royalty 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…

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

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

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

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

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

The first time I thought about religion and business after reading one of the fundamental books in management science “Management” by Michael H. Mescon, Michael Albert and Franklin Khedouri. The authors used the example of the Rome Catholic Church to explain that sometimes traditional organizations can exist without any improvements in management for centuries. I returned to this example more and more thinking about what would happen if the leaders of the Rome Catholic Church decided to make that changes (I mean only business and management spheres, and maybe personnel motivation or some marketing but nothing concerning religious doctrines). Will the organization operate better or worse? Will more people choose Christianity from other religions or Catholicism instead of Protestantism or Orthodoxy or other Christian direction? And in general, will more people start thinking about attending any church? Will using business instruments attract or antagonize people?..
 

Today I see a lot of churches from different denominations using business instruments. It works. They advertise on TV and radio, issue posters. They train their stuff to be good managers. They use interesting and sometimes even intrigue titles for sermons to attract different groups of people (more churches started teaching about money, business and investments). But what I wanted to emphasize they use franchise strategies to expand their influence.
 

Certainly, I do not want to say that this was invented in the 21st century. Mentioned before Rome Catholic Church has the outstanding number of congregations all over the world. And they continue to open more and more. But the main difference as I think is hidden in the procedure of opening the new ones. The initiative comes not from the leaders but from the prospective pastor. The leaders of the church motivate people to move to other cities, towns and countryside but the final decision is made by particular believer. The main church like ordinary franchisor provides him with start-up and current training, helps to solve technical problems and so on. The subsidiary church pays a royalty (usually it’s 10%), and everybody is happy.
 

Is it good and bad? As for me I think that it’s more likely good because being a part of a big church chain the young pastor has fewer opportunities to fall into heresy…

I found the information on two more eBay franchises. In my previous posts I described iSold, NuMarkets Franchise Program, QuickDrop Franchise Program and Ebay Drop Off Stores.

Today I want to write about an interesting one. They decided not to take a franchise fee and as I understand consider this as the main point of their franchise program. The title says for itself: “Auction Post Inc.’s No Franchise Fee Program”.

To tell you the truth I’m not sure that I completely understand why they do this. It seems for me that they operate like educational courses explaining how to use eBay for drop-off operations. This training will cost you $9,995 but as I see it’s the only money you have to pay them. Maybe it’s a part of their promotional strategy and they are trying to attract franchisees on the first stage… Maybe it’s the way they are trying to get a bigger market share… Maybe this is not the only program created by the company and they are promoting other Internet projects with the help of this one… Anyway the idea seems to be rather attractive.
Franchise program includes:
- guidance on setting up and running your store;
- training program based on their e-auction experience:
- operational consulting.

So I can find only the following risks when starting this franchise:
- their experience can be not enough for you and as a result training can be not so good;
- as their operational consulting is free for you can’t make high demands to its quality.

But you can get more information on that points (as you know them) asking other franchisees and studying the documentation.

The other eBay franchise I’m going to write about is called Snappy Auctions Franchise Program. As I realized it’s not so famous (maybe rather new one but I couldn’t find the information). It’s very common to the other eBay franchises. The franchisee has to follow their guidelines strictly when setting up the store. The program includes both types of payments to the franchisor:
- franchise fee is $15,000;
- Royalty payments are 2 - 4%.

My conclusion:
If you want to start a drop-off business based in the modern informational technologies (like e-auctions, Internet bidding and so on) you have a lot of franchise programs to choose from. They only thing you have to do is to compare the money you spend with the services and help you get from your franchisor.

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.  

So, I decided to continue the Internet franchising topic using the example of the most (as I think) well-known company in the sphere of web-consulting. I mean the WSI  or (as they call themselves) #1 Internet and Technology Services Franchise.
 And what do they mean by Internet and Technology Services?
The first thing I need to speak about is their target market and the problems they are trying to solve. WSI helps small and middle-size private companies to use the Internet resources as efficient as possible. Does it mean that many of them are using the Internet inefficiently? Unfortunately, yes. Global network provides a lot of opportunities to decrease costs and to increase sales at the same time. It allows to increase productivity and to improve the communication with the clients, suppliers and partners. It opens a wide variety of different marketing instruments (not only just web page registered in Google…).
But for most middle and small-size companies my previous paragraph brings nothing more than a disappointment. They understand that do not have enough experience in e-business and Internet technologies and have no time to study it.
 

So, WSI decided to present solutions that assists these businesses. They’ve created proven and patent pending Business Systems and established an outstanding Franchise System to reach as many small and middle-size companies as it’s possible!
 What do you need to know before making a decision if the become a WSI franchisee? I hope the following summary can be helpful.
 

********
Number of current franchisees: 1,000 franchisees in 87 countries around the world. More than 1500 offices of the company.
Franchise fee: $49,700 USD
Founded: 1995
Franchising Since: 1997
Estimated total cost of franchise: As the franchise is a home office based enterprise, costs on top of the initial fee are small. I can even say that it’s equal to franchise fee, not more.
Territories Available: There are franchises available both nationally and worldwide.
Royalty fee: 10%
 The main idea:
As new Internet technologies appear and will continue to appear, as a trained and certified WSI Internet Consultant, franchisee is positioned to assist businesses in capitalizing on these new possibilities.
WSI franchise program includes compulsory training of all potential franchisees to become Professional Internet Consultants, allowing them to act as a one-stop shop of internet solutions for small and middle-size businesses. Consultants help boost firms’ internet profits by offering a variety of web-based services, while still being able to work from the comfort of their own home.
As they say
“WSI liken their Internet Consultants to ‘architects’, who assess their clients’ business needs using WSI’s Lifecycle System. Each client is then provided with a tailor-made internet solution, which aims to both reduce business overheads and increase revenues.
Once the internet solution has been formulated, it is then independently built at one of WSI’s Global Production Centres, located in a low-cost, high-tech area such as India or Australia. The clients are then delivered a results-orientated, technologically advanced internet solution at an economical cost”.
To train the company also uses the Internet technology called e-learning or on-line education. It provides additional benefits to the potential franchisee as this variant is much cheaper (no transportation costs, you can choose better time and stay with your family).
 

Following current support:
WSI uses developed by themselves Client Support System. It can provide franchisees with an on-going stream of reoccurring revenue from each client. The company also helps franchisees by offering an on-going support program that is custom-made to meet the unique needs of each new franchisee.
******
 As for me, I think that I’d buy the franchise license. Why not yet? Maybe because I still see a very serious competition in that field. Certainly, the WSI company has a well-known brand and a wonderful advertising campaign, but…
Small business owners are trying to save every dollar and pound. And there are too many freelancers in the consulting sphere (undergraduate and graduate students and even former employee of WSI franchisees) that can provide that services for lower costs. I agree that in most cases WSI-trained companies using good software and technologies will perform better quality. But I’m still afraid…. Can anybody overpersuade me?

Ok, I’m back to continue writing about Internet and computer franchise opportunities. Last time I was so busy that I managed to write only about the first – providing web-services. So, now I’m going forth.
 2. On-site computer services will be the next idea to write about. The franchisee has to hire a specialist(s) in the technical sphere. Usually it’s not necessary to have prior experience in computer repair because franchisor will provide all the training. For example, Geeks On Call® Company says:
“Everything starts with “Geek University,” which is an in-depth, weeklong training program”
 

The benefits: the market of home and office computers is rather big and it’s growing; franchisor provides training and some other useful stuff for start-up (business plan, results of marketing research and so on); you can reach small business owners and households large service-centers are not interested in.

The potential losses: the competition in the industry is very tight; every technical specialist with even little experience in computer-repairing can provide the same services himself anв for lower cost (as he doesn’t have to pay royalty and other payments to franchisor).
 (to be continued)

“We are not so rich to buy cheap things,” the proverb says. Is it right about buying a franchise? Maybe… But before choosing between the high-cost and low-cost franchise in the same industry, I suggest you to think over the following information.
 

When you buy the low-cost franchise, the franchisor will never provide the same start-up assistance, training, advice or preferences as if you were investing in the high-cost franchise. So, one of the first questions you have to answer to yourself is to decide what assistance you REALLY need.  If you are a complete novice at this business, I think that it would be better to get a bit more (and to pay more too). But if you are only expanding your rather successful business, the information and assistance (that every franchisor must provide) may be absolutely enough for you.
 

So, it means that you have to know what help you’ll get for sure according to legislation. All the rest depends on franchisor’s willingness.

According to the FTC, franchisors must provide:

1. One copy of the Uniform Franchise Offering Circular. You’ll get it in at least 10 days before you sign the agreement
   
2. One copy of the franchise agreement, other contracts and franchisor’s financial statements with estimates of initial start-up costs (operation capital, equipment, construction and rent costs and so on)
   
3. At least one week of practical training for you and your manager in a parent company
   
4. Operational manual
   
5. Ongoing support
   
6. Guidelines on audits and assignment procedures
   
7. Other criteria for assignments, such as ownership rights and rights to sell the franchise
   
8. Initial fees, royalty and other costs information
   

At the same time your potential franchisor may provide some additional help. You need to take into consideration that this usually increases your payments. This additional assistance may include:

1. A marketing plan, promotional materials and site selection assistance
   
2. Adequate insurance for fire, inventory, burglary, workers’ compensation, accident and health, occupancy and general liability
   
3. A known trademark or service mark, or advertising to make it known
   
4. Guidelines on purchasing inventory and equipment, restrictions on goods sold and terms of agreement and renewal
   

The last word about “must” or “should”: remember that in different states and countries the franchise legislation is different. Spend some time to check your rights as a franchisee. And maybe you will change the proverb for yourself: “We are not so rich to buy high-cost franchising and to pay for the help that we don’t need!”

While searching the web I met a lot of advices how to choose the best franchise. So, I decided to create a test that can be helpful during the franchise choosing process. I ask you to be charitable… and your comments are highly appreciated.
 The rules of the test:
-try to be as honest as possible;
-you have to answer all the questions;
-each answer ranges from 1 to 10 points;
-for every question I provide an explanation of the lowest and the highest variants but you can choose any in between.
 

***********************************************

 QUESTIONS:
A. Does the Franchise meet your own personal and financial objectives?
1 point for – absolutely no;
10 points for – perfectly.
 

B. Does the Franchise represent the industry or business sphere that you like?
1 point for – you were never interested in that sphere;
10 points for – this was your lifelong ambition.
 C. What do you think about the franchisor’s company and/or people?
1 point for – you know little about the company and the people or you do not trust them;
10 points for – you trust the company and the people and you believe they have enough knowledge, expertise, financial resources, and commitment to develop and improve a business.
 

D. What is your attitude to products and services offered by your possible franchise?
1 point for – you never tried the products yourself and you think it’s strange why people spend money for them;
10 points for – you like that products yourself and you are sure that they will be demanded by consumers during the life of the franchise.
 E. Are you satisfied with what will you get for you franchise fee and royalty payments?
1 point for – you feel that franchise fee and royalty payments are too high and you are sure that you can spend that money much better yourself;
10 points for – you see that franchisor is ready to provide programs, guidance, and other forms of assistance which you are persuaded and all that programs are worth the money you pay to the franchisor.
 

F. Is franchisee protected from legal side?
1 point for – the agreement protects the franchisor’s rights but says nothing or very little about franchisee;
10 points for – your lawyer states that franchise agreement covers all the possible situations in your future business.
 G. Have franchisor provided you a disclosure?
1 point for – not at all or it contains the information that you can’t believe;
10 points for – you are completely satisfied with the disclosure.
 

EXPLANATION
0-30 – this Franchise is not right for you;
31-50 – you may continue thinking about this business but I suggest you to ask for advice and to study it better;
51-70 – you can do the next step toward buying this Franchise.
  ***********************************************
 I ask everybody to evaluate my ‘Franchise test’ and send me comments. Thank you in advance!

This page is generated by Wpkeys plugin