Franchising – An Alternative to Starting or Buying a Business

Franchising is a type of business arrangement that lies somewhere between buying a business and starting your own business. It involves an agreement between a Franchisor (Burger King, Subway, Mail Boxes etc,) and you, the individual business person, called the Franchisee.

The Franchisor offers their established corporate brand name, experience, expertise, training, support, and proven methodology to the Franchisee. In return, the Franchisee pays an upfront fee and continuing royalties.

I bring Franchising up in the Bootstrapping context as it almost completely solves the experience/know-how part of the limited resources equation. As to the cost part, many Franchises will be clearly out of most start-ups’ reach. However, the franchising industry is so big and diverse that many have a relatively low initial cost. Recently Entrepreneur magazine had an article on 80+ Franchises that required an initial cost of $25,000 or less. (Entrepreneur.com)

Franchising is a large business sector. There are over 300 types of business categories supporting over 18,000,000 employees and accounting for 3% of US gross domestic product (GDP). There are many and diverse categories of businesses available for Franchising. A partial list of the different franchise businesses is Automotive, Business Services, Children’s Products & Services, Education Financial Services, Food, Health Care, Home Improvement, Hotels & Motels, Maintenance, Personal Care, Pets, Recreation, Service & Tech businesses, and more every year.

Jeffrey Tannenbaum, the former Wall Street Journal’s expert on Franchising, described franchising as a mixed bag. He said, “For many people becoming a franchisee is the shortcut to prosperity, but for others, it is the shortcut to hell.”

Let’s look at the pros and cons of franchising.

ADVANTAGES

  • Allows you to be in your own business with a limited knowledge of the industry and of running a business. You get the advantage of the Franchisor’s proven track record of success, their training, their operating methods, their suppliers, their credibility, their ongoing support, etc.
  • Some major risks of business failure are reduced.
  • Quick start to get your business operational. Every facet of starting and running the business is provided to you. An entrepreneur, starting on his or her own, would take considerably longer to begin.
  • Expansion:  If you become successful, you can expand quite rapidly through the expertise and cooperation of the Franchisor. They are anxious to discover successful operators who have proven they have what it takes to grow. Sometimes the Franchisor will block your expansion plans, despite your proven success. If this happens, you can draw inspiration from Sam Walton, the founder of Wal-Mart. Sam’s initial entry to retailing was as a Franchisee for the Ben Franklin 5 & 10 Cent stores. He followed their formula and added his creativity and work ethic to become a leading franchisee. He started to expand in neighboring Arkansas towns. Early on, Sam spotted the advent of retail discount stores. He approached the Ben Franklin management to let him pioneer a discount store under their umbrella. They summarily dismissed him, and Wal-Mart was born. Little did the Ben Franklin management realize how profoundly they would affect retail history.
  • Due Diligence:  Franchising is a highly regulated business. By law, every potential Franchisee upon asking must be provided with a Franchise Disclosure Document from the Franchisor. This will give you details of the arrangement with Franchisees, financial strength of Franchisors, their list of existing Franchisees, and, in many cases, lists of past Franchisees. You want to know everything you can about your potential partner.
  • Training is provided to you and to your employees. The learning curve of running a business is accelerated.
  • In most cases Advertising and Marketing of the brand is provided. In some cases, you may be required to contribute to the costs of it.
  • Territory: You are assigned an exclusive Franchise for a specified geographic area. No one else can use your brand in this defined area. This provision should be specifically spelled out in the contract.

 

DISADVANTAGES

  • Lack of Control: You don’t have the independence of an owner of a business. The Franchisor requires you to strictly follow their rules and to use their systems. Changes require approval. You are also limited in where to buy your supplies, how to advertise, which products you can and cannot offer, volume goals, etc. The arrangement can be frustrating for a creative personality.
  • Costs can be high, both the initial fee and ongoing royalties. However, costs are never to be considered in a vacuum. They need to be measured against the profits you create.
  • Royalties are paid on volume and not on profits in most instances. This is usually not a great arrangement as one party can lose money while the other profits. Their interests are not aligned even though it is a partnership.
  • Inequality: It is an unequal partnership. The Franchisor has much more power. If the Franchisor does not deliver on their support promises, you may not have much recourse, as most contracts favor the Franchisor. Also, you may not have the money to pursue your expensive legal options.
  • Selling the company may be difficult. Let’s say you’ve been successful over the years in building the franchise and want to now retire or change your lifestyle. In an independent business, you are completely free to sell to anyone at any price you desire. This is not necessarily so for a Franchisee. Some contracts won’t allow you to sell, or you can only sell back to the Franchisor. This might not allow you to get a fair price. So, you should try to address this issue in your original contract.

 

WHERE TO GET HELP

In determining if Franchising is for you and which ones best fit your pocketbook and passion, you can go to the following sources:

  • Google: Just search for Franchising, and you will get enough sources to look at to keep you busy for a lifetime.
  • Entrepreneur.com is the website of Entrepreneur magazine which puts out a yearly issue of the top 500 Franchises. They offer a list by category and by costs. You can get a brief outline of each Franchisor and their website for more information.
  • FTC: The Federal Trade Commission is the government regulatory body for the Franchising industry. The FTC website is www.ftc.gov.  They are located in Washington, DC, and their phone number is 202-326-2222.
  • The American Franchising Association (AFA) is an industry association located in Washington, DC. They have lots of information about Franchisors and the industry. Their website is www.franchise.org. Phone number is 202-628-8000.
  • www.bestfranchiseopportunities.com. This website lists a multitude of Franchising opportunities with descriptions of each. You can check up to 10 of them, and with one click, your request for more information goes out to each company. I found that I received the same day replies from all that I clicked, with phone calls from them starting the next day.
  • www.Inc.com is the website for Inc. magazine, the publication for entrepreneurs. They have extensive information about Franchising and lists of questions to ask a potential Franchisor.

With a lot of due diligence, Franchising may be the low risk, low cost way to become your own boss.

Advertisements

Universities – How They Can Help Your Small Business

Professors at schools prefer to assign real life problems to their students. At most graduate business schools, they assign students singly or in teams to analyze a real company in their city. The other subject areas like engineering, graphic design, advertising, etc., are also looking for real life assignments for their students.

If you have a product that needs to be engineered, you can approach the professor teaching that subject to ask if students can be assigned to your project. They’re usually happy to comply. Most often there is no charge to you. Increasingly, more schools will charge a royalty if it’s a product you plan to commercialize. That is still a good deal as there should be no guarantees or up front royalty payment. (A Variable Expense)

We would go to the local design school to get a package for a new product developed. We might give a modest monetary prize to the student with the best design. More importantly, we would put their name on the package…great resume builder for the student. You might go to the local college or graduate business school and ask the Entrepreneurship professor if one of their student groups can come up with a business plan for your fledgling company. If you have a legal problem, approach the law school.

One year, we approached the engineering school at a major university to develop a savings bank with all kinds of bells and whistles. We wanted it to keep track of all the money in the bank at any moment, to play a song when money was deposited, to have a tabletop look, etc. For us this was a high tech project. For them it was a piece of cake. They were happy to take on the project as it was a real life situation.

In a recent survey I did with professors of Entrepreneurship, I discovered that a high percentage of them already have programs where teams of students are assigned to assist an existing company in solving its problems. The professors go into the community to find companies who want this help and who will cooperate with the students. They more than welcome companies coming to them to participate in this program. There are some smart young people involved who have a very open minded approach to solving problems and developing ideas. They are not constrained by the past. This is another cost free opportunity for assistance in developing your company.

Whatever your project, you should give serious thought to exploring the schools in your area for help. It can be an excellent cost-free solution. I believe your chances would be higher in schools that have a dominant position in the community. Helping the small guy while offering a good learning experience is a compelling proposition for a teacher.

A bonus for you is that you can find some great interns for your company during the summer months or school year. Some may turn out to be excellent hires.

Why Small Business Can Succeed in a Tough Economy

In many of my blogs and articles, I’ve emphasized that the key to starting and maintaining a successful small business is to find, sell, and satisfy customers. If you can do this, I believe there are lots of opportunities for new start-ups and growth, despite the condition of the economy. I read a story this week in the New York Times that illustrates this concept clearly. I have reproduced it in its entirety.

There are two quotes in the article that I would like to bring to your attention:

Referring to the right store she found. . .”where people who are making far from royal salaries still care about doing their jobs well. They even knew my name.”

Referring to why she makes it a point to patronize this “nice” store…”because being nice matters a lot in this brave new entrepreneurial world.” (Small things make Happy customers)

 

Finding Community, Even in a Chain Store

By JANE GROSS

Published in The New York Times: February 18, 2012

It is two minutes before 9 at night. The Staples store I use, for tasks I once did in an office, closes at 9. After I press my face to the glass door, pleadingly, holding work that must be finished tonight, the kindly manager lets me in. Then I join a half-dozen others still busy inside, at the copier or the scanner, dropping off FedEx packages, or picking up their new business cards with amorphous job titles.

I used to go to a different office supply store. Then came the day it ran out of FedEx envelopes. Oops, the store employee at its FedEx counter said, directing me to his counterpart at its United Parcel Service station. There, no one mentioned that it, too, had run out of padded envelopes. Then, without a word of warning, an employee put the CD I was sending, containing a video of a speech I had made, into a plain manila envelope, tagged it with its destination and rang up the bill in record time.

But, I explained, the CD would never get to its destination in one piece the way it was packaged. “Sorry for the miscommunication,” I said. (Yours, not mine, I muttered to myself — but not out loud, being a believer in honey rather than vinegar.) “Please give me my money back and I’ll take it elsewhere.”

“No you won’t, lady; it’s already rung up.”

“Yes, sir, I will take it elsewhere. I clearly asked for a padded envelope and an important job depends on this.” Anger, hard as I fought it, rose in my throat.

The argument that ensued is best not described here. In any case, I was too cheap to take back the overnight package I’d already paid for. The CD — for a potential client to view before deciding whether to hire me for a speaking engagement — indeed broke en route. I did not get the job.

Then I went looking for a new store to patronize.

This is my brave new world of entrepreneurial life, which began after I took a voluntary buyout from The New York Times in 2008. After working as a reporter and correspondent for 29 years, I was eager for a midlife adventure.

After I left, though, it felt strange not to work in an office, with its regular hours, bosses and, most important, co-workers and a sense of community. I joined the legions of solo operators who took their computers to places like Starbucks, seeking the sound of other people breathing. We knew the mental-health danger of staying home for weeks in the same dirty terrycloth robe, talking only to our animals.

I missed my office friends a lot. But I expected that. What I didn’t expect was how much I missed the copy machine, the scanner, the FedEx pickup, and the I.T. guy, whom I didn’t have to pay to repair equipment.

Could I have bought all the necessary machines for my nifty home office? I could have, though it would have been very expensive, and it’s a tight fit in there already. Besides, I hate gadgets, so the fewer the better.

Could I call for home pickup from U.P.S. or open a FedEx account? I guess I could. But I like going to Staples, now that I’ve found the right one, where people who are making far from royal salaries still care about doing their jobs well. They even know my name there.

There used to be a neighborhood store, Office Inc., but it closed as the big chains grew. I loved Office Inc. For years after it was gone, I’d see the owner around town and embarrass myself by tearing up. The sight of her would make me think that the bad guys, in some I-don’t-know-where corporate headquarters, had won.

Yet each big-box store, once you get past the fact that it looks the same as the others, has its own personality. The one I use now, with the manager who lets me in at two minutes till 9, has employees who help people slide balky credit cards through supposedly self-service fax and copy machines. It has a middle-aged woman selling computers because other middle-aged women don’t like doing business with dudes who call them Ma’am, or who condescend to them as if they don’t understand speedy technospeak, or who don’t even answer questions because their iPod buds are in their ears.

WOULD I choose to be in a Staples at 9 p.m. if I could help it? Not on your life. At times like this, I miss the perks, shrunken though they may be, of being a lifer in a big corporation.

But even out here in each-man-for-himself-land, there is kindness and camaraderie. That’s why I make it a point to patronize this “nice” Staples: because being nice matters a lot in this brave new entrepreneurial world.

 

The Game of Monopoly: A World War 2 Hero

In all my years in the toy industry, I never knew about the following story and the role of Monopoly in helping Prisoners of War escape in World War 2. It is a fantastic tale and exemplifies Entrepreneurial thinking at its best. Entrepreneurship is a way of thinking, not a particular type of person.

In this case there was:

Need – Find a way to help captured airmen escape.

Knowledge – The key Knowledge factor was discovering that the International Red Cross Care Packages for POW’s could include games and pastimes.

The Opportunity – To supply the POW’s with special Monopoly sets as set forth in this story which I’ve verified is true from multiple sources.

 

Here is the creative Entrepreneurial narrative directed to a higher purpose than profits, just as it was sent to me:

Starting in 1941, an increasing number of British Airmen found themselves as the involuntary guests of the Third Reich, and the Crown was casting about for ways and means to facilitate their escape…

Now obviously, one of the most helpful aids to that end is a useful and accurate map.

Paper maps had some real drawbacks — they make a lot of noise when you open and fold them, they wear out rapidly, and if they get wet, they turn into mush. Someone in MI-5 (similar to America ‘s OSS ) got the idea of printing escape maps on silk. It’s durable, can be scrunched-up into tiny wads, and unfolded as many times as needed, and makes no noise whatsoever.

At that time, there was only one manufacturer in Great Britain that had perfected the technology of printing on silk, and that was John Waddington, Ltd. When approached by the government, the firm was only too happy to do its bit for the war effort. By pure coincidence, Waddington was also the U.K. Licensee for the popular American board game, Monopoly. As it happened, ‘games and pastimes’ was a category of item qualified for insertion into ‘CARE packages’, dispatched by the International Red Cross to prisoners of war.

Under the strictest of secrecy, in a securely guarded and inaccessible old workshop on the grounds of Waddington’s, a group of sworn-to-secrecy employees began mass-producing escape maps, keyed to each region of Germany or Italy where Allied POW camps were located ). When processed, these maps could be folded into such tiny dots that they would actually fit inside a Monopoly playing piece.

As long as they were at it, the clever workmen at Waddington’s also managed to add:

1. A playing token, containing a small magnetic compass

2. A two-part metal file that could easily be screwed together

3. Useful amounts of genuine high-denomination German, Italian, and French currency, hidden within the piles of Monopoly money!

British and American air crews were advised, before taking off on their first mission, how to identify a ‘rigged’ Monopoly set — by means of a tiny red dot,

one cleverly rigged to look like an ordinary printing glitch, located in the corner of the Free Parking square.

Of the estimated 35,000 Allied POWS who successfully escaped, an estimated one-third were aided in their flight by the rigged Monopoly sets. Everyone who did so was sworn to secrecy indefinitely, since the British Government might want to use this highly successful ruse in still another, future war.

The story wasn’t declassified until 2007, when the surviving craftsmen from Waddington’s, as well as the firm itself, were finally honored in a public ceremony.

It’s always nice when you can play that ‘Get Out of Jail Free‘ card!

Cash Free Ideas to Beat Competition

Competition for customers in most industries is extremely intense. This is exacerbated if the customer is a large one and your product is not particularly unique or patent protected. Your customers are also in a high pitched battle with their competitors. This can be seen in your everyday life. Look at the competition in cars, retail stores, food stores, homes, computers, music, etc., for your dollar. This extends into the industrial sector and personal services.

Here are some non-cash ideas to help  your small business better compete.

Exclusives. If you have any type of new or unique product and no money to promote it, think of offering a key/large customer an exclusive. The exclusive can be for 30 days to a year with a performance clause for a time specified renewal. When we were in the game business, we would introduce a new game to the leading department store in each major city. We sold them on an exclusive basis for 30 to 60 days in return for their running an ad for our product at their expense. Your exclusive could be narrowed down to a particular channel. For instance, I  know of companies that gave Amazon.com an exclusive for all internet selling in return for them giving special promotional pushes for the product. Examples are running 2-day sales or pop-up ads when customers look at a related product (i.e., a wine game when a customer searches for one of their 9,000 wine books).

You could simply give an exclusive to a large retailer for buying it and putting it in all their stores: Radio Shack with 6,000 plus stores, Costco with 400+ stores, Wal-Mart with 3,000+ stores, etc. Exclusives can get you immediate orders, free ads, better position, earlier pay terms, earlier orders, etc. The result is more credibility, more cash, and brand building at no cost.

Better Service. Contrary to popular opinion, most purchasing is not based on the lowest price. Service is a key component in many buying decisions and can take many forms: shorter turnaround in shipping than competitors, customer training on your product features and how to use or sell it, friendly and knowledgeable people manning your phones, customer friendly website, dealing with problems quickly and fairly, admitting, correcting, and paying for mistakes.

One of the key factors of our success in the watch business was our service and special offers. The business was mature, highly competitive, and a me-too industry. We entered the industry with a unique novelty approach that featured artwork on the face and a rotating disk with art as the second hand. For instance, our most successful watch was a cute cat with a rotating mouse going around the dial that the cat always just missed catching. These watches were easy for competitors to copy. However, we copyrighted each design and consistently earned money from infringers. We offered two elements that propelled our success.

  1. Special exclusive designs for a low minimum of 200 watches with no premium cost to the buyer. This was in contrast to large watch manufacturers who asked for a minimum of 10,000 watches. We accomplished our low minimum by working closely with a small Chinese factory, by using standardized parts, and by our willingness to break even on these orders. We knew the profit would come on the re-orders. Our low minimum allowed us to break into the world of Disney, selling to their retail stores, theme parks, and catalog division. All three wanted exclusive merchandise that could only be bought through them. Our small minimums allowed them to test all their ideas without paying a price for mistakes. We were rewarded with large quantity orders for the watches that tested well. We also rewarded small customers who supported our line with periodic exclusive designs. The result was loyalty and increased business.
  2. Quick turnaround. This was and is increasingly a key component for small business success and survival. It reduces your cash commitment to inventory and likewise for your customer. It also reduces risk. You need to give a lot of attention and thought on how to realize quick turnaround. We analyzed every component used in a watch and the delivery or manufacturing time of each. We discovered the bottleneck in time replenishment was the unique printed dial on each watch. Every other component was easily available and in stock from many suppliers in China. Fortunately for us, the printed dial was a very low cost component. So we took chances and built up inventories of dials on watches we projected would sell well. The dials cost $.05 each; but in our pricing, we figured it at a $ .20 cost. This gave us the cushion for discarding unused dials.

We shipped all our watches from China to a public warehouse in Long Island without boxes, which were printed in the U.S. Air freight is a widely competitive business, particularly between UPS and FedEx. Therefore, we eventually flew watches in for $.17 each. We also discovered that the processing of shipments through customs varied greatly by which city they entered. The net result was that we could get watch reorders within two weeks of the order while our competitors’ lead time was generally two months. This was a tremendous plus for us with our customers and reduced our cash needs.

Special Terms. Cash strapped businesses with high profit margins should seriously consider additional discounts for immediate or quick payment.

Toy manufacturers usually ship most of their products in the fall. To plan production, particularly with overseas manufacturing, they need orders early in the year. So they successfully offer a special early buy discount to their customers.

Many companies offer volume discounts or rebates. They spell out the discount earned at various volume levels. These discounts can be achieved as you reach the level or can be rebated at the end of the year. This encourages your customers to place more of their business with you rather than sharing with other suppliers.

Private Label. Many products lend themselves to be made under the

customer’s label rather than your brand. The disadvantage to you is you don’t build your brand, and margins are usually lower. The advantages are you don’t need to maintain back up inventory, your order lead times are better, and you should get your payments quicker.

Your entire business should always be customer oriented. Special offers are particularly effective in building your relationship with a customer and does not drain your cash.

 

This blog is an excerpt from my book, Bootstrapping 101.

Entrepreneurs-Time To Be Thankful

Whether you’ve had a difficult year in this current environment or have been one of the fortunate ones and prospered, it would serve you well to pause and take stock of all the things you should be thankful for.

 

Be thankful you are in your own business and your own boss. Millions of people aspire for the same.

 

Be thankful for all your customers without whom you would have no business.

 

Be thankful you live in the United States, which affords you the opportunity to pursue your passion and to succeed with no limitations– and yes to fail, which is one of life’s great teachers.

 

Be thankful you can choose which 80 hours each week that you can work.

 

Be thankful for your family, friends and mentors who are your support team–an important element for Small Business owners.

 

Be thankful for your loyal employees who are helping you fulfill your dreams.

 

Be thankful you are rewarded for your company’s successes while knowing you can pay for its risks.

 

Be thankful that you can make sure everything is done the right way.

 

Be thankful you can try to implement any ideas you have and bring them to fruition.

 

Be thankful you are in a position to positively impact other people’s lives.

 

Bob Reiss www.bootstrapping101.com

Writing Business Plans-Anyone Have a Pencil?

The smartest entrepreneurs plan on growing and are prepared for change.

I have a few words of advice for first-time entrepreneurs, as well as seasoned business owners looking to hit a new stage of growth. My advice is this: write your business plan in pencil. I realize this may be difficult for all you non-golfers, but doing so will illustrate two important principles.

1. Change is inevitable.   

I have little doubt that you (the small business owner) will shortly have to change, amend, modify, scrap, or abandon your original business plan altogether.  One of the attributes of successful entrepreneurs is Flexibility. By writing your business plan in pencil, it forces you to look at change as the only constant.  Make change your friend, embrace it, and work it to your benefit. The reasons why your original plan will need to be changed after your company is actually operational are myriad. It’s likely you under or over-estimated your competition, margins, cash needs, competencies, and suppliers. Or you misjudged market need and size. Every entrepreneur discovers new opportunities that didn’t appear until there was actually a business up and running.

2. We must avoid business plan worship.

When we see documents neatly typed and even praised, we are reluctant to change. Especially for those who attended business schools where the plan took on a larger than life importance. People whose plans got high marks or even worse, won a Business Plan contest, tend to feel their plan is inviolate. They also tend to believe that if they rigorously adhere to the plan, it will yield the riches of their dreams. It Is my hope that the mental image of a pencil will remind you that change is good and will help you reach your goals.

Most small business owners that I know never wrote a business plan. In 16 start-ups, I never wrote one. John Altman, a very successful entrepreneur, founder of six companies, and former professor of Entrepreneurism, never wrote a Business Plan for his start-ups either. Most people who write a business plan do it to raise money or because someone told them that’s what they’re supposed to do. The fact is that a detailed plan is only required if you want to raise money from a bank or venture capitalist. Both will hardly ever offer a loan or invest in early stage companies. So your energies are wasted writing those long and thick plans.

Now don’t get me wrong. I strongly believe in planning, just not in long, voluminous tomes, that will probably go unread. For sole proprietors or a few employees, it can be in your head or- if you must commit it to paper- on a napkin.

If you really want to write a plan, try this. At the start of each year write your goals are for that year and specifically target new areas of distribution and the names of new accounts that you want to sell. Also put on paper the names of current customers with whom you want a deeper relationship and the strategies you’ll employ to do so. This plan should only run one or two pages. I also recommend you write down your accomplishments and shortcomings from the previous year. While you can do this exercise primarily for yourself, I would also share it with members of your team.

As your company gets bigger, written planning documents become paramount. As your company grows, you want to be sure all your employees are on the same page and equipped with the knowledge of how they can contribute to the company goals.

It’s a reversal of commonly accepted logic to suggest you postpone the business plan until you’ve reached a growth spurt. But as John Altman said on this point, “If you’re going to empower the other people in your company, guess what: You’d better give them a map to the highway you’re on! Otherwise, they can’t share that vision in your brain.”

%d bloggers like this: