Author Archives: franchisefred

The History of Franchising

The word franchise originates from the Anglo-French: franchir (to free) and franc (free). The concept of franchising slowly developed in Europe from roots going back to the middle ages. Back then, titled land owners granted rights to people to hold fairs, operate markets and conduct other business on their land. The rights became rules and as such, part of European Common Law.

The Sewing Machine

In the US, credit for beginning modern franchising, goes to Isaac Singer, founder of the Singer Sewing Machine Company. In the 1850s, Singer wanted a wider distribution for his sewing machine but did not have the cash to increase manufacturing them. Another issue he faced was that people would be reluctant to buy his machines without some type of training which was not provided by retailers at the time.

Singer decided to assess licensing fees to individuals who would own the rights to sell the machines in certain geographical areas. The licensees also were responsible for teaching customers how to use the machines. This created a platform for making a sewing machine commercially available to the public.

Howard Johnson and Ray Kroc

In 1932, Howard Johnson established the first modern restaurant franchise system stemming from one successful restaurant in Quincy, Massachusetts. The concept was to allow independent business people to use the same name, supplies, logos and procedures in exchange for a fee.

Ray Kroc was a salesman of milk shake makers. When he bought a small hamburger joint in 1954, he saw that the owners had perfected a high-volume food production system that combined fast service and low costs with consistent food results. Kroc became their licensing agent and first recruited franchises in the Chicago area (The first was in Des Plaines, IL, a northwestern suburb of Chicago).

The franchising business method got so big that the International Franchise Association was founded in 1960. Their purpose was to provide guidance to the entire industry. In 1978, the Federal Trade Commission got involved by creating laws designed to protect franchisees.

The franchising system has a stalwart history and has proven to be the path to success for many an entrepreneur.

Five Reasons to Buy a Business

The franchise business has weathered the recession better than most industries and it shows considerable promise moving forward. Plus, this is the time when more people are patronizing local shops allowing for the flourishing of family capitalism rather than big business capitalism.

Good reasons to buy right now include:

Seasonality: Be ready to take advantage of the seasonal spikes that occur during the holidays. This can make a huge difference in revenue if you time it right. For example, Postal Connections of America does 2 to 2.5 times their average monthly volume between Thanksgiving and Christmas. That might be the best time to buy that franchise.

Financing: Not only may sellers and franchisors be more willing to finance but other funding options such as SBA loans, penalty free 401k funding and using unsecured credit are being made more readily available. This trend is definitely headed in the right direction especially when compared with a few years ago.

Buyer’s Market: Right now, prices on business and the equipment to run them (including real estate) are lower than usual. As with the stock market, it’s good to buy low and sell high which makes now a fertile business buying time.

When it comes to leases, landlords are open to negotiating favorable terms on prime space for a new franchise operation.

In addition, interest rates are at all-time lows. If you have a good credit history, you will be able to find excellent interest rates. Keep in mind that as the economy continues to heat back up, so will expenses.

Job Market: In addition to it being a buyer’s market for opportunities, it’s a good market for hiring qualified employees. Because individuals in all sectors are experiencing layoffs and downsizing, it’s highly probable that you will be able to get the right individuals to help your business prosper.

Risk: If you are concerned about the risk of going it on your own, an established franchise system reduces the worries of business ownership entry. In fact, it’s one of the big advantages of franchising. You build on the experience of a franchisor and established franchisees that can support and guide you through the process. Another positive is that a franchise system offers the buying power, efficiencies of scale and training you need to build a successful operation.

If you have a dream to be a business owner now is the time to go out there and make it happen.

8 Steps to Take Prior to Buying a Franchise- Franchise Fred

As with any major purchase, especially one that will become your life’s work, perform your due diligence. Below are eight steps you need to take prior to buying a franchise:

Make sure your own finances are in order. Franchisors will want to know that you are financially secure before awarding you a franchise.
Carefully review the Franchise Disclosure Document (FDD). This document is a treasure chest of information about the Franchisor. Among other things, check for any litigation issues, your obligations to the franchisor and vice versa and any financing the franchisor may provide.
Understand exactly what the franchise fee covers. Some franchise fees cover for all of the start-up costs and some exclude marketing and training. Make sure you know what you will have to pay in addition to the fees to get a good start in your business.
Ask about support. Find out what level of support you will receive from the franchisor. Will they create ads for you? Assist you with hiring? Provide continual training?
Talk to current franchisees. Ask them about any disputes, if the franchisor does what they say they’re going to do and how long it took them to get to their break-even point.
Make sure there is a territorial clause in the franchise agreement you will be signing. This is defined as an exclusive territory around the business location. The agreement will specify that no other franchisee will be allowed to open in that territory. The territory could be stipulated by zip codes, the number of households in the area, highway boundaries or any number of other definitions.
Check for the existence of franchisee advisory groups and associations. In general, franchise advisory groups are organized by the franchisor. They are comprised of franchisees and representatives of the franchisor. An association usually is independent of the franchisor. As a franchisee, you may have to pay dues to join so the group can be funded. The presence of one or both of these groups generally indicates that the franchisor welcomes input and closely listens to franchisee concerns.
Know the franchisor. Any agreement is only as good as those who make it. Do your research on the internet and elsewhere about the franchisor. Check the franchisor’s employment history, how long they have been managing franchisees and any litigation history they may have been a party to.

Finally, consider retaining the services of an experienced franchise attorney to review the franchise agreement with you. This will help ensure you have a clear understanding of all of its contents.

The Impact of Franchising in America

Periodically, the International Franchise Association Educational Foundation publishes a study developed by PwC that measures the contributions of franchising to the US economy. The key economics measured in the study were jobs, payroll output and GDP establishments. It’s exhaustive research that even presents the impact on a state by state basis.

Following are some of the findings from that study (2007 data, the latest data available):

More than 828,000 establishments operated out of US franchise systems. They produced the following:

9.1 million jobs
$304.4 billion in payroll
$802.2 billion of economic output
$468.5 billion to the GDP

In addition, franchised businesses were 2.8% of all non-farm business establishments and their output contributed to 3.4% of the total US GDP.

Job Data

Franchising is a prolific employer. This is how jobs generated by franchising stack up compared to other sectors of the economy:

Durable goods manufacturing 9,171,500
Franchised businesses 9,125,700
Financial and insurance 8,801,600
Real estate and rental and leasing 7,765,500
Wholesale trade 6,582,600
Transportation and warehousing 5,949,900
Nondurable goods manufacturing 5,300,300
Information 3,556,900

Jobs generated by franchising are number two to durable goods manufacturing.

This pie chart from the report that shows how franchising jobs are distributed among the different businesses.

When you break it down by state the number of people employed because of franchised businesses was the greatest in New York, Illinois, Florida, Texas and California. On total jobs in a state, franchising had the greatest impact in Mississippi with 15.8% of Mississippi’s private sector jobs related to franchising. In fact, in every state franchising ranked over 10% of private sector jobs except in New York, Rhode Island, Massachusetts and the District of Columbia.

This data underscores the considerable contribution franchising systems make to the US economy. You can read a PDF version of the study at http://www.buildingopportunity.com/download/Part1.pdf.

Fred Morache has spent many years in the franchising business and is currently the managing franchisor partner for iSold It and Postal Connections of America franchises

How to Decide Between an Independent or Franchise Business

How to Decide Between an Independent or Franchise Business

When you decide to buy a business, one of the first decisions you will face is whether to purchase an independent or a franchise business. People succeed in both kinds of enterprises but there are significant differences between the opportunities. A big part of the choice may also be how well either one meshes with your personality. Talk with family, friends and trusted advisors to help get insights to this major career choice. Here are some points to consider:

Business Model

As an independent business you can change, add or eliminate products and services as you assess what works best in your market or even determine what your personal feelings are about what you sell.

A franchisor usually makes those decisions for a franchisee.

However, an independent business owner does not possess the security knowing that product lines and services have already been tested and maximized for the market. Franchisees give up the decision-making independence but reap the benefits of the tried and true.

Costs

In most cases, franchises have lower total investment expenses, especially up front. But, they have to pay ongoing royalties and may have little say in the timing and scope of other investments and renovations.

If an independent business owner is having a cash flow issue, expansion can be delayed. The owner can dictate the terms of any projects they pursue.

Brand

This can be a big advantage for franchise buyers. If the brand is well known and constantly cultivated, they will benefit from that exposure. It’s unlikely that an independent business owner will have the advantage of brand recognition unless it has been proactively marketed.

Resources

Franchisees have the advantage of a business system, a network of suppliers, marketing support and other services. These are especially helpful to those who might be lacking formal business education and experience.

Independent business owners are on their own. They have to develop their own supplier network, set price points and develop marketing strategies, all vital and daunting tasks, particularly for the novice. It can also result in a lot of trial and error to help figure out what works best which costs time and money. The independent business owner, however, retains complete control.

Support

Who can an independent business owner call in times of trouble? Maybe an outside advisor. A franchisee can call other franchise owners knowing they are experiencing the same situation. They can also call the corporate headquarters to get assistance in everything from training to troubleshooting. That can bring a significant degree of comfort to the entrepreneur taking the business ownership plunge for the first time.

At the end, make sure whichever opportunity you select matches your personality.

Fred Morache has spent many years in the franchising business and is currently the managing franchisor partner for iSold It and Postal Connections of America franchises.

(Pic from Te-deum blogspot)

Eight Ways to Finance a Franchise

The most important step, if you are seeking financing to buy a franchise, is to create a business plan. Banks, private lenders, and most money sources require a complete, vetted plan to decide on the credit worthiness of your business.

A thorough business plan explains how the money will be used, the state of the industry, a market analysis, the marketing and pricing strategies, your financing sources and costs/sales projections. Many resources are available to help you develop the business plan including the franchisor you are considering.

If you are considering financing a new franchise business, there are many routes you can explore to finance your dream. Below are five of them:

Leasing- If your franchise involves equipment, you may want to consider leasing instead of purchasing it. Leasing allows you put your working capital elsewhere and also preserves your lines of credit. This way of financing has been used by franchises where the vast majority of start-up costs include fixtures, equipment, signage, or other tangible assets that can be put on a lease.
Securities-based credit lines- Use your stocks, bonds and other securities as collateral to obtain a line of credit (LOC). This is not reported to your credit bureau.
Unsecured LOCs- There are programs available that will offer you a business LOC to fund your franchise. You pay a percentage on the loan, very similar to a credit card. No down payment is required and it is not reported to your personal credit.

An important aspect of business is to have controllable and predictable monthly costs so be careful about adjustable rates which can go up dramatically. If you’re making a decision to finance your business with debt, make sure you know what the servicing of the debt each month will be. If your interest cost takes an unexpected jump this could negatively affect the breakeven sales you need, increase pressure to raise prices and/or diminish what you can pay yourself.

Secured LOCs- An example of a secured LOC is to take out money against your home equity. If you owe $70,000 on a home worth $200,000, you may be able to get 80% of the difference or $100,400 in this case. Some see this as a risky strategy because if the business fails, it could impact repaying on the equity loan, possibly putting the home in jeopardy.
Retirement Funding- You can use your 401k or IRA to fund your business and not incur any taxes or penalties. This is not a loan you have to repay as your 401K or IRA becomes the banker. But you will need to form a C Corporation to be held in your 401K/IRA as an asset. It is wise to find legal counsel because the C Corporation has to be formed correctly to avoid taxes on the money you use.
US SBA (Small Business Administration) Loans- The SBA offers low interest government loans designed to spur business growth. The loan is made by a bank or financial institution and the SBA guarantees the loan. There are numerous qualifying requirements to get an SBA backed loan. (Note: A recent report co-authored by the International Franchise Association (IFA) stated that lending to franchises from the SBA has increased 60% from the previous year.)
Private Angel Lending- These are private investor sources who tend to be pro-franchise. It’s faster and easier to obtain a loan this way than it can be through conventional sources. There also might be more flexibility in terms such as down payment and interest rates. The challenge is finding and inspiring the Angel with a compelling, logical business plan or having a friend or relative who believes in you and your business plan.
Crowdfunding- Crowdfunding sites consist of groups of people willing to fund worthy business ventures. This is internet based and is used in efforts such as disaster relief, political causes and artist support. It is a relatively new phenomenon for businesses.

KIVA is an example of crowdfunding but it focuses on lending to overseas businesses. So, when you go on that site, you might see a food vendor in Uganda who needs $200 to help buy a booth to display his wares. According to the site, most of the loans are repaid.

For US businesses there are different types of crowdfunding and while it can be a good source of money, there may be some pitfalls, one of which is that the process is very public.

There are many financial firms that offer business lending. A broker that specializes in finding funding for franchisees, for example, may have several alternatives for you to peruse. The broker will help explain all of the financing avenues so you can make a good decision. Some of these brokers also assist writing a business plan for a fee. One online company that does this is www.biz2credit.com. Their business plans are detailed and cover the things lenders want to see.

Do your research to find out which funding source is best for you but make sure that before you do anything, prepare a bullet-proof business plan. It will be difficult to obtain most types of financing without one.

Let us know funding experiences you’ve encounter. There is an enormous amount of capital sitting on the sidelines waiting for the right business to lend to.

When You Buy a Business, Look for the USP and Customer Promise

The most important aspects of any business you will buy are the USP (Unique Selling Proposition) and the Unique Promise you will offer your customer. Successful development of these two concepts fuel most business successes.

For example, for McDonalds (from their website):

USP: McDonald’s brand mission is to be our customers’ favorite place and way to eat and drink.

Unique Promise: Our worldwide operations are aligned around a global strategy called the Plan to Win, which center on an exceptional customer experience – People, Products, Place, Price and Promotion.

Whatever business you may buy, you will need to put a USP and a Unique Promise around the products and services you’ll offer to customers.

But, as in the McDonald’s example, franchises, rather than independent businesses, are more apt to have this developed into a core mission, a set of values and a vision statement that resonates with the public. It’s likely that the USP and Unique Promise were honed over the years as they powered the success of the franchise.

In choosing a franchise opportunity, assess the USP and Unique Promise being made by the Franchisor. The USP may be the brand name and the franchise’s marketing strength or it may be a business formula and how it’s implemented. Headquarters may require tight control of operating practices and the prices you charge or you may have the flexibility to adapt to local conditions.

Often the price of entry to the franchise is the USP. In turn, that price will determine how long it takes to get a return on your investment and when you begin to take profits.

Here are a few factors that can help you analyze the USP and the Unique Promise of a franchise:

How is the franchise formula and business operation different from competitor’s? Does the franchise business offer different products, lower prices or better service or are these factors essentially the same? This is especially important to determine in established business sectors.
Is the brand name a high premium in the cost of the franchise and is it the USP that will bring customers to you as opposed to competitors? Will the brand support the higher cost of the franchise?
Price is very frequently presented as the key USP, especially if the franchise formula is offered by many others. Not only will the initial investment determine how much cash you need (or must borrow), but ongoing royalties, advertising fees and required product costs are all important to consider in defining the Unique Selling Proposition of a franchise. Can you compare the choices you have regarding how much each franchise costs you on an ongoing basis?
Buying a franchise is not a one-time event. It is an ongoing business partnership. What is the Unique Promise the franchisor makes regarding the business relationship, guidance and assistance over time? Is the franchisor’s view of the business in sync with yours?

It’s important to consider how well you’ll get along with the franchisor. Is the Promise one of trustworthiness, a friendly relationship of mutual respect and the willingness to coordinate business goals? The best way to determine this is through a one-on-one meeting with the top person prior to joining the franchise. Take that time to learn about each other’s vision for the business. It’s your “chemistry test” for how you’ll get along. Most franchise agreements are for several years.

Franchises are a unique American invention that has spread throughout the world. It’s typically American to admire the process and results of a well-run business. Franchising is a short-cut and risk-reducer for people who want to be in business for themselves. It’s a way to build an asset that can be sold or passed on to family. With so many good choices it pays to carefully analyze the options from many different angles. Viewing the opportunity in the same way that a consumer would assess the value of a product will help you make the right choice.

Reasons to Consider Becoming a Franchisee

Maybe you’re one of the growing number of baby boomers who have been downsized or have become fed up with the corporate politics. You might be seeking a business to own after serving our country in the military. Or you realize it’s time to act on the entrepreneurial spirit burning within you before it’s too late.

Whatever the reason, the next decision is what type of business to buy. One of the venues you might be considering is a franchise. Because you haven’t delved into it before, you might be unaware of a few key benefits of this business model. Many people have made very good livings under the protective umbrella of a franchise. Following are five reasons why:

It’s Established. A new business would require you to set up everything from scratch. Even with an existing business, you may be buying its problems. In either case, you will have to experiment (which may be costly) to get to the money making formula.

One variation of buying an existing business is purchasing a current franchise. Here the franchisor should be willing to provide a description of the business model and what it takes to work properly. With a franchise, everything is ready to go. Unsuccessful techniques have already been drummed out of the system. What’s left are methods that should work with your investment and efforts.

Marketing. Probably one of the toughest business concepts to execute well as an independent start-up, especially if you’re not familiar with it, is how to successfully market your product or service. Due to the enormous change that the Internet has introduced to business (Think about what it did to the Yellow Pages.), this has become particularly challenging without the help of a franchise system.

The Internet has been a great boost to many franchises that compete with bigger companies that spend millions on mass media advertising. Most franchises are about local business or one-on-one customer connections. The Internet helps make these connections. Look for franchises that help you use the Internet juggernaut in tandem with other marketing ideas.

For example, the types of ads, where to run them and how to reach your target market are all crucial to your business success. A franchisor not only creates advertisements beneficial to all but also provides guidance for what media is most effective for specific business locations.

Pricing. This is a two-part consideration. First, considering the initial investment, starting up a business from scratch can be a tough guessing game. A very common cause of business failure is under-funded start-ups since no accurate cost estimates were available.

Be sure you purchase a franchise you can afford that does not result in an excessive debt burden. And consider how much cash in reserve you need to have. This is the extra money that is needed to keep up with the ongoing cost of doing business before the business can provide a good level of income. The franchisor should be able to give you fairly accurate start-up costs and alerts to extraordinary things that can happen. The franchisor can also give you an estimate of how long it can take to have a new store pay the bills. Finally, consider what it takes to keep your household going and have the cash on hand for that.

The second part of Pricing is how to charge your customers. This often is a mysterious trial and error process with non-franchise businesses. For franchises, in many cases, the franchisor will set the prices or provide price guidelines so that you can make money. This saves you from having to perform the tough task of arriving at the right price point on your own.

Keep in mind, though, that the franchisor cannot set your day-to-day prices unless you sign an agreement that stipulates this is the way you will operate the business. This is especially important to retail businesses where local competition can radically affect pricing. Be sure you closely review your franchise agreement wording around this issue before entering into a long term arrangement.

Support. One of the major pluses of owning a franchise is that you will find assistance and guidance for setting up the business. This support is ongoing through any rough patches you might encounter. In addition to the franchisor, you have a network of other franchise owner-operators with whom you can discuss concerns.

Look carefully for how business information is delivered to franchisees and how easy it will be to get the franchisor’s attention on important issues. Ongoing access to decision makers and personalized attention when needed goes beyond company manuals and online email contacts. Being able to get this valuable input if/when it’s needed, can make the difference between costly mistakes and consistently implementing what works.

Innovation. A good franchisor is always on the prowl for ways to improve the experience of their business owners. This could come in the way of new advertising, additional ancillary products/ services to sell and opportunities to expand beyond the original business model.

Ask the franchisor if new ideas and products are tested or proven when they are introduced. Also, find out whether new things not in the business model when you join up, are optional or if they become mandatory when they are introduced.

Remember, franchisors have a vested interest in the success of their franchisees.