promotion at Business Franchise

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…

It seems for me that I spent enough time to express my opinion that it’s necessary to evaluate an idea before investing money. This statement completely refers to franchise business. Success of other franchisees doesn’t guarantee your success because as I mentioned before it depends on a particular region and particular conditions of that region.

Now I think it’s time to say a few words about conditions that make business idea practically acceptable.
1. Technological practicability. If to speak about business ideas in general there can be a lot of reasons for inability to realize them. Sometimes it’s too expensive, sometimes there is not enough space to build the plant and locate all the necessary equipment and so on. Even one of the most outstanding producers George Lucas faced the technological problem while realizing his creative ideas. He had to start his Star Wars from Episode IV and only after many years he found a good technological decision to shoot Episodes I, II and III.

Going back to franchise ideas I think that this problem is not so important as franchisor has already created the technological system and tested it. But still potential franchisee has to check the local situation. There can be some legal restrictions for particular region or ecological situation can influence technological practicability or inability to hire personnel of proper qualification can create barriers for the success.

2. Long-run future viability of new business. Starting your business you need to be aware that it will exist for some period of time. It’s important to see the difference between a project and a business. Project can last for several days (like organizing a show or a party) or for several years (like house construction). But when you plan your business it’s a good idea to create it for years and to foresee the conditions for its growth. Maybe one day you’ll sell it and get more money than invested or hand down to your kids.

3. Acceptable economic efficiency and payback period. One survey said that only 30% of all the small businesses were started in order to earn money. The other 70% of new-born entrepreneurs presented the following reasons:
-want to be “my own boss”;
-want to realize my personal ideas;
-want to achieve something in my life and to make a business career, and to help other people… and many other “bombastic” reasons.
As I think it’s possible that people really think that way and do not consider money and profit as important factors of small business. But my experience (not so big but enough to have an opinion) says that most of them will change their minds during the first year of business operations. As the owner of a small company you’ll deal with money everywhere – paying salary, rent, public utilities, and interest for the credit, administrative costs and Internet, advertising and promotion expenditures and many others. You’ll charge prices, calculate revenue and taxes, and so on. Of course, it’ll take some time. I even insist that it takes a lot of time. And every reasonable person wants to get something for the time spent. His family also wants to see the pecuniary results not only self-realization or happiness of other people.
That’s why I suggest everybody to think about economic part of any idea even if you really believe that money is the last thing in the world you want to speak about.

4. Acceptable idea from public or community point of view. Take it seriously! Today people as never before feel very lonely. As a result they try to solve this problem participating in different public organization and community projects. I do not recommend you to start any business that may conflict with public interests. You will loose in 99% of cases…

My conclusion:
Some of these factors are limitations; the others (like economic efficiency) can be used as the main criteria for a franchise idea evaluation. Want to add something? If so, I will highly appreciate your comments.

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.

Today I was a witness of the dialogue between two students. They are 14 or 15 and were discussing how they would start their future businesses. I hope they will not have objections if I present a part of this dialogue here.

“I’m thinking about IT business. It’s the easiest… and the sphere is growing”
“Do you have an exact idea? E-commerce?… ”
“I don’t know. I think to take the list of franchises and will choose the one with the best program or the least investment…”

I wanted to interfere but decided to stay away and to express my opinion here.
I’m absolutely sure that it’s necessary to study a franchise program before investing your personal or borrowed money. But I think that studying the idea itself is more important. If you choose a franchise with an attractive program but the idea is not OK for your region or your country the result will never satisfy you. And it’s not necessary to be a prophet to say that to avoid bankruptcy you’ll have to invest more, to work harder and so on.

What factors can make an idea having no prospects? I found some and want to express my opinion with the potential readers of my blog.

At first I need to mention the demand for the product. You need to take into consideration as many as possible factors that influence the willingness and ability of people of the concerned territory or country to buy these goods and services. It’s not too hard if you live in this region yourself. You can spend some time listening to people’s complaints. You can ask your friends and neighbors. It’s not necessary to carry out a marketing research if you are planning to start a small business company. (Certainly if the matter concerns a big investment and large company it’s better to order a marketing research from professionals).
The factors you have to think over vary for different ideas and different markets. I’ll say some words about the most important ones as I think.

So, the first one is geographical, historical, religious and cultural traditions that prevail on the concerned market. I’ve read a story about McDonalds’ franchise in France (unfortunately it was some years ago and I can’t recall the source). It was a sad story. The idea almost collapsed because of cultural food traditions in the country. The author of the article explained that historically the French were in earnest about food. And the idea of fast-food itself was offensive for them. But if to add that the French have no special liking of American life style we’ll get the complete picture of extremely bad idea.
But at the same time the same franchise idea (I mean McDonalds’) became enough profitable in Japan. Why? Because it was absolutely uncommon for Japanese and was taken by them as something interesting, and unusual, and modern.

The next factor that influences demand is size and growth of the target market. It includes the number of potential buyers. Thinking about buyers you have to study their tastes and preferences on the one hand. Also you need to study buyers themselves: age, income, sex, life style and so on. You need to study their attitude to your idea before you start your business. By the way it will help in future while planning advertising and promotion activities.

Also it’s necessary to think about seasonality of demand. If sales change greatly during the year it means that your personal income will change too. Sometimes you’ll get nothing at all. Usually you’ll have to invest more money in inventory when demand goes down. Are you ready for this?

OK. That’s enough for demand factors for the first time. Read my next post to answer what other factors can make a franchise idea having no prospects.

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.  

McDonald’s is launching the first lunar franchise. At first sight it looks like a joke. Whom to serve on the Moon? How to deliver the food ingredients? Who will work there?… These and many other questions appeared in my mind immediately after I’ve read that information.
 

Certainly, they can’t consider this as a profitable project. As I understand they can’t even think about getting their investment back within the next dozens of years. But as I understand they are thinking about indirect benefits.
 

The first unquestioning benefit is promotion and advertising. That idea is enough interesting and strange for many journalists to write about it. People will discuss it too… At the same time the idea gives rise to positive emotions. Just listen to your emotional reaction when reading the following:
“The famous astronaut is lending the Moon and he has only 2 hours to meet his sweetheart. They meet at the McMoon. The stars are surrounding them. They can see the Earth through the window…A robot in a traditional uniform is serving them… ”
 OR
“A small space ship flies up to the McMoon using the special corridor. Two strange aliens are ordering 4 BigMacs and 2 Colas. It’s a “McMoon drive”…” 
Is it funny? Yes! Fantastic? Sure! But I bet that you’ve smiled while reading this. That’s what I meant while speaking about positive emotions. And what will you say about Ronald McDonald in the rocket?…
 

The second benefit for the company concerns costs. According to the official information, because of the high cost of providing living space and life support technologies, all food preparation, serving, cashier duties and maintenance will be performed by a crew of specially designed robots. And if everything works OK they will start using the same technology in some terrestrial restaurants! As a result this can help saving thousands in annual labor costs (certainly if trade unions will not lobby a law to forbid it).
 

I hope I managed to prove that this idea is not so strange and stupid as it seems from the first sight.

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

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

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

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

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

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

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

Everyday I get so many e-mails that are really spam advertising. But unlike many other Internet users I decided not to use anti-spam programs and services.  I delete these letters and messages by myself but only after some very brief analysis. You know, if to group that letters according to the products they advertise you will get a sketchy picture of small business trends. Why small? It’s obvious! Big companies will never use such a doubtful way of promotion as spamming. But for many small companies it is be a good variant.
 
You can ask why I write about spam in franchise blog? Coz recently I found some changes in a list of products. Much more people started to sell different types of software and computer programs for everyday use. And most of spammers introduce themselves as representatives of this or that big software development company.
 
As I see entrepreneurs can deeply feel the advantages of buying computer franchises. They can be absolutely new in that sphere. No problem – they will get all the necessary help with training services, maintenance, marketing and even financing. At the same time software-selling franchise can be cheaper to start-up especially when programs are distributed mostly through the Internet. You don’t need to pay rent, to buy shelves and other shop equipment. It seems to be very profitable! And it can become profitable even sooner that with other types of small business opportunities.
 
Interesting fact about software or computer franchise is that entrepreneur can not only get benefits from using the trademark, name and advertising. Selling software he usually is not the end of the relations with the customer. Later he will call for upgrade of sold program or will order another one as his/her business develops and they have more business processes to serve. Today the world of information technologies changes so fast that even few customers can provide software or computer franchise owner with a stable profit.

To buy a franchise license? To start your business as a part of a large chain? No problem. You do not need to spend any time thinking about business idea. Just open business pages of your newspapers, business magazines and search the Internet. Economists predict that very soon a half of all retail shops will make money for “the Kingdom of Franchise”.

 As I think it’s not a good sign. It points to a growing problem of  slowing down in business sphere. Many new entrepreneurs don’t want to put on their “thinking-caps” and think about new products, new ideas of selling, promotion or new technologies. They are not ready to take a risk. Sometimes I even think that franchise expansion can become one of the main reasons leading to slowing down the economy in general….

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