www.franmarket.com
AN ONLINE MARKETPLACE FOR FRANCHISES & BUSINESS OPPORTUNITIES
Franchise SPRING 2006
America's Resource For Entrepreneurs and New Businesses
MARKET MAGAZINE
Should You Buy A Franchise?
16 THINGS To Ask Your Franchisor Before You Invest Franchisors Taking Aim At War Vets
CHINA The Mother of All Franchising Markets
Franchising’s
GROWTH May Come From New Sectors MATTHEW SHAY, President of the International Franchise Association
Women in Franchising.. An Uncanny Marriage
Contents SPRING 2006
Franchise [MARKET MAGAZINE ]
14
Should You Buy A Franchise?
40
Is Franchising right for you? Are you right for franchising? This article will help.
CHINA The Mother of All Franchising Markets
21
Franchising’s Growth Could Come From New Sectors Matthew Shay (President of the IFA) looks at the new sectors that could impact franchising’s growth in 2006 and 2007.
24
16 Things You Should Expect From Your Franchisor There are a lot of things you should expect. This list is only the beginning.
29
Women in Franchising... An Uncanny Marriage. Franchising is the ideal match for most women. Flexible, RelationshipBased, and Huge Growth Opportunities.
www.franmarket.com
5
Franchise [MARKET MAGAZINE ]
New Trend
34
51 How The SBA
Franchisors Taking Aim at War Veterans
Can Help You Start Looking for some general business start-up information? Look to the SBA (Small Business Administration)
53 Score Tips Hands-On leadership
55 Score & UPS Store Success Story
12 What on Earth
10 From the Publisher
is SCORE ?
Franchising is alive and well in 2006!
Get some sound business advice from SCORE counselors in 389 offices nationwide.
23 The Internet &
®
Franchising How one company combines the best of both.
38 Beware the Ambush
Articles from Score
Here’s where many businesses die. When those closest to you say it’s not a good idea.
6
Score helps a young entrepreneur find his way to UPS Store ownership.
57 Score & Sylvan Learning Success Story Score helps couple get their new franchise funded and assures their future success.
58 Score Tips Renewing Yourself as a Leader
46 Surf’s Up!
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Spring 06
International Franchising
64 Closing Quotes
Can you navigate through these waves? If so, a treasure awaits.
Quotes from those who have been there, done that.
HOME FRANCHISES PRODUCTS MAGAZINE
Finding the Right Franchise Online
INTERVIEWS ADVICE EVENTS FRANCHISE SEARCH BY INVESTMENT SEARCH FOR CONSULTANT
INTERVIEWS
“Read Interviews With Top CEO’s From Major Franchisors” HEAR FIRST HAND WHAT MAKES THEIR BUSINESS OPPORTUNITY WORK.
Go to: www.franmarket.com for details.
FIND A FRANCHISE
FIND FRANCHISE EVENTS International Franchise Expo Show Dates Friday, June 2, 2006 Saturday, June 3, 2006 Sunday June 4, 2006 Show Venue Washington Convention Center Washington, DC 20001
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SEARCH FOR A CONSULTANT A franchise consultant can help you find the franchise that’s right for you. One that matches your talents, background, experience, goals and budget. Consultants can be found on our home page for easy access.
FROM THE PUBLISHER
Franchising is Alive and Well Welcome to the Spring 2006 issue of Franchise Market Magazine … the magazine for new businesses. In this issue, we take a bird’s eye view of the entire franchising sector. With over 760,000 franchised businesses in the U.S. … and more than $1.5 trillion being churned into the U.S. economy (9.5% of the private sector’s economic output) while employing over 18 million people, you might say franchising is very much alive and well.
Editor Art Director Managing Editor Associate Editor Assistant Art Director Production Manager Contributing Writers
Robert Pitts George Byfield Michelle Jerla Brenda Brader Rex Wilson Diane Traylor Michael Seid Kay Marie Ainsley Gene Koprowski Mark Howard Terry Wilkerson Howard Bassuk Gerald Moriarty Mark Siebert ______________________________________ Publisher
For those of you just starting out, there are articles that deal with some important issues … “Should You Buy a Franchise?” … “16 Things to Expect From Your Franchisor Before You Invest” … and “Beware the Ambush” which discusses how your closest friends can kill your plans before you begin. For those who have been in the marketplace, we asked Matthew Shay, President of the IFA (International Franchise Association) to discuss the new areas of growth … demographically … in “Franchising Growth May Come From New Sectors”. If you’re not interested in franchising, that’s OK. There’s plenty in this issue that discusses how to start a business, funding, business plan development, and plenty of good old-fashioned wisdom from leaders in the business world. You’ll find tips provided by SCORE... success stories involving SCORE counselors & franchising … as well as insights all of us could use. On our web site, www.franmarket.com, there is an ever expanding list of franchises to consider and franchise advisors to assist you. Please be patient with our site as we are still adding features, and have many franchisors knocking on our doors. I look forward to seeing you all at the IFE (International Franchise Expo) show ... where we are a sponsor … June 2-4, in Washington D.C. (see ad in this issue). The magazine you are holding will be available at the show at no charge.
Research Manager Advertising Director East Coast Ad Manager Midwest Ad Manager West Coast Ad Manager
Robert Dallas bdallas@reni.net Cheryl Watwood Brandon Moxam bmoxam@reni.net Nicky Harvey Matthew Russell Kenna Rogers
Florida Sales Office: 150 3rd Street SW, Winter Haven FL 33880 Telephone: 863-294-2812 ___________________________________________ Webmaster Jay Hook
Advertising Director
Brandon Moxam bmoxam@reni.net Internet Sales Deanna Pearce dpearce@reni.net ___________________________________________
Franchise Magazine is published quarterly by RENI Publishing, Inc. 150 3rd Street SW, • Winter Haven FL 33880 Telephone: 863-294-2812 Fax: 863-299-3909
President & CEO Group Publisher Operations IT Services
Joe Jensen Jim Phillips Denise Harwell Jay Hook
Bob Dallas Publisher P.S. Don’t miss our next issue this summer, which will be in-market late June!
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Information in this magazine is subject to change without notice. While every reasonable effort has been made to ensure that the information was accurate as of publication date, RENI and its employees, agents, clients and distributors shall not be liable for any damages arising from the use of or reliance on the information contained in this publication or from omissions to this publication. _________________________________________________
for starters Business Counseling
WHAT ON EARTH IS SCORE ? ®
The SCORE Association, headquartered in Washington, D.C., is a nonprofit association dedicated to entrepreneurial education and the formation, growth and success of small businesses nationwide. SCORE "Counselors to America's Small Business" is the best source of free and confidential small business advice to help you build your busi-
solid business counseling and informative educational workshops. SCORE "Counselors to America's Small Business" is the best source of free and confidential small business advice to help you build your business—from idea, to start-up, to success. SCORE's 10,500 volunteers have more than 600 business skills. Volunteers are working/retired business owners, executives and corporate leaders. They share their wisdom and lessons learned in business with aspiring entrepreneurs. Business counseling can help you start, grow and manage your business. SCORE is a resource partner with the U.S. Small Business Administration.
Small business owners wear many different hats. On any given day you manage product development, marketing, sales, operations, personnel and finances. SCORE’s experienced business counselors can help in areas where your expertise may fall short. Local SCORE chapters offer low-cost business workshops and seminars for both start-up and in-business entrepreneurs. Training covers a variety of topics, from writing a business plan to importing/ exporting to e-commerce. Workshops also offer a chance to network with local, small business owners.
[
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offices nationwide.
O "How to" articles and business templates
How to reach Score
O Low-cost workshops at 389 chapter
]
SCORE can also be found on the Internet at www.score/org . SCORE's presence on the Internet makes it possible to reach more small business clients than ever with mentoring and counseling services.
advice online.
counseling at 389 chapter offices.
aspiring entrepreneurs since it began.
SCORE's Presence on the Internet
O SCORE offers Ask SCORE email O Face-to-face small business
Score has advised over
“7,200,000”
Services for Entrepreneurs
ness—from idea, to start-up, to success. Have you ever paid $100 for a one-hour consultant? You probably won’t pay that for an entire year of SCORE services because business counseling is free and confidential. When considering starting a business, or while in the midst of contemplating an expansion, make SCORE the place you turn to for
HOW MUCH HAS SCORE HELPED
If you need help with your franchise or small business, please contact SCORE for online counseling or to find your local office for face-to-face business counseling and workshops. SCORE Association 409 3rd Street SW 6th Floor Washington, DC 20024 1-800-634-0245
www.score.org
for starters
SHOULD YOU BUY A FRANCHISE? resources are created for those markets. When a business licenses its tradename and operating systems to a third party in exchange for a payment, and exercises some control over the operation of the third party's retail unit, the business generally is defined as a franchise.
— by: Micheal H. Seid
It is important in understanding franchising to recognize that McDonald's does not "franchise" hamburgers nor does Midas "franchise" mufflers. What they both franchise is a business system - and it is that system that delivers the products or services. It is the entire method of doing business, the name, the product, decor and methodology of delivery that is franchised.
It is impossible to drive down any Main Street in American today without passing a franchised business. Franchising has grown so rapidly since the end of World War II that by the end of this decade over 50 percent of every retail dollar spent in the United States will be from an automobile, beverage, hamburger, dry cleaning or one of the other 75 industries which make up the franchised marketplace.
While sophisticated investors are becoming a major force in franchise ownership, it has been the individual, investing in a franchise opportunity, that has fueled franchising's growth. These franchisees typically express their reason for buying a franchise as a desire to achieve the Great American Dream of financial security and independence. They see themselves as entrepreneurs.
Internationally, franchising has become one of the great intangible exports for the United States. Franchisors have penetrated the iron curtain with a long list of industries including restaurants, retail and service providers. The markets in unified Europe, the Pacific Rim, Mexico, the Middle East, Asia, South America, and even Africa are absorbing American style franchising at an ever increasing rate. This export of business technology to the emerging markets is one of the great stabilizing social forces as jobs, services and the supporting
Truly though, an entrepreneur or an independent person should never buy a franchise. If they want independence and the ability to control everything, they should start their own business. For a franchise system to be successful, it is the responsibility of the franchisor to control the system and - - - It is the responsibility of the franchisee to follow the methods laid down by the system.
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The principal reason for the franchisor to exercise control is to protect the public's ability to rely on the franchisor's trademark as an indicator of
the system’s products or services, delivered consistently from location to location. Another reason is to protect the franchisees, who rely on the franchisor to ensure that other franchisees do not diminish the value of the trademark, and by extension the value of their franchises, and to keep the franchisor financially sound. Your decision to purchase a franchise should be based upon two broad understandings: First: You should have an understanding of the advantages and disadvantages of franchising and Second: You should have an understanding of the franchise you want, and how to evaluate it. The public has become accustomed to a certain level of quality and consistency from brand name franchised locations. The established franchisor, through the trademark, provides the franchise with a customer base accustomed to shopping under the marks. It is this brand identification which makes it easier for new franchisees to compete with the well established —continue on page 16
Look for the quality of the Business System “McDonald’s does not ‘franchise’ hamburgers. They franchise their business system.”
for starters SHOULD YOU BUY A FRANCHISE? independent operators and against well established chain operations. Franchisors, having survived their mistakes while developing the franchise and operating their prototype locations, can guide their franchisees to not make the same mistakes. Upon joining an established franchisor, franchisees receive comprehensive initial training in the operation of the franchise system, its product, services and methodologies. The franchisee benefits from the operations manuals, site selection, store design, construction programs and continuing system support which would not be available had they started independently. They not only have their franchisor as a seasoned partner from whom they can get answers, they also have the network of other franchisees who can provide added assistance in the continuing operation of their business. In essence, many of the major stumbling blocks which could lead to failure are removed by a good franchisor. These franchisors prepare their franchisees for the business and then continue to support them. A statistic often cited about small business failure is from The Department of Commerce, which estimated that over 80% of independent small businesses fail in the first five years. The International Franchise Association estimates that during the same five years only 5% of all franchisees fail. "Failure", as commonly used in franchising, must be carefully understood by the prospective franchisee. Business failure refers to the closing of the location's doors, on a permanent
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basis. In a franchise system, statistics on failures do not include franchised locations which are repurchased by the franchisor, and continue in operation as a company owned location, or as a location resold and operated by a new franchisee, at times with a financial return to the original franchisee. Franchisors will often acquire locations for strategic reasons, which may include a desire to operate more company owned locations or because a franchisee is not performing to standards. Instead of terminating the relationship through litigation, the repurchase of a franchise may be the most attractive route. On the other hand, franchisees often sell or abandon their businesses because they have not received the rewards they expected, or for other reasons including retirement or the desire to change their life patterns. Therefore, it is important when discussing failure rates with any franchisor that you ask about reacquisitions and transfers. New UFOC (Uniform Franchise Offering Circular) requirements will provide for this information. Request the names of those franchisees involved in the transactions and determine for yourself why the businesses were sold. This difference in failure rates is an impressive reason to consider in favor
[
In The First 5 Years...
80% of Independent Businesses Fail
vs
5%
of Franchised Businesses Fail
]
of buying a franchise. However, the Small Business Administration revealed in a recent study that the success rate for independent start-ups is similar to that of franchisees when the new business had adequate capital to support the business. Independent businesses do not fail
solely because of poor quality products or services. They often fail because they could not anticipate their capital requirements, and do not have the experience or resources to fully analyze the risks they face. Capital adequacy is a function of business uncertainty and is the primary risk for new enterprises. Will the location they selected provide them with sufficient customers? Is the size of the location too large or too small? Is the rent too high? How many staff are required at what times of the day and how much should they be paid? Is the equipment selected the best for the operation and is the price for the equipment fair? These and hundreds of other issues must be considered and answered. Well developed franchisors have experience in starting and operating the business the franchisee are going to operate. They can guide their franchisees in making these critical determinations. That experience lessens the franchisees risk of mistakes, helps them to avoid underestimating their capital needs, and therefore lessens their risk of failure. Franchising is not a perfect vehicle and has disadvantages. It is important for new franchisees to recognize that many of the disadvantages inherent in franchising may also be advantages. One that is often perceived as a disadvantage is the public's perception of the system as a chain. When they receive great service at one location they assume they will get great service at all locations. The reverse is also true. You will be judged not only by your performance but by the performance of all of the other franchisees. Therefore, when evaluating a franchise make certain that the franchisor has the right in the agreement to enforce the systems standards and has strongly exercised those rights. You need assurance that performance standards will be enforced and enforced uniformly. —continue on page 18
for starters SHOULD YOU BUY A FRANCHISE? The franchisor's standards on product and services are restrictive, but they provide the public with assurance on the meaning of the trademark. The limitations on territorial rights may constrain your market and income, but it allows for other franchisees to contribute with you to the market's advertising fund and provides the critical mass needed for the system to compete effectively against the competition. The possibility of being terminated for failure to follow the system, or the franchisor having the right to approve the person to whom you may want to sell your business, protects you from those other franchisees who may not perform as well as you and to whom your success is tied. Therefore, many restrictions placed on a franchisee can also be viewed as an advantage for the franchise system. But, for those franchisees who see the loss of independence and the other restrictions as a disadvantage, the proverbial cup will always be half empty, and the advantages of the system will always be unbearable personal disadvantages. Finally, have realistic financial expectations. Should you find the franchise with the $30,000 investment and the 2 percent royalty that provides you with a six figure income in the first year and returns your investment in six months, please give me a call. I will immediately leave my consulting practice and join you in that investment. Unrealistic expectations is the greatest disadvantage of every new business, not just franchising. Financial realism is important. Select an industry which meets your personal needs and likes. If you will be embarrassed to tell your friends that you own a drycleaning business, even it is highly lucrative, don't buy one. If working twelve hour days, seven days a week is not your idea of fun, make certain the franchise industry you
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select from has better hours. If you need $100,000 a year to support your family, make certain that the other franchisees in the system you select make that type of return. Your answers will come from two main sources. The personal meetings with the franchisor at their headquarters and your contact with other franchisees already operating in the system. Begin your examination of the offerings in the industry that meets your needs. The obvious choice may be the well established company with hundreds of franchisees, but keep in mind, many of the newer opportunities have entered the market with innovations that may not be possible for older systems to incorporate. Contact each franchisor in the industry and obtain from each an information package. Once you have received and reviewed the information about the companies you contacted, select those which meet your criteria and arrange to visit their headquarters and meet management and the staff. Come prepared, with your questions written down and do not be embarrassed to ask them. Be satisfied by the answers and do not be reluctant to probe for further information. Buying your franchise is likely to be one of the most important personal business decisions you will ever make - be sure. One final piece of advise in making your franchise selection is to suppress your emotions. Never buy a franchise based upon the sizzle of the brochure or the salesmanship of the franchisor. Base your decision on the quality of the investment and on the available facts. Make certain before you invest in a franchise that it will benefit you both personally and financially. —FMM Michael Seid is CEO of Michael Seid & Associates. www.msaworldwide.com
[ COVER STORY ]
“Services related to the baby boomer generation, particularly as it matures, are in demand,�
Franchising’s
GROWTH May Come From New Sectors Franchising Now Contributes $1,500,000,000,000 (that’s “trillion”) to the U.S. Economy n spring 2004, the International Franchise Association’s Educational Foundation released its benchmark study, “The Economic Impact of Franchised Businesses,” which reported there are 760,000 franchised businesses in the United States. These businesses currently generate 9.5 percent of the private-sector economic output or approximately $1.5 trillion … and provide more than 18 million jobs. International Franchise Association President Matthew Shay believes these statistics and others in the study provide an impressive backdrop for efforts to maintain and advance franchising’s position in the marketplace for 2006 and beyond.
I
With the economy showing strong signs for positive gains, and a majority in U.S. Congress supportive of small business, all signs point to new opportunities for growth in the franchising sector, both here and abroad. With continued optimism, franchising leaders are keeping a close watch on trends and growth patterns, both in the sector and the overall marketplace to help optimize their response to ever-changing consumer appetites. Shay, who leads the world’s oldest and largest trade group representing franchising, enumerates several current trends in franchising. These trends include consolidation of brands among www.franmarket.com
21
[ COVER STORY ] existing franchisors who recognize the synergies of operating multiple brands; considerable growth in multi-unit and multi-branded franchisees, as well as area representative relationships; more international growth, with franchisors beginning overseas expansion earlier in their operations; increased use of technology, especially in management and reporting tools; growth in marketing alliances between franchisors; increased use of franchise broker networks; and, wider use of earnings claims in franchise disclosure documents. In market trends, Shay notes the increased growth in the service sector, especially those involving the changing needs and wants of the American family. “Services related to the baby boomer generation, particularly as it matures, is in demand. Senior services are huge and becoming segmented and specialized. And, life-style services, such as MedSpas and meal preparation
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stores where you ‘make,’ ‘take’ and ‘bake,’ are in high demand as working couples have more discretionary income and view time as precious a commodity as money.” Another evolving trend is the population and demographic change in America, which franchising continues to adopt and embrace. Minorities, including African, Hispanic and Asian Americans, are leading the U.S. population and will make up the principal share of new growth in the coming decades. The U.S. Census Bureau estimates these minorities will represent 50 percent or more of the total population by 2050. In addition, studies have shown minorities are currently opening new businesses at a rate far greater than their white counterparts. In many areas of the country, these minority groups represent new segments of consumer purchasing power.
What does this mean for franchised businesses? In the future, the pool of potential franchisees and customers will look dramatically different than it does today. Franchisors must increase their efforts now to reach out to this growing segment of the population so as not to be left scrambling later. Now is the time to be building greater brand awareness among these rapidly growing segments of the U.S. population. Looking ahead, the IFA president views the year ahead as an opportunity to build on what has already been accomplished. The association that represents more than 1,000 franchisors, 8,000 franchisees and 400 suppliers will continue to educate policy makers about the tremendous impact that franchising has on the economy and continue to build relationships between franchise systems and potential entrepreneurs. —FMM
TREND
THE INTERNET & FRANCHISING How One Company Combines the Best of Both he Internet is still emerging. Yet as of 2006 depending on what source you use, it is estimated that there are nearly 200 million homes on the Internet in the US. And almost $12 billion is being spent on advertising online. All together, it is a marketplace representing billions of dollars with an increasing impact on more and more industries. Franchising contributes $1.5 trillion to the US economy involving 760,000 franchised businesses and employing over 18 million. Franchising began primarily in the retail sector and has expanded over the years to over 76 industries.
T
Some have thought the Internet could slowly replace franchising, and in a few cases it has done that. Take Amazon.com … through a single web site, it has grown to $3.05 billion in sales (Barnes & Noble $ 4.54 billion) with no bricks & mortar, no stores or shelves, not even a network of web sites. Amazon has grown through its powerful affiliate program and by marketing itself offline in major media.
Entrepreneur Magazine’s Franchise 500 and #1 Technology Sector.
Annual in the
The company prides itself on developing franchisees that know how to speak in regular business language, not “tech-speak” or online jargon usually associated with the Internet. Its business is helping other companies make money online. The company utilizes the full benefits of the THE INTERNET & FRANCHISING Internet to teach, train, have THE COMPANY workshops, training semiTHAT KNOWS nars, regional & global conHOW TO ferences, and Mentoring EXPLOIT BOTH Programs with its franWILL BE THE chisees.
But there is one company which has used Franchising as a reliable business system, and the Internet as a far reaching tool to build a global consultancy which itself targets companies that want WINNERS to do business on the Internet. That company is Many franchises today are WSI, a Toronto based franforced to have physical chisor with 1500 offices in 87 counmeetings where franchisees fly into a tries. Its expanding franchisee base big city to learn what the new product has provided profitable Internet soluline will be. WSI simply has a webinar. tions to SMEs (Small & Medium sized Still others have no controls over what Enterprises) from web site creation to their franchisees are doing on the robust e-commerce stores that rival Internet, with some creating their own Amazon itself. After a decade of site, while others have no site at all. growth, WSI is ranked number 50 in
WSI makes full use of the Internet, both as a communications link to its expanding franchisee base, but also in advising clients how to increase their profits on the Internet. The Internet & Franchising can work very well together. WSI is one company that shows us all how it’s done. Interested parties may find WSI at www.franmarket.com.
www
Top 10 Countries of Internet Users #
Country or RegionInternet Users
1 2 3 4 5 6 7 8 9 10
United States China Japan India Germany United Kingdom Korea (South) Italy France Brazil
TOP 10 Countries
203,824,428 111,000,000 86,300,000 50,600,000 48,722,055 37,800,000 33,900,000 28,870,000 26,214,174 25,900,000 653,130,657
Source Nielsen//NR Dec/05 and others
www.franmarket.com
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Things to Expect From Your Franchisor Before You Invest! BY HOWARD BASSUK
I
f you’re thinking of buying a franchise, it’s important that you understand what you should expect from your franchisor. With thousands of franchises to choose from, you can be sure that there will be many differences in what they offer you, and what you can expect. Despite the differences, there are several things you should expect from any franchisor. It’s important that your expectations be reasonable. At the same time it’s just as important that you not settle for less than you should. Over the years, I have heard some pretty amazing things that prospective franchisees thought they should expect from their franchisors. I’ve heard everything from franchisees suggesting that the franchisor should to the day-to-day work for the franchisee, to the idea that the franchisor ought to pay for the furnishings, fixtures and equipment that would then be owned by the franchisee. It’s hard not to smile at some of these expectations of what a franchisor should do. However, there are many real and essential expectations that a
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prospective franchisee should have about what their franchisor should be able to provide for them.
1. A franchisee should expect a franchisor to have a successful system that can be easily transferred from the franchisor to the franchisee. If the system isn’t successful or proven why should you as a franchisee pay for it? Don’t put yourself in the position of having someone learn their business on your fees!
2.
You should expect the franchisor to spend the time to answer your research questions before you buy. There are certain legal restrictions like those concerning earnings representations that may prevent a franchisor from answering some questions. But, other than those prohibited by law, all questions should be answered.
3. You should expect that your franchisor is someone you feel you will be compatible with. You should like your franchisor, and feel that the franchise’s
vision of the future conforms to your own. It is very important for you to believe in the future plans of the franchise. Remember that very few things stay the same, and certainly businesses will need to change to stay competitive.
4. You should make sure your franchisor and your franchise agreements are fair. The nature of a franchise agreement is usually at least somewhat slanted towards the franchisor. The owners of the franchise company have taken a risk and developed a business that you are asking them to teach you. In return, they will want to be protected, and they will want to control certain parts of the system. However, make sure that the street runs both ways. Find a franchise that grants you unlimited rights to renew (an evergreen clause) and rights to sell and transfer your franchise easily and fairly. Most importantly, find a franchise that recognizes your equity rights in the business that your are going to work so hard to build.
N E X T ST E P S
5. You should expect your franchisor to help you find a location that is suitable to your needs. Legally, many franchisors are afraid to “insist” that you take a location that they have found. Conversely, many are loath to let you pick a site on your own. The best solution is to have a franchisor that works very actively with you to find a location, and that gives you several choices to pick from. Find a site that both you and the franchisor like, rather than one that only one of you believes in. Make sure that you don’t try to become a demographics expert overnight. It happens to all of us. We sign the franchise agreement, and all of a sudden we are magically endowed with great wisdom and insight. Resist this temptation. I have seen franchisees insist that they could recognize a good site better than a franchisor who has hundreds of locations and over 25 years of experience.
6. You should expect your franchisor to provide you with quality training. Franchisors typically assume that you have no prior independent ownership experience. That means they not only have to teach you about business, but about the franchisor’s specific business. Be certain to talk to some of the newer franchisees and see if the training they received was complete enough to get them successfully into business with the fewest possible problems and glitches. Check to see if the franchisor has a real commitment to current and future training, too. Find out what happens if you need additional training later on, either for yourself or for your employees. Will you have to pay for it? The franchisor should, within reason, make training available to you, either at no charge or at a reasonable rate.
7.
Your franchisor should visit you and help you at your location after you have opened for business. The purpose of the franchise fee that you are paying is to acquire the license to operate your franchise and to cover the costs the franchisor incurs while you are getting into business.
The fee will cover the franchisor’s cost of marketing to find franchisees, and will cover the costs of consultants, brokers, real estate agents, trainers, etc. There should also be enough of the fee allocated to local follow up so that you are given whatever support that you will require getting your business launched. There’s a trap here. Sometimes franchisees think that a lower franchise fee equates to a better buy. In fact, in many cases, nothing could be farther from the truth! If the franchisor does not have the funds to help train you, follow up with you, and do what is necessary to give you the best chance for success, you will have saved nothing and probably cost yourself your business!
8. You should expect your franchisor to have the name recognition and/or growth possibilities that you feel are needed to give you an advantage in implementing your personal business plan. Often you will have to make decisions that balance name recognition (usually a bi-product of size and age) with growth opportunities.
9. You should expect your franchisor to think of you as an associate, a “partner”, and as a customer. This is a hard balance to strike, but you want your franchisor to be franchisee friendly. You can often find out much more about how a franchisor behaves by talking to other franchisees than you can by simply reading the franchise offering circular.
10. You should expect your franchisor to be future oriented. It’s not enough to have a system that works well today, and has succeeded up until now. Businesses, like the world around them, constantly change. Your franchisor must have a good, clear vision of the future, and you must agree that the vision is the right one before you buy. Too often franchisees get dissatisfied when a franchisor does not change with the times, yet that same franchisor might have demonstrated little propensity to change in previous years, and you as the franchisee could spot that
likelihood by your investigation before buying. A few days ago I was talking to a franchisee who bemoaned the fact that the franchisor did little “national marketing” for the franchisees. I asked him how much each franchisee had to contribute to such a national ad fund (typically it is one to three percent of sales) and he told me that there was no mandatory contribution required by the franchisor. I then asked him why he was surprised that little was done in that regard and why he didn’t realize that would be the case when he purchased the franchise. Be careful here: Oftentimes a franchisee will think a franchise is more attractive because it does not charge fees that are charged by other franchisors. Later on, as mentioned above, the franchisee might be sorry that the charges don’t exist because the franchise has grown to the point where the fees would be more than offset by the benefit that would accrue to the franchisees by their use! A better solution is to find a franchisor that has the right to collect fees even if they don’t presently do so, as long as there is some surety as to how and when those funds will be spent.
11.
Look for franchisors that are “inclusive” in their dealings with their franchisees. Look for franchises that have strong advisory councils, and/or franchisees represented on the franchisor’s Board of Directors. You want to be part of a team, and want to know that your voice will be heard. Look for franchisee friendly franchisors. Franchisors that are accredited with groups like the American Association of Franchisees and Dealers have to agree to certain standards in working with their franchisees. If they also meet your competency standards, they might be great franchisors to look at.
12.
Look for a franchisor that has a solid record of keeping its franchisees in business successfully. Some franchisors will move heaven and earth to help you succeed in business. Others will assist you to sell should you want www.franmarket.com
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N E X T ST E P S
to leave the business. Both are extremely important should you run into trouble, or want to leave the business altogether. Very often younger franchisors will have neither the resources, nor the experience to help you if you get into financial trouble. Sometimes a bigger and more established franchisor will have those resources, and will use them for you benefit (and often their own).
13. You should expect your franchisor to have the human and financial resources to provide the support needed to give you the best chance of being successful. Too often franchisors, like other growing companies, are short of money, people or both. While a younger company will obviously not have the resources of a major corporate behemoth, you must still make sure that your franchisor, regardless of size, has the resources needed to do the job for you properly.
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14. You should expect your franchisor to be relatively litigation free. Be sure that any litigation against the franchisor would not affect your ability to do business. In today’s litigious society it’s ridiculous to expect a franchisor to be litigation free, but there are many excellent franchisors that have little, if any litigation, year in and year out.
15. Expect your franchisor to use technology and communications to keep you ahead of the competition. Don’t underestimate the importance of this. If a franchisor is slow to embrace new technology, you could suffer.
16. Expect your franchisor to be selective in whom they award franchises to. Ask the franchisors that your are talking to how many people they turn down for a franchise, and why. In part, the strength of a franchise system will be based on the quality of the people involved in that system. If a franchisor
selects better franchisees, chances are the system itself will be stronger. There are a lot of things you should expect from a franchisor. This list could be even longer, but what really matters is that you make sure that the franchise that you become a part of has the ingredients necessary to help you become successful. Think of a franchise as a box of tools. You will want to have the very best tools for the job you want to, but you will still have to be the one that uses the tools successfully. The more and better the tools, the greater the chances that you will be successful in your job of building a successful business. So, expect the franchisor to provide you with great tools for the job you’re considering. Just remember that tools alone will not get the job done. —FMM Used with permission. Howard Bassuk is Founder and President of FranNet.
& WOMEN n
FRANCHISING An Uncanny Marriage BY MARK HOWARD
W
ith the complexities of juggling a family and career, sellemployment, particularly franchising opportunities, are especially appealing to women. "Seventy Five percent of
the adult population has that grain of sand in their shoe. They want to be self-sufficient," according to Terry Powell, CEO and Founder of The Entrepreneur Source. Women are definitely no exception. "We want to be our own boss and dictate our own lifestyle and work hours," says Dr. Tracey Banks, president of North Central Women's Health Partners and co-owner of two franchises. Franchising enables women to achieve those goals. "Franchising offers two major advantages for women," says Dr. Banks, "1) self-employment using proven methods and 2) Flexibility to cater a business to the lifestyle we want."
This article was first featured in Black Enterprise Magazine
Ms. Lorenz offers some "woman-to-woman" advice to women wanting to own their own franchise.
1) What are your lifestyle goals? How will the franchise fit within the framework of family, community, volunteer service and personal time? Especially consider the commitment to the franchise as it relates to a spouse and children if this applies. Have clear honest, parameters to these questions.
2)
Work with a franchise consultant, preferably someone who is recommended to be objective and knowledgeable about franchise opportunities. A qualified consultant will not push you into making a decision, but facilitate the path and set milestone decision points for you.
3)
WOMEN ENJOY THE MANY OPTIONS FRANCHISING OFFERS. Rose Lorenz, a blossoming franchisee with Educational Outfitters also believes that the primary benefit of joining a franchise vs. creating a business from scratch is "the infrastructure that comes with the franchise package." The infrastructure doesn't just refer to the physical systems (equipment, store designs, processes, etc.), but also the network of franchisees, vendor partners, and experience. According to Mrs. Lorenz, "a successful track record with other franchise locations will assist women when they're securing startup capital, selecting a location, managing the human resource part of the business and establishing marketing and sales strategies. Women, by nature, can network, multitask, and delegate. With these foundational skills, applying an existing business model created by a franchised organization makes sense for us, as long as the product or service is something we believe in." Traditionally, women have found franchises that cater to the needs of
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women/children or service oriented to be very gratifying and fulfilling. Women are able to join any franchise system that exists; however some of the more popular ones for women have been those systems that offer the most flexibility or control over their schedule. These "quality of life" businesses may range from home-based businesses to those that have limited weekend hours or 9-5 hours. A perfect example of a home-based franchise that caters to the typical lifestyle of a busy woman is Housewarmers. Housewarmer, a newresident welcoming service, was the idea of Founder & CEO Rachel Ireland and is a business that allows her and her franchisees to balance work with their family lives. Several owners operate the business on a part-time basis from their homes, while others operate it on a fulltime basis. Another example is Parcel Plus, a postal center that is centered in residential communities. It is very attractive to women and husband/wife combinations because it offers limited weekend hours and 9-6 weekend hours.
Speak with as many franchise owners as possible. A reputable franchisor will be able to provide you with locations and contact numbers for franchisees in your area. Ask some basic questions: What works well for you as a franchisee? What does the franchisor provide for you to be successful in your franchise? What would you like to see done differently in the franchise organization?
Additionally, Jacqueline Prude, a 6 year franchisee with the Coverall Franchise in the Detroit area offers this personal testimony to women considering a franchise vs. starting your own business: "I used to own an independent beauty supply store prior to joining the Coverall Franchise. When you are independent, all of the other businesses in your category are your competitors, and it is very hard to compete and succeed alone. You're not in business by yourself when you are in a franchise. With a franchise, you're almost guaranteed. It's already been proven a success by the founders. If you have a good attitude, are outgoing, love people and possess some general skills, you can make it.
The training typically provided by a franchise is phenomenal. You sit sideby-side with your new franchisee peers, and experience a cohesiveness that is hard to find with an independent business. The franchisors often have a Ranchisor Day or Conference where new and old franchisees come together to discuss their businesses, their challenges, their successes, their best practices, and their friendship. This is so wonderful when I compare it to the prospect of starting or having your own independent business. I have no regrets!"
IFA's Bonny LeVine Award in 2005 for her ongoing efforts to mentor women seeking careers in the sector. Ms. Barnes has long promoted franchising as a vehicle for economic development. She provides diversity leadership for all of Yum! Brands in forging strategic business partnerships with national and local community-based organizations, multicultural groups, and minority and women's associations. Ms. Barnes was also instrumental in creating the IFA's Women's Franchise Network, Minorities in Franchising Committee and Women's
Franchise Committee. There definitely is a future for women in franchising. Franchises offer a buffet of opportunities that can fit any lifestyle through already proven methods. As more and more women decide to become self-employed, they are turning to franchise models that aid in the balance of career and family. Maybe it's time to check the sand in your shoes and see if there is a pearl of a business waiting to be conquered by you.—FMM Used with permission. Mark Howard is President of Howard Enterprises, Inc.
According to a recent study sponsored by the U.S. Small Business Administration, for the first time in 10 years, self-employment rates are on the rise across the country. Technological start ups, minorities, women, and baby boomers are driving the surge. Women now make up 32 percent of the country's 12.2 million business owners, up from 25 percent in 1983, according to the SBA. "More women, African Americans and Latinos are climbing the entrepreneurial ladder that is selfemployment and realizing the advantages of becoming franchised smallbusiness owners," said International Franchise Association (IFA) President Matthew Shay. If you are looking for a couple of good female role models in the franchising community, a few females on the move (in franchising) are: Linda L. Burzynski and Terrian C. Barnes. Ms. Burzynski is the president and CEO of Computer Moms International, a nationwide leader for providing affordable IT services to the residential market. Computer Moms' (Mentors on the Move) franchisees are trained on a broad array of skills, offering a one-stop, end-to-end solution for the home or small business. Recently, Ms. Burzynski was elected to the International Franchise Association's (IFA) board of directors and was the 1998 recipient of the distinguished Bonnie Levine Award from the International Franchise Association, honoring individuals who further the cause of women in franchising. Similarly, Ms. Terrian C Barnes, director of public affairs, community diversity for Yum! Brands Inc. received the www.franmarket.com
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FRANCHISE TREND
FRANCHISORS
TAKING AIM AT WAR VETERANS —BY GENE KOPROWSKI oseph Sagastume imagined opening a business when he was in Afghanistan, and finalized the plans when he was liberating Baghdad. The decorated former Marine Corps aviator — now back home safely in the U.S. — runs a pizza franchise in Lubbock, Texas. “The leadership skills I learned in the military helped with opening my restraurants,” said Sagastume. He’s not alone. Franchise operators, like Toledo-based Marco’s Pizza, are targeting military veterans, especially veterans returning from the War on Terror, by offering them special financing packages and franchise discounts.
J
The reasoning is rather straightforward — franchise operators believe that military training gives these men and women a competitive edge over other budding entrepreneurs. That means a faster return on investment, and lower risks, for the franchise.
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“Words and phrases that are shared by franchisees and the military are as follows: not afraid of hard work, discipline, sense of community service and involvement, routine-oriented, leadership, and the ability to follow a program,” said Jack Butorac Jr., president of Marco’s Franchising LLC. Contrast that with the perception among savvy franchisors of other, would-be entrepreneurs who have never had military training or experience. “The average citizen with no military background sometimes requires a great deal of handholding, while former military have seen it all and rarely worry over the small stuff,” said Cynthia McKay, chief executive officer of Le Gormet Gift Basket Inc., a 510-store franchise based in Castle Rock, Colo.
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Franchisors like Marco's Pizza are looking at military personnel like those serving in Iraq as potential franchisees.
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FRANCHISE TREND
Used to boot camp All new franchisees with Marco’s must undergo an eight-week boot camp of sorts, called the Training and Procedures Program or TOP. This program sounds like something out of Richard Gere’s movie, “An Officer and a Gentleman.” The program lasts eight weeks, and it provides trainees time in a simulated store, where they can learn the basics of pizza-making and store management. There is also a four-day management standards section of the program. Generally, it is hard to make the cut to even get into the pizza-making boot camp. Aspirants must have liquid assets of $60,000, and overall assets of $100,000, for one store, and a net worth of $360,000 and cash assets of $180,000 to purchase three pizza stores. The cost of starting up an individual store ranges from $139,000 to $297,000. The return on investment was 47.8% in 2003, said to be one of the largest ROIs in the industry. A lot of people want a crack at making that kind of money.
But, knowing that military veterans have what it takes to succeed in the competitive franchising world, different terms are offered to qualified former officers and enlisted personnel.
Military discounts Projects can be financed with just 20% down, and veterans receive a discount of $2,500 off of the franchise fee. The franchise has also arranged for financing for vets through local banks and the International Franchise Association. “We think it’s time for veterans to be at the receiving end of patriotism,” said Butorac. The company has 145 locations throughout the Midwest and Southwest, and it is scheduled to open 24 new stores this year. The firm launched its military franchising incentive program last fall. The veteran demographic is a solid one, experts say. According to census data, 63% of the country’s veterans are
under the age of 65. The veterans typically enter franchise training with many of the skills the franchisor is seeking. “Discipline, structure and organization — these are all attributes taught and enforced in the military,” said Jim Flynn, chief executive officer of Wingstop, an aviation-themed restaurant franchise that has attracted a number of former military officers as franchisees. “Successful multi-unit and individual franchises thrive from these qualities.” There are other factors that make the military men and women stand out. “When you consider cleanliness, which is very important in the restaurant industry, it is a matter of step-by-step discipline, and former military personnel have that experience,” said Flynn. The military spends a long time — years, in fact — ingraining these attributes in individual soldiers, sailors and airmen. “These are all fundamental survival skills in the military,” said Flynn. “If you didn’t have them when you arrived, they were instilled in you. Also, it is very hard to do everything on an individual basis and still survive in a military organization. You must become a team player.”
Team-oriented Being a team player like that is perhaps one of the most ideal skills for franchisees to have. Franchisors often have expansion plans — and these can only be executed through people on their teams. A Chicago native, Sagastume is of Hispanic ancestry, and he has served on the diversity advisory council of AMR Corp., the parent of American Airlines Inc. Pizza Patron, a franchise chain predominantly located in Hispanic neighborhoods, asked him if he would move from his hometown, and he agreed, adopting the franchise’s goals as his own. “I have zeroed in on the West Texas market to open my Pizza Patrons,” said Sagastume. “My first four are planned for Lubbock, and then I will move into Amarillo and Abeline. Pizza Patron captures the positives of diversity, and I expect the West Texas Latino com-
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FRANCHISE TREND
munity will enjoy the product.” Teamwork also means that the franchisee expects the franchisor to be supportive — just as in the military — something that Sagastume said he has experienced thus far. “Pizza Patron has provided me with the moral support as well as the business support to make the dream a success,” said Sagastume. “I didn’t have to pass through many layers to get answers or to get things accomplished. There is a direct connection to the executive team, and that direct personal touch suits my culture well.” The company, which was founded in 1986 and began franchising in 2003, has also encouraged him to connect to the local community — just as U.S. military personnel are doing in Iraq and Afghanistan. In the eight months he has been open in Lubbock, with his first restaurant, he and his team have developed community ties by donating to the local churches and participating in Parent Teacher Association drives. “You can have an Hispanic name and call yourself an Hispanic company, but unless you commit to connecting to the community in which you serve, you won’t be successful,” said Sagastume.
office or home office operations. “Although most people might believe that every day is scripted out in the service, it is not,” said Hollis, who enlisted at age 17. “You must be fluid in your thought processes and ability to perform your job. Plans change — and you don’t know what to expect from day to day. That has helped me adapt with Soho Hero tremendously.” The softer skills — used for customer relations — that many former military personnel like Hollis have included patience, time management, goal setting, and good customer relations. In addition to these skills — soft skills and hard — retired military personnel also have something that most other 40-somethings don’t have — a stream of income, even if they no longer work. That’s because military personnel can retire after 20 years of active service, and immediately begin drawing a pension. With that money to meet personal expenses already on hand, the franchisee does not have to worry as much
as a civilian does about bills during the start-up phase. “The former military personnel are a great fit for us,” said Chris Kouloukas, president of Soho Hero, a service center for small office, home office operations. “They solve problems well, helping customers overcome their own business glitches by being calm and available.” What is more, former military personnel definitely know how to work within a system in order to succeed. This is something even McDonald’s is now learning. The fast food giant, seeing the success that smaller franchises have had, is now targeting recruitment among former U.S. Marines. Others think that’s a savvy, sophisticated recruiting move. Tom Hofer is a former U.S. Navy pilot, and is chief executive officer of Spring-Green Lawn Care, a lawn care franchise based in Plainfield, Ill., near Chicago. —FMM Gene Koprowski is a Lilly Endowment Award-winning columnist based in Chicago.
Charles Hollis SOHO HERO in Jacksonville, Florida.
Customer service skills These kinds of skills, honed in civil affairs operations, in which American troops interact with local civilians in the theater of operation, generate the ability to have excellent customer relations, said Charles Hollis, owner of a franchise called Soho Hero, located in Jacksonville, Fla. Hollis, who was in the Navy for 22 years, last summer opened a Soho Hero franchise, which is a service center concept that is emerging in suburban areas with lots of small
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B U S I N E S S AT T I T U D E
BEWARE THE AMBUSH By Howard Bassuk and Gerald Moriarty t’s one of those primal instincts. Maybe it’s survival or some sort of self-preservation. Maybe it’s just a sixth sense to beware. But no matter what you call it, you know it’s one you should be paying attention to. Whenever we are in danger, our instincts take over and our most basic automatic responses start to kick in. It overwhelms thought and reason because there might not be enough time to respond if we have to analyze the situation.
Most people will give you their opinion with the best of motivations. That does not make the opinion valid. I once had someone tell me that he had decided not to go into a franchised food business because he had a cousin who had operated an independent restaurant and had failed. This man had his dreams ambushed, and he didn’t even know it.
I
The fact that his cousin had failed should have meant almost nothing. His cousin may have been in the wrong business, the wrong location or may have simply been a poor businessman. His cousin was an independent, and my client was thinking about joining an established and successful chain.
Your heart is racing. There’s the distinct tingly sensation caused by the hair at the base of your neck standing up and the muscles tensing. Simultaneously, you can feel a cool breeze flowing across your head, contradicting the beads of perspiration that have started to form on your forehead. Something is going on. Your body is on alert. Each step is accompanied by an all-inclusive radar like scan from your eyes, ears and other senses. You are sure there is danger somewhere. You’re not sure exactly where it will come from or what form it will take, but you know it is coming. Your body is too keyed up to be wrong. You shudder a little. What form will it take? Where will it come from? You have no choice. You steel yourself against its inevitability. You know you are heading straight for it. And then, you remember those words you heard when you started your journey — beware the ambush. Silly? Not at all. If you are thinking about going into business for yourself, you can probably count on the fact that someone, somewhere, for good reasons or bad, will ambush your attempt to become self-employed. It’s human nature. People have opinions, and they love giving those opinions. They may be offering those opinions for the most noble of reasons or for the most selfish of motives. But either
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Sound silly? Are you feeling just a little bit smug because you never would have fallen for that ambush? Don’t smirk just yet. Ambushes come in many forms and from many places.
way, people will try to inflict their opinions on you. Think about it — people seem to have opinions about what each of us should do in life. It doesn’t matter whether it’s something very critical like who we should vote for or how we should raise our kids, to things almost trivial like what restaurants we should eat in or what makes a good movie, it makes people feel good to voice their opinions. If you’re going into your own business, you can count on people to give you their opinion of how you should do it, with whom, and when. The problem with that part of human nature is that many people who have opinions are often not the best sources of information, and these opinions can be dangerous — even disastrous — to you if you should listen. In short, you can be ambushed by someone’s opinion.
Please don’t get us wrong. We’re all in favor of you seeking out qualified advice. That’s the key — it must be qualified. If you get advice from someone who isn’t qualified or has other motivations for giving his opinions to you, then you are heading straight into an ambush. By all means, talk to others in the same type of business you are contemplating getting into. Seek out attorneys, CPAs, and other qualified business experts, but stay away from “expert opinions” from people who are not experts.
A DREAM DENIED Many people find a franchise that captures their interest. They feel at last they have found something that might be the vehicle for business ownership they have been seeking. But after a short time, a few days or a week at most, interest and even excitement is gone — even before they have done
any serious research on the opportunity. What happened? They were ambushed!
What kind of ambushes are there? Unfortunately, there are quite a few. Across is a sampling of some of the most common.
THE SPOUSAL AMBUSH This is a familiar event. The business seeker claims, “I’ve talked it over with my spouse, and she says it’s my call. Whatever I want to do is just fine!” Fine, that is, until the hopeful owner comes home and starts talking about the franchise. Suddenly, the objections and concerns begin to flow. Soon, the task of business ownership becomes complicated by marital disagreement, and what was so promising now appears impossible. The Solution: Owning a business, franchise or not, is a family decision. If it’s scary for you, imagine how it must feel to those around you who have less information about what you are thinking of doing than you do. Even before the search begins, a married couple needs frank, honest discussions about the benefits and problems of business ownership. When there is agreement to go forward, both parties should attend any discussions so each has the same information. An added benefit is that one may ask a question the partner did not consider.
THE FRIEND/NEIGHBOR AMBUSH It is flattering to be asked for your opinion. Most of us readily respond, even if we don't know anything about the subject. So friends and neighbors will cheerfully provide their (uninformed) opinions when asked. The Solution: Without being rude or close-minded, try to limit the input from well meaning, but non-expert people. Give each opinion the worth it deserves based on the knowledge and business experience of the opinion giver.
THE ENVIOUS ASSOCIATE AMBUSH It’s not pleasant to contemplate, but sometimes your decision to explore new horizons may create envy, resentment or fear from people you know. It sounds silly. Why should someone else care what you do? Simply put, it’s because people tend to compare themselves to others. So, if you are taking a giant step forward, your “friend” may be envious that he is not doing it, too. However, rather than join you on the journey to new successes, the “envious associate” will try to find good sounding reasons to justify doing nothing. Essentially, this means that by stopping you from moving forward, it justifies your associate’s inability to move. The Solution: Keep yourself focused on your goals. No matter whether the person who is trying to hold you back is doing it for the right reasons or not, those are her reasons, not yours. If the reasons make sense to you and to your goals, then pay attention to them. If not, ignore them.
THE COLD FEET AMBUSH This is one of the most common ambushes. Most things that we do for the first time are at least a little bit scary. Going into business is a big thing, and it is definitely scary. So, you set up a way to avoid having to make a tough and scary decision. In this ambush, you find reasons to justify not going into business. If the reasons are legitimate, than you are doing the right thing. But if you are just letting your fears get ahead of your hopes, you deprive yourself of the opportunity to achieve the very thing you most want — the independence security and freedom that comes with being the boss of a successful business. The Solution: Give yourself permission to be scared. Use the fear factor to your advantage. After you have clearly set your goals, compare several different opportunities in terms of which one most closely matches your “perfect model business.” Don’t compromise on items like cost of acquisition or what skills have been needed by those
people who are already successful in that business
THE SELF AMBUSH Often people destroy their own dreams of business ownership by confusing casual inquiry with real research. It is a classic case of “shooting yourself in the foot.” For example, a person considering a retail business tries to find out how many similar businesses are listed in the Yellow Pages. That is interesting — but tells him nothing about the true size of the market or the market niches the retail business targets. It may be the market is underserved. Or, a person asks a competitor about the business opportunity. Don’t expect an unbiased opinion. None of this “looking around” is research. The Solution: Serious research about the industry and the franchise is absolutely required. The best source of information about the franchise is the franchisor and the franchisees. To conduct that research, you must get a copy of the Franchise Offering Circular, which only the franchisor can supply. Information about the industry size, stability, and growth may be available from business journals and books available at local and college libraries. Ask the librarian for assistance. Preparation and foresight are the greatest weapons against ambushes. Inclusion of those around you who will also be involved in some ways by your actions can also minimize the likelihood of being ambushed on the way to your goal. Clear focus and faith in your own judgment are great tools if you want to avoid the indecision that can come from over analysis and too many opinions being considered in a decision. Knowledge of yourself, your goals and your priorities are critical to making a good decision and avoiding an ambush. —FMM Used with permission. Howard Bassuk is Founder and President of FranNet.
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Starbucks launched in China in 1999 and has developed a network of almost 150 stores.
Additional economic and marketing research data can be found at this web site. www.FranchisinginChina.com
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CHINA The Mother of All Franchising Markets —By Jerry Wilkerson With the opening up of the Chinese market, a giant opportunity is presented to franchisors. Former president and executive director of the International Franchise Association Jerry Wilkerson provides his reflections formed on a recent trip to the country. rom my room in the Beijing Hotel I overlook the vast expanse of Tiananmen Square and a host of insipid office buildings that surround the government district; all that lies within this vista is in the service of the People's Republic of China (PRC). The morning sky is a dove gray, Chairman Mao's favourite colour as replicated in his official uniform. Mao's likeness gazes South across the square from the huge portrait over the massive gate to the ceremonial center of China and the ancient, historically preserved Forbidden City.
F
The great Wall is the one created by Chinese bureaucracy restricting free trade... They call this place "the former centre of the world." Perhaps someday China may once again lay claim to such an illustrious title. With a population of 1.3 billion people, China is the mother of all markets. In modern China, everything is gobbled up, consumed in huge quantities 24 hours a day. World markets wobble under the upward spiral of material costs and the price squeeze bulldozed by the Chinese economic powerhouse.
Today, complex issues intertwine to deter development of world business in China. Politics, economics, social development and ideology, coupled with bureaucratic interference, distrust of foreigners and lack of legal protections, have slowed the march to capitalism. These obstacles create great tribulations for international enterprises operating in China. Franchising has been investing in China for years, yet only a few global franchise brands are flourishing as they relentlessly learn to absorb elements of Chinese culture. A crucial problem for franchising is that for years the Chinese Ministry of Commerce has been unceremoniously dragging its feet on passage of a Franchise Trade Regulation. With no primary enforceable rule in place, franchisors are reluctant to take the risks of franchising in China and of being forced to become partners in joint ventures with their Chinese franchisee investors. Such uncertainty is clearly not the milieu in which franchisors normally covet to do business. The Great Wall of China is not just the ubiquitous ribbon stretching for thousands of miles as seen from outer space. No, the modern Great Wall is the one created by the Chinese bureaucracy restricting free trade. To a great extent, like it or not, China is changing the way the world does business.The fact is foreign franchising in China is a very grey area, and without government concentration and deliberation at the highest levels, it will remain static. This inertia helps no one. Protecting intellectual property under current law is almost impossible: Chinese pirates take advantage of every opportunity to counterfeit and distribute seemingly anything made by man, including franchise systems. Last year, China had the most software forgery in the world with more than 90 per cent counterfeit-
try is required to embrace franchising by 2005 with definitive laws and regulations that can be enforced in a courtroom (the next WTO meeting is in Hong Kong in December).
Jerry Wilkerson former President of the International Franchise Association, provides data on recent trip to the PRC.
ed, bootlegged and sold for use across the country at pennies on the dollar. Software manufacturers lost billions of dollars in fees, and the potent truth is that China will add almost 90 million new internet users in the next three years. In recent years, theft of American technology in China accounted for well over US$300 billion in losses of intellectual property for US firms. Ironically, the Chinese culture knows and appreciates the value of another person's knowledge. Yet bootleggers habitually produce products and use technology without respect for obligatory fees. Over the years, China has tended to treat technology theft as a civil rather than criminal matter. Without new, enforceable regulations in place, this thievery will likely continue. Trademarks, copyrights and patents are the quintessential, worldwide recognised means of defining business and its attendant rights. Without these guarantees and protections, franchising takes on the risks of a game of chance. Understandably, foreign franchisors are concerned that their knowledge, expertise and system operating procedures can and will be illegally exploited in China. A solution that will add needed legal protection and defendable safeguards is on the horizon. Because of China's accession into the World Trade Organization (WTO), the coun-
The Chinese government is at last learning that franchising can be a boon to its people, for it is an excellent mode to solve the enormous job problem and the country's scattered private capital dilemma. China's capital markets are woefully underdeveloped and franchising would allow the assembly of capital from a wide base through franchisee investment. Economic sources report that the Chinese unemployment rate is at or above 23 per cent - a state secret. This estimated percentage translates into a mind-boggling 169 million people. Such a number is equal to the entire US labour force. The Yuan, or Renminbi, is not the only currency in China. In the PRC, one must have currency within the government and bureaucracy. If a business person or organisation is not connected, hard wired into the government agencies, little commerce will take place regardless of capability, aspiration, force or enterprise aptitude. You will also need a business guides and interpreters that are on your side: individuals that understand business culture - subtle gesticulations, what is enforceable and what is not in the country - speak the language and know where they are going day and night. They will know the assemblage of people to do business with, and even more significantly, those through which you should not conduct commerce and trade. In other words, they have strict allegiance to you and your business development within the PRC. Franchisors have great faith in the legitimacy of the printed word to guide them through the long-term legal relationships with franchisees. A severe disparity exists within the Chinese business culture on this essential aspect of franchising. Within this culture, the written word is not considered the final authority of meaning. In China, words and contracts are merely the beginnings of understanding, not sacrosanct agreements. For most global —continue on page 44
entrepreneurs, this attitude represents harsh culture shock. A Chinese business negotiation strategy is intentional lack of transparency disclosures and a precipitous perseverance to hold final negotiations on their own turf. Further hindering the growth of franchising is the almost total lack of training in the PRC. The increasing numbers of qualified potential Chinese franchisees with robust resources for funding and a motivation to become entrepreneurs hold out promise to correct this inadequacy. However, even with such a vast market potential and a national economic growth rate of 10 per cent annually, things are not shifting as smoothly as franchisors wish. China is learning, however, that when investment is linked to continuous training within a well tested operating system, franchising can swiftly move the inexperienced franchisee into the successful commercial market based economy. Fortunately, the Chinese
way. Economists and business analysts predict that we will soon see franchise growth and development flourish in China. Although today the line to enter the country is comparatively short, I forecast that that will change rapidly when the draft regulation on commercial franchising is promulgated in China. Couple that action with the 2008 Olympics in China, and you have a definite need for infrastructure to be set in place.
“Many will see the possibilities in China - it will be tough to pass up the largest marketplace the world has ever known...,” government is coming to this positive conclusion, although rather sluggishly. China's rapid economic growth corresponds proactively with franchising, as many cultures of the world collide in this immense melting pot of consumerism. It is said that one could be blind and still hit a buyer's market in China today. Standardised management and efficient inter-cultural understanding through franchising will help guide the
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The Chinese government, hearing clock ticking, will surely act upon its awareness of the perfected ability of franchising to help assemble the mammoth partnerships on which this worldwide pinnacle of showcases will take place.While our franchising initiatives meetings were taking place in Beijing, Donald Evans, the US Secretary of Commerce, and Elaine Chao, the Secretary of Labor, were also on a week long visit to China. Emphasising the importance of moving toward mar-
Starbucks to hit 150 in China Starbucks launched in China in 1999 and has developed a network of almost 150 stores. The brand is most concentrated in Beijing, where it has 43 stores, Shanghai, where it has 42, and Hong Kong, where it has 34.
ket-based reforms and a free flow of capital and currency, Evans urged the Chinese government to break down trade barriers. Evans, moreover, cited the obvious quandary China has with defending intellectual property theft in the PRC. Franchisors have always been pioneers moving into new untamed markets with products and services. Many will see the possibilities in China and accept the challenge. After all, it will be tough to pass up the largest marketplace the world has ever known. As I approach my 27th year in the business of franchising, I have never witnessed possibilities of this magnitude for the community of franchising. I have a conviction of confidence that China will be a magnificent place for franchising to flourish in the near future. The mysteries of the Orient have summoned mankind for centuries, and franchising has a destiny to achieve. Franchisors must demand that the Chinese government fulfill its responsibility as a world leader nation and member of the WTO. This very thought evokes a Chinese proverb: "Parents who are afraid to put their foot down usually have children who step on their toes." —FMM Jerry Wilkerson is the former president of the International Franchise Association (IFA) in Washington D.C. Jerry is currently President and Founder of Franchise Recruiters LLC. www.franchiserecruiters.com
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Subway’s Chinese expansion In December 1995 Subway established its pilot store in Beijing. Today, there are 27 Subway locations in China. The company, with more than 22,800 locations in 73 countries, considers China to have the potential to become its largest single market outside of North America.
I N T E R N AT I O N A L
surfs up
INTERNATIONAL FRANCHISING
—by Mark C. Siebert n a recent trip to Hawaii, a client took me to the Bonzai Pipeline to watch some of the most incredible surfing action in the world. At times, the waves break forty or fifty feet high, and for the surfers skilled enough to survive those waters, that kind of action can provide the ride of a lifetime.
O
Up and down the Hawaiian North Shore, not far from the Pipeline, there is a breed of surfer who lives for that ride. Some hold down part-time jobs near the ocean. Others just watch and wait. I happened to be there on one of those rare days when the forces of nature were aligned just perfectly, and up and down the beach could hear the cry of, "Surf's up!" And when that cry went out, the surfers came running. You could sense the urgency in their faces. They had to move fast. The forces of nature wait for no one. In today's booming international franchise marketplace, the surf is up for US franchisors bold enough to take the plunge. And while the waves are certainly too strong for some, for those that have the skill, the wave of the century is rolling in.
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Why International Expansion? With such a strong domestic market, one might rightly ask why any US franchisor would consider going global. For some US franchisors, the US markets are relatively saturated. But for most, the promise remains largely unfulfilled. Why then, go global?
In a word: Timing. The growth of franchising in many markets follows a pattern. When people in the industry say that a market is 20 years behind the US, they are not merely making an analogy or reminiscing about the "good old days." The fact of the matter is most experts recognize that the pattern is predictable. In today's global marketplace, never before has the timing been so good for US franchise concepts. For one thing, more and more markets are reaching the Rapid Vertical Expansion and Horizontal Proliferation stages of growth - stages at which the imports of US franchises by local companies are most aggressive. In addition, in recent years we have seen a compression of the early phases
of the franchise life cycle. Introductory and Early Expansion stages, which might have lasted a decade once, are today lasting half as long in some countries - accelerating their demand for international franchise imports. And when a foreign investor decides to buy a franchise, where do they go shopping? Consider the following: The United States invented franchising. It is home to the vast majority of the world's brand name franchisors. It is the heart of capitalism and entrepreneurism. In many countries, US concepts carry a certain cachet simply because they are from the US. Part of this is the US mystique, and part is the competitive environment in which these businesses are grown. The retail and service environments in most countries are simply not as competitive as they are in the US. And in the Darwinian world of business, that type of environment produces the strongest survivors. The fact is that the United States is the shopping mall of the world when it comes to franchise opportunities. And more international investors are shopping today than ever before.
How to expand internationally Many franchisors initiate their global franchise efforts through serendipity. Perhaps a foreign investor looking for a specific type of franchise runs across a listing in Successful Franchising, and that chance encounter leads to an international franchise opportunity. But encounters like this are not an effective strategy for international growth. Franchisors aggressively targeting international growth are best off targeting a specific country or group of countries in which they would like to expand. To do so, the first step is to identify the best counties for your particular concept. Factors such as franchise climate, the market for your particular product or service, competitive factors, proximity, language barrier, political climate, and relevant legal concerns should all be factored into this decisions. Once a market is identified, one effective means of targeting prospects with-
in this market is the use of trade missions. Sponsored by groups such as the International Franchise Association, trade missions attempt to provide franchisors with introductions to a number of qualified candidates in each country. The franchisor is typically responsible for their own expenses (which can run upwards of $10,000), their own follow-up, and their own negotiations. The sponsoring organization is only responsible for the introduction. Another alternative for franchisors interested in global expansion is the use of brokers. Brokers work by promoting your franchise within a particular market, and will often employ a strategy of directly contacting the best potential partners to determine their interest. Generally, brokers will not ask the franchisor to visit the country until they have generated some serious interest, and oftentimes, the candidates will visit you as a first step, thus minimizing your expenses. More importantly, this direct contact approach will
generally result in the best follow-up, as the broker will generally derive the bulk of their compensation based on "success fees." These fees generally range between 10% and 20% of the initial fee. In addition brokers may ask you to offset out-of-pocket expenses, and may, in some cases, ask you to underwrite the development of market research (which may cost $10,000 or more). As an alternative, of course, you can try to go it on your own. The U.S. Government is even available to assist you in these endeavors through programs such as the Gold Key program. Simply contact the appropriate U.S. embassy and, for a modest fee, they will assist you in researching the market and identifying potential partners. They will even set up meetings with these partners. All you have to do show up and negotiate the deal. Once you have identified several candidates, remember, the strength of your —continue on page 48
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partner is even more integral to your success internationally than it is domestically. As a franchisor you may have significant difficulties that you would not encounter domestically. Language barriers. Cultural barriers. Substantial time differences. And you will be dealing with a franchisee who has substantially greater responsibilities than your typical domestic franchisee. Not only will your franchisee be responsible for developing and adapting your foreign prototype to a new and different market in which it has limited name recognition, but he will also be responsible for implementing your expansion plan for an entire country. Moreover, if your franchisee fails, your subsequent efforts to develop that market will likely meet with stiff resistance. In the minds of locals, will not be the local partner who failed. It will be the concept. Structure of the International Transaction Once you have identified the best possible international franchise candidate, the next question you must answer is how to structure the transaction. First of all, you are probably looking at selling the entire country, or at least a substantial territory. The barriers and costs involved simply make individual franchising unfeasible for all but a select few franchisors. While some of these arrangements are structured like area development agreements, most resemble subfranchise arrangements, in which the partner would not only develop units, but will sell franchises much the same as you would as a franchisor. Franchisors typically are compensated in these arrangements through a combination of initial fees, ongoing fees, and unit opening fees. Before deciding on a fee structure, it is important to get an understanding of the services required to establish a successful international venture. Fees can then be determined after estimating associated expenses. Bear in mind that the costs of closing an international —continue on page 50
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transaction can be significantly higher than a domestic transaction. Brokerage fees, international franchise lawyers, travel costs, and substantial training commitments both at home and abroad can easily give you a six-figure headache. For this reason, initial fees for most countries generally range between $100,000 and $1 million, depending on the size and maturity of the market involved and the overall demand for the franchise in question. Francorp studies have indicated that larger and more mature markets tend to see initial fees in the range of $0.005 to $0.01 per person, while smaller and less mature markets tend to produce fees in the range of $0.002 to $0.004 per person. In a master franchise relationship, both royalties and fees are generally a fraction of what they are in a direct franchise relationship, with the licensee generally receiving the lion's share of the revenues from both. The U.S. franchisor generally receives between 20% and 50% of the
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franchise fee upon each unit opening, and between 25% and 40% of royalty revenues. These fees should not be determined based on the country in question, but rather on detailed financial analysis and an understanding of specific support services required. In structuring these transactions, two additional points are of critical importance: Performance requirements and expenses. The speed with which you are able to establish the foreign franchise organization will be a critical element in determining when you will achieve positive cash flow. If your licensee is not willing or able to commit to an aggressive development schedule, be sure that you write provisions into your agreement requiring them to cover all direct expenses until a certain number of franchises have been established. Lastly, be sure that you get the counsel of an attorney familiar with franchising in the host country prior to finalizing any agreement. Peculiarities relative to
allowable royalties, intellectual property, trademark, employment, and anti-trust laws may have a profound impact on your structure. Surf's Up! There is no doubt that the waters of international franchising are dangerous. The international franchisor must deal with different laws, different cultures, and different markets, while bridging gaps of time, distance, and language. Their efforts are sure to divert at least some of their attention from the core business and the process is often more expensive than you think. Never before, and perhaps never again, will US franchisors have the opportunity they currently have to dominate the global franchise marketplace. It remains the choice of each franchisor to determine their level of skill and their ability to navigate these waters. Surf's Up! —FMM Mark Siebert is Chief Executive Offer of the iFanchise Group. www.ifranchise.net
B U S I N E S S R E SO U R C E
HOW THE SBA CAN HELP YOU START
ongratulations on thinking about starting your own business. Each day thousands of people across the United States exercise their independence by creating small businesses.
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Whether your target market is global or just your neighborhood, the U.S. Small Business Administration and its partners can help at every stage of turning your entrepreneurial dream into a thriving new business. If you’re just starting, the SBA and its resources can help you with loans and business management skills. If you’re already in business, you can use the SBA’s resources to help manage and expand your business, obtain government contracts, recover from disaster, and have your voice heard in the federal government.. You can access the SBA help online 24 hours a day at www.sba.gov or visit one of their local offices for assistance. You can find your local office at our Web site or by checking the government pages of
your phone book. You can use SBA resources to help organize your thoughts on what type of business you want to open.
How to use the resource? SBA resources include district offices in every state and territory, nearly 400 offices of SCORE – Counselors to America’s Small Businesses, and more than 70 Small Business Development Centers primarily located on college campuses. More information about SCORE and the SBDCs is detailed later in this publication, or you can go to www.score.org or www.sba.gov/sbdc/index.html
for SBDCs. These professionals can also help you with writing a formal business plan, filling out loan applications to finance your business, managing and expanding your business, finding opportunities to sell your goods or services to the government, recovering from disaster or acting as advocates for small businesses with Congress and regulatory agencies. The SBA also has programs for helping special audiences, such as women and veterans become small business owners.
Women Business Owners Women entrepreneurs are changing the face of America's economy. The SBA serves women entrepreneurs nationwide through its various programs and services, some of which are designed especially for women. There are women’s business ownership representatives in every SBA district office to help women access all of SBA's programs and services, including loan guaranties, federal contracting opportunities, training, counseling and more. These local representatives can also provide information about other local resources available for women entrepreneurs. Another valuable tool available for women business owners and entrepreneurs is the Women's Business Center Program, funded in part through a cooperative agreement with the SBA. Located across the country, approximately 100 WBCs provide training, technical assistance, counseling and mentoring specifically to women, especially those who are socially and economically disadvantaged. —continued on page 52
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Mindful of the special needs of women entrepreneurs, the centers offer their services at convenient times and places. In addition, some centers provide child care, and many provide their materials in Spanish and other languages, depending on the unique needs of the communities in which they are located. Many classes offered by the centers are either free or charge a small fee. And often there are scholarships to help those who need them. If you can’t get to a Women’s Business Center, the full range of services is available through the SBA’s Web site for women entrepreneurs, which provides access to all of the SBA's online services, including its extensive library of information, training courses and electronic tools designed to help small businesses. This site also contains information about the services available in local communities. It can be accessed at: www.sba.gov/women.
Veterans Business Development
The SBA offers a variety of services to American veterans who have made or are seeking to make the transition from soldier to small business owner. Each of SBA's 70 district offices throughout the country has designated a Veterans Business Development Officer to help veterans prepare and plan for entrepreneurship. The Veterans Business Outreach Program provides entrepreneurial development services such as business training, counseling and mentoring to eligible veterans owning or considering starting a small business. Small Business Development Centers and SCORE also provide management assistance to veterans who are current and prospective small business owners, offering one-stop assistance to small businesses by providing a variety of information and guidance in easily accessible branch locations. SCORE provides resources and counseling services online at: www.score.org. The SBA offers special assistance for activated Reserve and Guard members and the small businesses they work in or own. Any self-employed Reserve or Guard member with an existing SBA loan can request from their SBAlender or SBA district office, loan payment defer-
rals, interest rate reductions and other relief after they receive their activation orders. The SBA offers special low-interest-rate financing to small businesses with essential employees called to active duty. The Military Reservist Economic Injury Disaster Loan Program provides loans to eligible small businesses to cover operating costs that cannot be met due to the loss of a key employee called to active duty in the reserves or National Guard. Small businesses may apply for MREIDLs of up to $1.5 million if they have been financially impacted by the loss of an essential employee. The SBA has created a special web page specifically for Reserve and Guard members at: www.sba.gov/reservists. To ensure that veterans, service-disabled veterans and Reserve and National Guard Member entrepreneurs receive special consideration in all its entrepreneurial programs and resources, the SBA has established a fully staffed Office of Veterans Business Development. OVBD develops and distributes various informational materials for entrepreneurship such as the Veterans Business Resource Guide, VETGazette, and Getting Veterans Back to Work, and various other materials. Veterans may access these resources and other assistance from OVBD by visiting the Web site at: www.sba.gov/VETS/.
Native American Business Development The SBA also features programs for American Indians, Native Alaskans and Native Hawaiians seeking to create, develop and expand small businesses. These groups have full access to the necessary business development and expansion tools available through the agency’s entrepreneurial development, lending and procurement programs. More information is at: www.sba.gov/ managing/special/native.html.
Most new business owners who succeed have planned for every phase of their success. —continued on page 54
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5
TIPS FROM
SCORE
Hands-On Leadership
1
Be there. A successful business can slip when an owner is not there. keep in touch with how things are going.
2
Set an example for working hard. One wholesale bakery owner sometimes sleeps on the couch in his office so he can be there when the early shift comes in at 4 a.m.
3
Don’t confuse “hands-on” managing with micromanagement. Give guidance, but don’t make employees do every little thing your way.
4
Understand your business. The founder of a toy-store chain visits the stores and observing customers’ reactions.
5
Stay in touch with “stakeholders”—including customers, employees and suppliers.
Brought to you by SCORE "Counselors to America's Small Business." www.score.org/
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Thomas Edison, the great American inventor, once said, “Genius is 1 percent inspiration and 99 percent perspiration.” That same philosophy also applies to starting a business. First you’ll need to generate a little bit of perspiration deciding whether you’re the right type of person to start your own business.
Start by evaluating your strengths and weaknesses. • Are you a self-starter? It will be up to you – not someone else telling you – to develop projects, organize your time and follow through on details. • How well do you get along with different personalities? Business owners need to develop working relationships with a variety of people including customers, vendors, staff, bankers, lawyers, accountants and consultants. Can you deal with a demanding client, an unreliable vendor or a cranky staff person?
• How good are you at making decisions? Small business owners are required to make decisions constantly, often quickly, under pressure. • Do you have the physical and emotional stamina to run a business? Business ownership can be challenging, fun and exciting. But it’s also a lot of hard work. Can you face 12-hour workdays six or seven days a week? • How well do you plan and organize? Research indicates many business failures could have been avoided through better planning. Good organization – of financials, inventory, schedules, production – can help avoid pitfalls. If you haven’t already done so, after you’ve answered those questions you’ll need to decide what type of business you want to start, and where it will be located. Do you want a home-based business? Want to buy an existing business? How about opening a franchise of a
chain business? Each type has advantages, and SBA’s professionals can help you sift through it all.
Franchising Franchisees have been active participants in the SBA's small business loan program for many years. There are primarily two forms of franchising: 1) product/trade name franchising and 2) business format for franchising. In the simplest form of franchising, while you own the business, its operation is governed by the terms of the franchise agreement. For many, this is the chief benefit for franchising. You are able to capitalize on a business format, trade name, trademark and/or support system provided by the franchisor. But you operate as an independent contractor with the ability to make a profit or sustain a loss commensurate with your efforts. There are more than 3,000 franchised businesses. The challenge is to decide on —continued on page 56
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B U S I N E S S
B U I
L D E R S
]SUCCESS STORY
SCORE and UPS Store Franchise Tom Scherwitz of San Antonio, Texas, never planned on running his own business. But after enduring two corporate downsizings, it seemed the best alternative to finding another job in a distant city that would require a long commute or uprooting his family. But with so many possibilities and pitfalls associated with being a small business owner, Tom was venturing into unfamiliar territory. Fortunately, he didn’t have to look far for help. His father-in-law, Hap Appleman, a former business owner, was also a SCORE volunteer counselor. After discussing Tom’s experience, skills and interests, they decided to investigate the world of franchising. Hap recommended that Tom contact The Entrepreneur’s Source, a consulting firm that performs advance screening services for many regional and national franchisers. After going through the Source’s testing and assessment process, Tom received a list of potential franchise opportunities to consider. Intrigued with the business potential of operating a mail and shipping service, Tom applied to the UPS Store for one of several franchises slated for metropolitan San Antonio. “SCORE can cover the many different aspects of business. You can always find people there with experience in every area imaginable.” —Tom Scherwitz, franchise owner, UPS Store #4997 Hap also recruited other volunteer SCORE counselors to help Tom secure an SBA-guaranteed loan, make leasing arrangements and set up an accounting system. After selecting a location and undergoing franchisee training, Tom signed his agreement with the UPS Store in July 2005 and opened his store on Northwest Military Highway three months later. For more success stories, see wwww.score.org
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one that both interests you and is a good investment. Many franchising experts suggest that you comparison shop by looking at multiple franchise opportunities before deciding on the one that's right for you. Some of the things you should look at when evaluating a franchise: profitability, effective financial management and other controls, a good image, integrity and commitment, and a successful industry. If you are concerned about the risk involved in a new, independent business venture, then franchising may be the best business option for you. Remember that hard work, dedication and sacrifice are key elements for success. For more information visit the SBA Web site at: www.sba.gov/starting_business/ startup/franchise.html or visit the Franchise Registry at www.franchiseregistry.com/ or call your local SBA office.
Home Based Business Considerations Going to work used to mean traveling from
home to a plant, store or office. Today many people do some or all their work at home. Garages, basements and attics are being transformed into the corporate headquarters of the newest entrepreneurs – the home-based business person.
Getting Started Before diving headfirst into a homebased business, you must know why you are doing it. To succeed, your business must be based on something greater than a desire to be your own boss. You must plan and make improvements and adjustments along the road. Ask yourself these questions – and remember, there are no best or right reasons for starting a home-based business. But it is important to understand what the venture involves. Working under the same roof where your family lives may not prove to be as easy as it seems. It’s important to work in a professional environment. One suggestion is to set up a separate office in your home to create this professional environment.
Ask yourself: • Can I switch from home responsibilities to business work?
• Do I have the self-discipline to maintain schedules? • Can I deal with the isolation of working from home? • Am I a self-starter?
Finding Your Niche Choosing a home business must be approached carefully. Before you invest time, effort and money.
Ask yourself: • Does my home have the space for a business? • Can I identify and describe the business I want to establish? • Can I identify my business product or service? • Is there a demand for that product or service? • Can I successfully run the business from home?
Legal Requirements A home-based business is subject to many of the same laws and regulations affecting other businesses.
Some general areas include: • Zoning regulations (including certificates of occupancy). If your business operates in violation of them, you could be fined or shut down. • Product restrictions. Certain products cannot be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, explosives, sanitary or medical products and toys. Some states also prohibit home-based businesses from making food, drink or clothing. • Copyrights. Protect thoughts and original writings, recordings, broadcasts. • Federal self-employment tax • Immigration Act. Verifies the eligibility of new employees. • Adequate insurance. Covers liability, property, business interruptions, key persons, autos. • Workers’ Compensation Be sure to consult an attorney and your state’s department of labor to find out which laws and regulations will affect your business. Additionally, check on —continued on page 58
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B U S I N E S S
B U I
L D E R S
]SUCCESS STORY
SCORE’S Work with Franchise Learning Center Owners is a Lesson in Start-up Success Taking early retirement after more than three decades of working in the Lawton, OK, public school system didn’t mean that Howard and Jo Jean Johnson were ready to slow down. They dreamed of starting a business that would fill a need in the community and provide them with a successful career change. The ideal solution was to open a franchise of Sylvan Learning Centers, the world’s leading provider of supplemental education services to primary and secondary school students. First, however, the Johnsons had to convince Sylvan’s corporate officials in Baltimore that Oklahoma’s third largest city qualified for a franchise. “Sylvan’s demographic review indicated that Lawton was indeed a viable location for its third Oklahoma Learning Center,” Howard says. “It was up to Jo Jean and me to make it happen.” Having worked with community education during his years as a school administrator, Howard knew all about SCORE and the valuable services the organization provides to new entrepreneurs. But he was in for a surprised when he called SCORE’s Lawton Chapter. “ The man who picked up the phone turned out to be Vic Yarborough, my family’s nextdoor neighbor when I was growing up,” Howard says with a smile. “He and his colleagues would be a tremendous help in getting us started.” Yarborough, a retired executive with Halliburton Services, immediately enrolled the Johnsons in several seminars that provided advice on banking, legal issues and zoning. As with most of new enterprises, though, the big issue was money. “Vic put us in touch with a bank and helped us prepare the business plan for the loan application,” Howard says. “That led to an SBA-backed loan that we used to pay the franchise fee, lease a building, do the build-out, purchase equipment, meet city zoning requirements and meet our other start-up costs.” More than four years after contacting SCORE, the Lawton Sylvan Learning Center serves approximately 150 students each month with after-school help reading and math, as well as other academic needs. In terms of revenue, the Johnsons’ franchise ranks among the leading 35 percent of Sylvan’s more than 900 Learning Centers in North America, putting the couple more than halfway on the road to repaying their bank loan. They also purchased a new building that gives them an additional 1,500 square feet of much-needed space for their growing business. The Johnson’s still call on SCORE occasionally when a question arises about management or finances. Howard is also pleased that his search for a new business advisor reconnected him with an old family friend. “I was so happy when Vic stopped by recently to tour our new building,” he says. “The expert, caring help he and his colleagues at SCORE provided was absolutely essential to our success. They have been helpful from the get-go.”
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5
TIPS FROM
SCORE
Renewing Yourself as a Leader
1 2
3 4 5
Take a time-out each day. Put a “Gone Thinking” sign on your door and don’t let anyone disturb you. Pursue hobbies and interests outside your business. They’ll provide relaxation and may inspire creative ideas that you can feed back into the business. Take a vacation or a sabbatical. (But first, make sure you leave the company in good hands!) Spend time with your family. Kids provide a refreshing perspective. Do something you’ve always wanted to do but never did—learn to build a house, or take a course in acting.
registration and accounting requirements needed to open your home-based business. You may need a work certificate or license from the state. Your business name may need to be registered with the state. For home-based businesses, a separate business telephone and bank account are normally required. Also remember, if you have employees you are responsible for withholding income and social-security taxes, and for complying with minimum wage and employee health and safety laws. If you’re convinced that working from home is for you, it’s time to create your business plan. The SBA and its resource partners, such as SCORE and SBDCs can help make the process easier.
Choosing Your Business Structure You may operate your business under one of many organizational structures generally chosen for liability and tax reasons. The most common organizational structures are sole proprietorships, general and limited partnerships, C and S corporations and limited liability companies. Each structure offers options appropriate for different personnel situations and which affect tax and liability issues. If you’re uncertain where to start, contact the SBA first and you’ll be referred to the proper source.
Sole Proprietorship – One person operating a business as an individual is a sole proprietorship. It’s the most common form of business organization. Profits are taxed as income to the owner personally. This rate is usually lower than the corporate tax rates. The owner has complete control of the business, but faces unlimited liability for its debts. There is very little government regulation or reporting.
General Partnership
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– a partnership exists when two or more persons join together in the operation and management of a business. Partnerships are subject to relatively little regulation and are fairly easy to establish. A formal partnership is recommended to address potential conflicts, such as, who
will be responsible for performing each task; what, if any, consultation is needed between partners before major decisions, etc. Under a general partnership each partner is liable for all debts of the business. Profits are taxed as income to the partners based on their ownership percentage.
Limited Partnership – Like a general partnership, this is established by an agreement between two or more individuals. However, there are two types of partners. • A general partner has greater control in some aspects of the partnership. For example, only a general partner can decide to dissolve the partnership. General partners have no limits on the dividends they can receive from profit so they incur unlimited liability. • Limited partners typically receive a share of profits based on the prorated amount on their investment, and the liability is similarly limited in proportion to their investment.
“C” Corporation – A “C” corporation is a legal entity made up of persons who have received a charter legally recognizing the corporation as a separate entity having its own rights, privileges and liabilities, apart from those of the individuals forming the corporation. It’s the most complex form of business organization and is comprised of shareholders, directors and officers. The corporation can own assets, borrow money and perform business functions without directly involving the owners. Corporations are subject to more government regulation and have the advantage of limited liability, but not total protection from lawsuits.
Subchapter “S” Corporation – This is a special section of the Internal Revenue Code and permits a corporation to be taxed as a partnership or sole proprietorship, with profits taxed at the individual, rather than the corporate rate. A business must meet certain requirements for Subchapter C status. Contact the IRS for information. —continued on page 60
LLCs and LLPs
lender or investor wants to see.
– The limited liability company is a popular business form. It combines selected corporate and partnership characteristics while still maintaining status as a legal entity distinct from its owners. As a separate entity it can acquire assets, incur liabilities and conduct business. It limits liability for the owners. LLC owners risk only their investment, not personal assets. The limited liability partnership is similar to the LLC, but it is aimed at professional organizations.
A comprehensive business plan is not done on the spur of the moment. It can be a long process, and you need good advice. The SBA and its resource partners, including Small Business Development Centers located on many college campuses, and SCORE, Counselors to America’s Small Business, have the expertise to help you craft a winning business plan.
Writing a Business Plan
You can find the nearest SBDC at: www.sba.gov/sbdc/.
After you’ve thought about your business, the next step is to develop a business plan. The business plan is a formal document explaining in some detail your plans to develop a financially successful business. It’s vitally important for two reasons: • Preparing a business plan forces you to think through every aspect of your business. If you need outside money, your business plan will be one of the first things the
The nearest SCORE chapter can be located at www.score.org.
• A business plan serves as an assessment tool for the owner.
You can also find business-plan help on the SBA’s Web site at www.sba.gov/starting_business/index.html.
In general, here’s what a good business plan contains:
Introduction • Give a detailed description of the business and its goals. • Discuss ownership of the business and its legal structure. • List the skills and experience you bring to the business. • Discuss the advantages you and your business have over competitors.
Marketing • Discuss the products and services your company will offer. • Identify customer demand for your products and services. • Identify your market, its size and locations. • Explain how your products and services will be advertised and marketed. • Explain your pricing strategy.
Financial Management • Explain your source and the amount of initial equity capital. • Develop a monthly operating budget for the first year. • Develop an expected return on investment and monthly cash flow for the first year. • Provide projected income statements, balance sheets for a twoyear period. • Discuss your break-even point. • Explain your personal balance sheet and method of compensation. • Discuss who will maintain your accounting records and how they will be kept. • Provide “what if” statements addressing alternative approaches to problems that may develop.
Operations • Explain how the business will be managed day-to-day. • Discuss hiring, personnel procedures. • Discuss insurance, lease or rent agreements, and issues pertinent to your business. • Account for the equipment necessary to produce your goods or services. • Account for production and delivery of products and services.
Concluding Statement Summarize your business goals and objectives and express your commitment to the success of your business. Once you have completed your business plan, review it with a friend or business associate or SCORE counselor or Small Business Development Center representative. —continued on page 62
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When you feel comfortable with the content and structure, review and discuss it with your lender. Remember, the business plan is a flexible document that should change as your business grows.
Business.gov Business.gov provides 24/7 access to the critical information businesses need from the federal government. Business.gov is managed by the SBA in partnership with federal agencies providing business-oriented programs and services. You can find links to accurate information on how to comply with federal rules and regulations; all the government forms you’ll need; and tax information from federal and state tax resources, including forms and assistance. Business.gov has thousands of forms issued by more than 40 federal agencies. You’re just a computer click away from help 24-hours a day at www.business.gov You’re just a computer click away from help 24-hours a day at www.business.gov.
Small Business Development Centers Small Business Development Centers, in coordination with federal, state, local and private-sector resources, including funding through a cooperative agreement with the SBA, meet the needs of small businesses and promote economic development in local communities by helping create and retain jobs. SBDCs provide services such as development of business plans, manufacturing assistance, financial packaging assistance, contracting assistance and international trade assistance. Based on client needs, SBDCs tailor their services to meet the evolving needs of the local small business community. As the SBA’s largest non-finance program, SBDCs meet the counseling and training needs of nearly 1 million startups or existing business clients annually. For more information, visit the Web site at: www.sba.gov/SBDC —FMM
[ CLOSINGQUOTES ] Quotes From Famous Business People
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Wherever you see a successful business, someone once made a courageous decision. —Peter F. Drucker
It is unfortunate we can’t buy many business executives for what they are worth and sell them for what they think they are worth. —Malcolm Forbes
Our favourite holding period is forever.
A Most of what we call management consists of making it difficult for people to get their work done. —Peter F. Drucker
Whenever an individual or a business decides that success has been attained, progress stops. —Thomas J. Watson Jr.
—Warren Buffet
A market is never saturated with a good product, but it is very quickly saturated with a bad one.
A committee is a life form with six or more legs and no brain. —Robert A Heinlein
Lots of folks confuse bad management with destiny.
—Henry Ford
—Elbert Hubbard
A The purpose of a business is to create and keep customers.
The first thing to decide before you walk into any negotiation is what to do if the other fellow says no.
—Theodore Levitt
—Ernest Bevin
Our main business is not to see what lies dimly at a distance, but to do what lies clearly at hand. —Thomas Carlyle
I love the man that can smile in trouble, that can gather strength from distress, andgrow brave by reflection. ‘Tis the business of little minds to shrink, but he whose heart is firm, and whose conscience approves his conduct, will pursue his prinicles unto death. —Thomas Paine
A butterfly will never fly...thinking like a caterpillar. —George W. Byfield
A man to carry on a successful business must have imagination. He must see things as in a vision, a dream of the whole thing. —Charles M Schwab
You have to learn to treat people as a resource......you have to ask not what do they cost, but what is the yield, what can they produce? —Peter F. Drucker
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organizations “Failing are usually over-managed and under-led ” —Warren G. Bennis