the Franchise Agreement.
Every franchise company in every industry should provide its prospective franchisees with that information divided by the following 23 categories:
1. The Franchisor and Any Predecessors
2. Identity and Business Experience of Persons Associated with Franchisor
3. Litigation History
4. Bankruptcy (i.e., any franchisees who may have filed)
5. Listing of the Initial Franchise Fee and Other Initial Payments
6. Other Fees and Expenses
7. Statement of Franchisee’s Initial Investment
8. Obligations of Franchisee to Purchase or Lease from Designated Sources
9. Obligations of Franchisee to Purchase or Lease in Accordance with Specifications or from Authorized Suppliers
10. Financing Arrangements
11. Obligations of the Franchisor; Other Supervision, Assistance or Services
12. Exclusive/Designated Area of Territory
13. Trademarks, Service Marks, Trade Names, Logotypes and Commercial Symbols
14. Patents and Copyrights
15. Obligations of the Franchisee to Participate in the Actual Operation of the Franchise Business
16. Restrictions on Goods and Services Offered by Franchisee
17. Renewal, Termination, Repurchase, Modification and Assignment of the Franchise Agreement and Related Information
18. Arrangements with Public Figures
19. Actual, Average, Projected or Forecasted Franchise Sales, Profits or Earnings
20. Information Regarding Franchises of the Franchisor
21. Financial Statements
22. Contracts
23. Acknowledgment of Receipt by Respective Franchisee

While surfing Internet I have met an article that made me overlook some of my views on franchise system.
It is called Marketing the Franchise and written by Edward N. Levitt, a franchise lawyer and partner with Gowling LaFleur Henderson LLP, who has over 30 years experience practicing franchise law, is a prolific writer, a noted lecturer and is currently General Counsel to the Canadian Franchise Association.
I used to consider franchises mostly from franchisees point of view. What should an entrepreneur do in order to find the right franchisor? What are the most thrilling franchise experiences in … (let’s say Australia)? What are the main rules to follow in order to be successful franchisee?
But franchise as any other system is a two-way highway. And franchisors also face a lot of problems during setting up and organizing a franchise system work.
Their problems are problems of other growth. Where should a company search for its franchisees? What are the criteria to choose the right guys to work with that business? How should business relationships be installed? Where are the responsibilities borders? What information and authority should be shared with franchisees? How should a company respond to improper franchisees?
All that topics are called franchise marketing. And a franchisor should be clear in his mind answering all that questions.
So the article is a must read to anyone thinking to install his own franchise system and highly recommended to anyone interested in franchises.

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.

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…

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?

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.

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