Franchise Market Magazine - Summer 2006 by The Nissen Group

12 FRANCHISE OR BIZ-OP 18 10 THINGS TO AVOID

22 SPOT A FRANCHISE SCAM

Franchise SUMMER 2006

Americaâ&#x20AC;&#x2122;s Resource For Entrepreneurs and New Businesses

MARKET MAGAZINE

Contents SUMMER 2006

Franchise [MARKET MAGAZINE ]

34 22

How Do You Spot A Franchise Scam? During the mid-1900s, freudalnt franchises ran rampant. Today, people still need to be cautious when choosing a franchise.

10 Dumb Things To Avoid When Buying A Business There are a lot of things you should expect. This list is only the beginning.

Making The Choice: Franchise or Biz-Op Franchise or Business Opportunity? Learn how to choose the right one for you.

www.franmarket.com

Franchise [MARKET MAGAZINE ]

30 Atlanta Bread... Not Only Bread 10 From the Publisher

Grown, Now its Time To Go.

28 Score Tips Cultivating Confident Employees

For Many Successful Entrepreneurs, It’s Very Hard For them To Know When To Let Go.

42 Looking For A Franchise … Check The Internet.

49 The Internet &

Learn how the Internet has Impacted Researching a Franchised Business for Purchase

45 What is the ASBDC Network? SBDC in-depth clients generated $6.1 billion in new sales.

46 You Made it

Welcome to the Internet of today.

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Franchising How One Company Combines The Best Of Both.

50 How The SBA Can Help You Start Looking For Some General Business Start-Up Information? Look To The SBA (Small Business Administration).

55 Score Tips Exemplary Leadership

64 Closing Quotes Quotes from those who have been there, done that.

HOME FRANCHISES PRODUCTS MAGAZINE INTERVIEWS ADVICE EVENTS FRANCHISE SEARCH BY INVESTMENT SEARCH FOR CONSULTANT

INTERVIEWS

for a 42 Looking Franchise... Check the Internet

“Read Interviews With Top CEOs From Major Franchisors” READ FIRSTHAND WHAT MAKES THEIR BUSINESS OPPORTUNITY WORK.

Go to: www.franmarket.com for details.

FIND A FRANCHISE

FIND FRANCHISE EVENTS www.franchiseshowinfo.com Tampa/Orlando Sept. 9 & 10, 2006 Detroit, MI Sept. 16 & 17, 2006 San Francisco, CA Sept. 30 & Oct. 1, 2006 Boston, MA Oct. 14 & 15, 2006

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Kansas City, KS Oct. 28 & 29, 2006 Chicago, IL Nov. 18 & 19, 2006 www.wcfexpo.com Los Angeles, CA Nov. 3 - 5, 2006

FROM THE PUBLISHER

Welcome to the internet of today. Currently there are 1,023,863,307 Internet users worldwide (that’s 1.02 Billion!). 16% of the total population in the world. But when you consider how many do not have access to the Internet at all, that percentage increases to over 25%.

Editor Art Director Managing Editor Associate Editor Assistant Art Director Production Manager Contributing Writers

In the United States alone, Internet users total 205,326,680 … or 69% of the total population of 299,093,237. And more and more have become comfortable buying things on the Internet. E-Bay has $1.5 Billion in net income (before taxes) and now has a market cap of $37.2 Billion! That’s more than Bloomingdales, Macy’s, May Department Stores, and Lord & Taylor combined. Google has $1.465 Billion in net income and is valued at $125 Billion. That’s more than GM and Ford combined! The Internet has been quietly growing and expanding as we all go about our businesses. In some corners of the franchise industry, it’s quite conceivable that some businesses don’t really care how the Internet is growing. But in this issue, we look at some of the dramatic changes taking place in franchising and the impact the Internet is starting to have … on franchisees … on franchisorfranchisee relationships … and on the legal implications of franchise contracts and the Internet, specifically relating to e-commerce issues. Is this an opportunity for franchising? Or a problem? It really depends on who you talk with … and the type of business they have. There are some who have built their franchise opportunity around the Internet, who are doing very well. Others are playing “catch-up” encountering conflicts of interest between direct e-commerce business and their franchisees. Still others are capitalizing on the Internet enabling their franchisees to acquire more sales through it. One thing is for sure. The Internet is not slowing its growth. And whether you are just starting out in business or considering franchised business, you need to consider how it impacts your business. With the right outlook and proper planning, the Internet can be a boon to franchising. Hopefully this issue will help you do some homework.

Robert Pitts George Byfield Michelle Jerla Brenda Brader Rex Wilson Diane Traylor Michael Seid Kay Marie Ainsley Howard Bassuk Cheri Carroll Lori Kiser Block Helen Dixon Barry Quinn

______________________________________ Publisher 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@franmarket.com Nicky Harvey Matthew Russell Kenna Rogers

Florida Sales Office: 150 3rd Street SW, Winter Haven FL 33880 Telephone: 863-294-2812 ___________________________________________

Webmaster Advertising Director

Jay Hook 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. We welcome all the SBDC offices and their clients. Tell us how we can serve you better.

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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

making the choice — BY MICHAEL SEID

FRANCHISE

BIZ-OP

Franchise or Business Opportunity

It is a quiet Saturday morning. While having coffee and watching your morning news program, a television commercial announces that a Franchise and Business Opportunity Show is at the Coliseum this weekend. If you are the typical American, you have become concerned about the economy and how it will affect your company and your career. You may even be thinking about the “Great American Dream” of business ownership. The franchise and business opportunity exhibition is a good place to begin your search. As you enter the exhibition hall, you are met by a sea of professionally produced trade booths offering investments that range from the instantly recognizable brake and muffler franchises to businesses that offer you the opportunity to place beverage vending machines in offices. While on the surface, the messages from the various salesmen seem similar, the legal and business relationships are widely different.

BUSINESS OPPORTUNITY A business opportunity is a highly regulated method in which one company provides the opportunity, for a fee,

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tionship. Because of the apparent similarities of many franchise programs and business opportunities, in some states, franchisors have the added burden of meeting the business opportunity statues as well. Even competent legal counsel sometimes has difficulty in sorting out this regulatory moras. Under the Federal Trade Commission’s rule governing franchise and business opportunity relationships, a business opportunity exists if each of the following elements are present.

1. The “licensee” sells goods supplied by the “licensor” or its affiliates, or by suppliers with whom the “licensor” requires the “licensee” to do business.

2. The “licensor” secures outlets or to another company or individual to go into business. Because of the historic high rate of fraudulent schemes, the federal government and many states have enacted regulations and disclosure requirements that govern the rela-

accounts for the goods or services sold by the “licensee,” or secures locations for vending racks or machines, or provides the services of someone who can perform either of these functions; and

3. The “licensee” is required to make a payment of $500 or more to the “licensor” or a person affiliated with the

for starters “licensor” or a person affiliated with the “licensor” at any time before or within six months after the franchisee commences business operations. Business opportunity describes the specific product or service associated with the delivery, not the system of delivery as in business format franchising.

yourself...period. Depending on your entrepreneurial nature and talents, this may be the perfect opportunity for starting a new business.

—Distributorship The purchaser buys the rights to sell the company’s product with a territory which may or may not be exclusive. The purchaser does not typically use the company’s name or logo in identifying the business. —License The purchaser obtains the right for access to proprietary data or technology from which products or services can be offered to the public. The major advantage of a business opportunity over a franchise is that it offers a buyer a greater degree of flexibility in conducting their business than a franchise at a lower cost of entrance and without royalty payments. It is often a good method for home-based, part time or second income businesses. Its most significant drawback is that typically the business owner does not receive significant management systems, training, ongoing support and marketing, which are typical of a franchise relationship. Depending on the business opportunity, there may be system-wide savings on the purchase of products and services sold or offered that are also standard with most franchise systems. The often used expression in franchising is that “you are in business for yourself and not by yourself.” With the independence offered in a business opportunity, this is not the case. After being established in business, generally the lack of support services from a licensor ensures that you are in business for

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Franchising: Franchisee is identified by the trademark. Business Opportunity: May not be identified by the trademark which is incidental to the products or services offered. Franchising: Franchisee receives training, marketing and other support on a continual and ongoing basis.

Primarily there are three types of business opportunities. —Rack Jobber The purchaser buys a route from the company enabling them to service the company’s clients by restocking the client with the company’s products.

The chief differences between Business Opportunities and Franchising is in the degree of the relationship:

FRANCHISING Franchising finds its roots in the Middle Ages. It first appeared on the U.S. retail scene at the turn of the century. It emerged as a force to be reckoned with in the post war ’50s. It boomed in the ’60s. It policed itself in the ’70s and it matured in the ’80s. Franchising has become the dominant retail force in the economy of the 1990s and beyond, accounting for over 35 percent of all retail sales in the economy with in excess of 500,000 locations. The regulations and understanding of the definition of a franchise is considerably more structured than a business opportunity. There is a variation between federal and state definitions and some variations from state to state. Under the Federal Trade Commission rule, the following three definitional elements are required to be present for a company to be defined as a business format franchise.

The franchisee is given the right to distribute goods and services which bear the franchisor’s trademark, service mark, trade name, advertising or other commercial symbols;

2. The franchisor exercises significant control over, or provides the franchisee with significant assistance and, the franchisee’s method of operations; and

Business Opportunity: Training, marketing and other support may not be provided and is incidental to the relationship. Franchising: Franchisee offers products or services typically on an exclusive or semi-exclusive basis and based upon standards of performance and product line dictated by franchisor. Business Opportunity: Typically may handle a variety of lines. Franchising: Franchise fee is typically higher than the minimum payment of $500 and is for the right to enter into the relationship and use the franchisor’s system and trademark. Business Opportunity: Business opportunity fee is typically lower than the minimum payment of $500 and is for the purchase of identified products or services. Franchising: Franchisee pays a continual royalty typically based on gross sales for the right to continue the relationship. Business Opportunity: Continual payments, if any, are for identifiable products or services supplied by the company to the business owner.

The franchisee is required to make a payment of $500 or more to the franchisor or a person affiliated with the franchisor at any time before or within six months after the franchisee commences business operations.

Lewis Rudnick, a well known franchise attorney in Chicago describes the franchise relationship as “a pooling of the capabilities, know how and experience of a franchisor with the capital and motivational efforts of the franchisee.” The results of this symbiotic relationship is a greater likelihood of success for a franchisee than for an independent entrepreneur embarking on a start-up business. Franchising describes the system of delivery, not the specific product or services associated with the delivery as in a business opportunity. The growing perception today is that franchising is a “sure fire” method of expansion for business and a safe investment for franchisees. While a properly designed franchise program can be an exceptional method of expansion, poorly designed or operated franchises, are not. This is not just a franchise reality but a business reality. Your decision to purchase a franchise should be based upon two broad understandings:

An understanding of the advantages and disadvantages of franchising in general.

An understanding of a particular franchise and how to evaluate them.

Advantages of Franchise Ownership. The benefits of franchise ownership are only as strong as the franchise you select. Generally speaking, the benefits can be classified in these broad areas:

Overall Competitive Benefits. The public has become accustom to a certain level of quality and consistency from brand name franchised locations. Whether you believe a company’s product is superior or mediocre, the secret for their success is that it is consistent. The consumer knows the level of quality they will receive in every location they visit. This trademark identification will often provide the new franchisee with an established

customer base accustomed to shopping at the franchise. Brand identification makes it easier to compete with well established independent operators and even against other well established franchised competitors. The advantage extends to the national accounts program many franchise systems benefit from.

PRE-OPENING BENEFITS Franchisors have made mistakes. Another advantage of franchising is that they have survived their mistakes and can guide their franchisees not to make the same mistakes. Upon joining with an established franchisor, new franchisees receive comprehensive initial training in the operating of the franchise system, its product, services and methodologies. While the cost of entrance into a franchise system includes a franchise fee, which is often cited as a disadvantage, the franchisee benefits from, among other things; operations manuals, site selection, store design, construction programs and reduced cost of equipment, to name just a few. Additionally, they have not only their franchisor as a seasoned partner to ask questions to but the network of other franchisees within the system who can be of assistance. In essence, the major stumbling block for pre-destined failure is removed by the franchisor. Most independent businesses don’t fail because their product or services were inadequate. They fail because they did not anticipate problems. Chief among these is working capital. Well developed franchise programs ensure that before they accept a new franchisee that they have adequate capital, even after servicing their debt and taking into account seasonally adjusted cash flow. Without this guidance, many independent operators fail soon after opening.

ONGOING BENEFITS In exchange for paying an ongoing royalty and other payments, franchisees benefit from continual training programs and ongoing home office and

field assistance. Often through buying groups established by the franchisor, franchisees have more reduced cost of goods that their independent competitors. Leveraging off the contributions of the entire franchise system, franchisors are able to create professionally designed point of sale, advertising, grand opening programs and other marketing materials which independents could never afford. Franchise programs can also afford to continue to modernize the system through ongoing research and development and the test marketing of new products and operating programs. Franchising is a critical mass business. The spending power of the individual dollar, combined with their fellow franchisees within their market and the rest of the system enable franchises not only to dominate local markets and established independents but compete effectively against the established large chains.

DISADVANTAGES FOR FRANCHISEES One of the benefits cited above for the selection of a business opportunity is the most serious disadvantage for some people in selecting a franchise as a business. It is the loss of independence. By definition, franchisees are not entrepreneurs. If they were, they would never buy a franchise. For the truly entrepreneurial person, franchising is the wrong choice because the structure of the system requires the loss of their independence. This loss of independence, if taken to the excess leads to a further disadvantage of franchising. That of over dependence on the system. Franchising succeeds best when franchisees are at risk and are motivated by their financial and emotional risk to succeed. Where franchisees rely totally on the system for their success, their over-dependence can cause problems. The franchisee therefore must balance system restrictions and their personal ability to manage their own business. As stated above the principal reason for franchising’s success is the public’s perception of quality and consistency throughout the system. Therefore when the public receives great service at one location the assumption is that the sys-

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for starters tem has great service. This is also the major weakness inherent in franchising. You are not only judged by your performance but by the performance of the other franchisees. Poorly performing fellow franchisees will damage your business even where they do not share

the business. While this is a weakness of franchising, it’s also a weakness of every business. Realism is important in making investment decisions. Some of the other often cited disadvantages of franchising are the same restrictions which make it successful including;

“Without this guidance, many independent operators fail soon after opening.” your market. If the hamburger is bad in one location, the public assumes it is bad throughout the system. While good franchisors try to protect against it, some franchisees have unrealistic expectations concerning the income they will earn from their location. Their expectations, when unmet, will cause a franchisee personal financial problems and make them regret the investment in dollars, time and effort that they made in

restrictions on product and services offered, limitations on territory, the possibility of termination for failure to follow the system, the cost of transfer and renewal, and restrictions on independent marketing. In addition are the added costs for royalty, advertising, additional training and other service costs. Therefore, every restriction placed on a franchisee that benefits the system as a whole strips the franchisee of some

independence and therefore on a unit basis can be cited as a disadvantage.

MAKING YOUR FRANCHISE OR BUSINESS OPPORTUNITY SELECTION Most businesses can be offered as a franchise or business opportunity. Many even appear the same on the surface. It is important you sort out the good from the bad before making a decision. The first step in franchise selection is conducting a personal audit. Make certain the industry you select is one that meets your personal needs. Once you have created a short list of industries you are comfortable with, begin with an examination of the industries and the companies within the industries. Finally, when you have selected an industry, begin your examination of the companies. The obvious choice may be the wellestablished 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 in older systems. Contact each franchisor in the industry and obtain their information package. Compare their services, as well as their fees. Visit the headquarters of each franchisor you are considering. Even large established franchisors have problems, which can only be determined from personal visits. Ask questions and do not accept superficial answers. At the meeting with the franchisor you will receive, as mandated by the franchise laws, a copy of the franchise disclosure documents. The disclosure document will provide you with a wealth of information that should also be reviewed by your accountant, as well as a qualified franchise attorney. The one piece of critical information not in the disclosure document is an earnings claim or a projection of franchisee profitability. It is therefore critical that you base your financial assumptions on available information, which is available from articles about the company and discussions with franchisees. —FMM Michael Seid is CEO of Michael Seid & Associates. www.msaworldwide.com

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Dumb Things to Avoid when Buying a Business BY CHERI CARROLL AND HOWARD BASSUK

ime and time again, people make the same stupid mistakes when buying a business. They fall into the same traps that have victimized others before them. You’d think people would learn!

NOW HOLD ON! That’s not fair! Let’s just wait a minute and remember that most people are buying their very first business, so they simply don’t know.

“

Never, never buy a business that you can’t afford.

”

However, some mistakes can be avoided simply by being aware of them. You may have already heard that the two biggest killers of start up businesses are under-capitalization and lack of experience. Sadly, experience and wisdom is often something we acquire by making mistakes. So, it can be a vicious circle. We all learn by making mistakes. However, if a mistake is a large one, it can be fatal, and we won’t get another chance to make good. Many mistakes people make are predictable. To help you to avoid making them, we have compiled a list of 10 of the dumbest mistakes you can make when going into business. We’ve made some of them ourselves, so take advantage of our experience and save yourself from some potential problems!

DON’T overextend financially when buying a franchise.

Never, never buy a business that you can’t afford – it is the No. 1 reason

businesses fail. They simply run out of cash to operate and advertise before they have enough customers and cash flow to support the business. If you run out of money in your business, it’s like being in first place at the Indianapolis 500 and running out of gas after 499 miles. No matter how well you were doing up until that point, if you can’t cross the finish line, you lose!

DON’T start to look until you have an idea of what you’re looking for.

Would you open a closet and stare into it without having any idea of why you were looking there? Would you look for your shirt when what you need is shoes? Of course not! Yet many people look at businesses without first determining what they are seeking. Some people assume all good businesses are good for all buyers. That’s preposterous! Your skills, goals, values, and ambitions will all play a role in determining the best business for you. If you use a little self-analyzation,

N E X T ST E P S

you will have a greater likelihood of successfully finding the right business for you.

DON’T assume that starting a business is easy!

While it’s true that sometimes people get lucky and their businesses are smash hits with seemingly no effort, that kind of success is relatively rare. You should plan on exactly the opposite for the business you start. Assume you will have to work longer and harder than others in the same business just to make it work. If you’re not willing to do that, walk away. When you’re planning, be conservative. If there are going to be surprises, let them be pleasant ones. If you know in your heart that you can do what it takes to make a business succeed no matter how challenging it is, then you are well on your way toward success. If you’re basing your chances for success on being among the operators who were pleasantly surprised by the effortless success of their businesses, you will often have exactly the opposite result.

DON’T try to go it alone.

Use Experts. Lack of experience is often cited as one of the two biggest killers of start up businesses. Certainly your franchisor will help you by sharing their experience with you, but use the experience of other experts, too.

Sometimes we don’t seek expert advice because we simply don’t want to hear anything that does not agree with our hopes. That’s a big mistake. If something is really wrong, it’s better to find out before you’re already deeply invested, both financially and emotionally. On the other hand, if something is wrong, it may be easy to fix if found early, so the advice you get could definitely be the perfect “ounce of prevention.” Be sure to consult with financial experts, franchise consultants, and per-

haps most importantly, a franchise attorney. We know that you like to avoid spending money that you feel you can save, but having an attorney, who is knowledgeable about franchising, review your offering before you buy could be a lifesaver. Think of it as insurance to help protect against some predictable disasters!

DON’T forget about a business plan.

It’s a bit like your mom telling you to dress warmly before you go out in the cold. You’ve heard it all before, but it’s sound advice none the less. Before you plunge into a business, in addition to investigating the franchise you are buying, also study both the local market in which you’ll be operating and the industry that you are contemplating joining. The franchisor, and also other franchisees, can often tell you a lot about the national and local market and the trends in the industry. Don’t stop there. Talk to the local chamber of commerce, check out the Internet, and do research through the industry reference books at the library. Investigate thoroughly. Then put together your business plan. If you are not impressed with it, don’t do it!

DON’T pick a business because “there are so many of them, they must be good.”

When buying a business, feeling safe is a strong and undeniable urge. When you look at an already popular franchise, your safety level instinctively is high. You can see how easy it appears to operate, and you know that your skills could easily accomplish the necessary tasks. Right? Not necessarily! Sometimes too many good things can mean competition is so fierce that the market is saturated and there is little or no room for new operators. Additionally, just because you know how to do something doesn’t mean you’ll like it! If you have a basic need

for variety or for constant challenge, you may find that repetitive tasks, which are required in many businesses, would actually bore you to tears. Also, be sure to remember that the number of franchises in an area is no automatic indication of their financial potential. Some of the best franchises only allow one or two franchisees in an entire city, while others have dozens in a single marketplace.

DON’T skip talking with the other franchisees.

What do they know? Everything! People who are in a business that you find attractive are the best source of information that you’ll ever find. But watch out – sometimes there may be a hidden agenda. If you wander into a dry cleaner, tell him you are thinking of going into dry cleaning, and ask his opinion, what value are you going to put on the response? Do you think he will give you an honest answer if he thinks you may be planning on opening a competitive outlet just down the street? On the other hand, when you have done your homework with a franchisor, have read the offering circular, and are calling franchisees all over the United States, you’ll get valuable information that you can check out with others to see if it rings true throughout the franchise system. It’s important to find the people who are doing well in a franchise as well as to find people who are struggling. Which one are you most like? Do your skills match the winner? Or are there www.franmarket.com

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“

Something is wrong if you are the only one who loves the product.

”

tasks that must be done in the business that you are unwilling or unable to do? If you hate cold calls and the business requires talking with every merchant in your territory, pass. If your goal is to find a business that you will enjoy, then get the real facts from the people in the know – the franchisees.

Don’t put it on your credit card.

Wow. At 18.9% interest (or whatever the current rate), you better pray the cash flow starts very quickly! Chances are very strong it won’t. Most reputable franchisors would strongly discourage you from using this kind of financing if they feel it could impact your ability to succeed. Unfortunately, outfits that may not care if you survive may encourage you to buy now (and cry later) no matter what you must do to pay for it. Reputable franchisors want you to succeed – that’s how they make their money. A franchisor charges a royalty, which is a percentage of your gross sales. In return, they give you service and support. If you don’t make money, they don’t make money, and they still are obligated to serve you. So if they don’t think you can make it, they have many reasons to be frank with you.

DON’T pick the business your dad (or spouse) likes best.

Each person in the world has different skills, needs, and desires. Why would your dad or your neighbor or your spouse like the same businesses that you do?

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When you look at a business, you need to think about how it matches with the things that you truly want to do and whether it will fulfill your goals. You need to analyze what is important to you – Independence? Money? Freedom? Flexibility? Growth? Challenge? Variety? People? Each business can fulfill different types of needs. If you want freedom and flexibility of hours, then food and some other types of retail may be too demanding of your time – perhaps a service business where you can book your own appointments would be better for you. On the other hand, if you want high visibility, then perhaps retail would be perfect. If your wife would love a flower shop, and you really want a transmission shop, are you better off compromising and buying a different franchise altogether so that you can both work together? It depends! It’s important for one or the other of you to buy exactly what you love and are great at doing. If the other one can pitch in and help – great! If not, then they should work for someone else and give you staunch support and cash flow — it will be better than having a business that neither one of you cares much about.

10.

DON’T fall in love with the product.

If you like new age crystals and aromatherapy or sporting gear, or bikes, candles, hubcaps, flowers, or low-fat yogurt, you are ripe for the picking! When you enjoy a certain type of product, naturally you’d like to be around it, but retail is retail, so make sure you can do the things needed to make the business successful. It takes a certain personality type to do the things that retail demands: Be there …hour after hour, day after day, being nice to your customers, making change, and keeping track of the inventory. It takes someone who loves schmoozing with everyone and being of service to others. It takes a teambuilder to keep good employees. Sure,

you love those auto parts! But in the end, what you are doing with them is not putting them on your classic car – you’re standing behind a counter selling them, putting them onto shelves, dusting them, and inventorying them. When you pick a business, check out what you would be doing all day every day. Your dream, of course, will be to have other people pour the frozen smoothies or ring up the oil filters, but most young businesses will demand that you work there for at least the first few months to get the cash flow going. Can you take it, or will you find out that the true love you felt for the product was only a short-lived lust and soon gone when you had to be there for the day-to-day grind? Many of us dream of being our own boss someday, and we know that it’s impossible to take all the risk out of going into business for ourselves. Avoiding as many dumb mistakes as possible can certainly help us move the odds into our favor. —FMM Reprinted with permission from FranNet.

“

Find your passion in business, you will find your success.

”

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HOW DO YOU SPOT A

FRANCHISE SCAM? — By Michael Seid

ack before California started the move to regulate the offering of franchises during the 1960s, and long before the Federal Trade Commission published its franchise rule at the end of the 1970s, buying a franchise could be as risky as putting your 401K into Enron or Talk Magazine. Before disclosure, the franchise industry suffered from companies that had lots of hype, little substance and an absence of management talent. What they did have were great salespeople. Some of the franchise offerings back in the ’50s, ’60s and ’70s were for companies that had never opened a single unit before selling franchises. Some had management that had never been in the business being offered. But, they did have experience in bankruptcies, litigation and problems with regulators. Some of the companies were so financially weak, they needed the proceeds from franchise sales to meet payroll or to pay for the franchise ads the prospects responded to. There were even stories of franchisors whose furniture was being repossessed in one room while the prospective franchisee was in the other. Nevertheless, just because the government regulates something doesn’t mean things are always better. While not common, there are still franchise offerings today that are such poor opportunities they would have fit in nicely with the bandits of the past. How is that possible? Part has to do with the ease of developing a franchise system, part is due

There’s no single indicator of a franchise scam,and you need to weigh all of the indicators in making your assessment.

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to the lack of consistency in franchise regulations; and, part is due to how franchises are sold. But, the primary reason franchise scams still exist today is due to the individuals who do not do their homework and invest in these “opportunities.” They allow the bad opportunities to remain in business. There’s no single indicator of a franchise scam, and you need to weigh all of the indicators in making your assessment. Just remember, there are hundreds of superior franchise opportunities available today, and there is absolutely no reason to settle for less than the best opportunity in your investment range. There is little you can do about the ease of development or the inconsistency of regulations, but you can protect yourself by doing your homework.

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The disclosure document is a wonderful tool for prospective franchisees to have. At your first personal meeting with a franchisor, they are required to provide you with one. Some franchisors will mail you a disclosure document and others post them on their web sites.

Before you make that investment ven before you get to the point of contacting a franchisor, you can get a sense of whether their opportunity is for real. Go on line and research news stories about the company and the industry. If the company is public, look at the information available from their SEC filings. Visit their Web site and get information about their consumer offering, as well as their franchise offering. Learn what you can about their management and thoroughly research their background.

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Compare the company to its competition – both franchised and non-franchised. Locate some of their stores and speak to existing franchisees. Then, when you are satisfied, contact the company. When you first contact the company ask them about the process they use in selecting franchisees. If you get the sense they don’t select franchisees but are in the business of selling franchises, that’s the first indication the franchise is risky. Remember, a franchise system is only as strong as its brand, and that brand rests to a great extent on how well the other franchisees in the system perform. If the franchisor lets anyone who has money in the system and does not have selection criteria, then in all likelihood, your investment is going to be at risk. If the company is willing to “sell” you a franchise and does not require you to visit them at their company headquarters so that you can perform a thorough evaluation of them and they can perform a thorough

evaluation of you, that’s another indication of a poor franchise system. If, on top of that, the salesman you are talking with is not an employee but an outside sales broker, that’s even a stronger indication. Remember, unless you buy the franchise, the brokers don’t earn any money. And, since he is not an employee of the franchise system, he doesn’t risk much more than the chance to earn a future commission check if he introduces into the franchise system individuals destined for failure. Franchise brokers just move on to the next franchisor looking to sell franchises. When you visit the franchisor’s headquarters, meet as many of the franchise support people as you can. Assess whether they have the experience to do their jobs. You need to be certain that they can and are required to provide you with the level of support you are anticipating getting. Take a look at the condition of their offices. Do you get the feeling of success or

N E X T ST E P S

impending doom? Do all of the company’s resources seem to go into marble and brass or does it seem that the company is investing in computers, personnel, training programs and other components of support. Once you get the disclosure document, be prepared to analyze it thoroughly. If this is an opportunity that still interests you after you read the company’s information, you should engage a qualified franchise attorney, consultant or accountant to help you in conducting your due diligence. The franchise salesperson or broker works for the franchisor. No matter how friendly or professional they may be, they should not be a source of advice that you rely upon. Some of the indicators of scams include the following:

• Does the company have experience in the business being offered? We’re not talking about a related business but the exact business. If the company has successfully been operating 4,000 square-foot stores but the franchise opportunity is only for 1,000 squarefoot stores, it’s not the same business no matter what they say. The same works in reverse – bigger is not always better. If you will be opening your franchises in Boston but the only experience the company has is in Texas it’s not necessarily the same either. Have they done the necessary research to determine if the concept will work in Boston, or are you going to be their cold weather guinea pig?

• Does management have a history of success? Now, success as franchisors is wonderful but what about in the industry in which you will be operating. Does management of the franchise system know

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how to operate your business successfully? If not, what type of support are you likely to get? How frequently have they changed jobs? How well are their former companies doing? If they seem to move just before the sheriff or process server arrives, that is not a great indicator. If they have been with other franchisors call franchisees of those systems and find out how well this management did in the past. A mix of executives with experience in the business and as successful franchisors is a great benefit to franchisees.

standards will occasionally need to sue its franchisees. If they are able to still maintains a good relationship with their other franchisees than that type of litigation is an indication of a strong and responsible franchisor. However, if there are pages upon pages of lawsuits from franchisees in the disclosure documents, that is not a good sign. You need to understand the basis for the lawsuits and make a decision based upon the facts. Your attorney can help you analyze the franchise litigation.

• What is the financial condition of the company?

• Is the franchise offered only in the non-registration states?

Your investment is likely to be significant. In some franchises, between debt and equity, your investment may be more than seven figures. What about the franchisor, will you have more skin in the game then they do? Do they have a history of profitability? Are they earning their revenue from royalties and other continuing sources of revenue or are they relying on the sale of the next franchise to make payroll? Even new franchisors need to have financial resources to meet their commitments.

• Are you getting value for your money? Sure, if it’s a well known established brand and the franchisees in the system are doing well, expect to pay a sizeable franchise fee. But, if it’s a new franchise system and your training lasts only a few days are you paying more than it is worth? Paying $25,000 or more for a franchise fee when you are only getting one week of training from a new franchisor with limited experience, simply because they have a great brochure and a spectacular franchise sale program, doesn’t seem to be value for your money. Ask the other franchisees in the system if they got value for their money. Remember that franchisees new to the system may not even know yet.

• What’s the franchisor’s litigation or regulatory history? Franchisors must disclose relevant litigation. Sometimes litigation is good. Any franchisor that enforces system

There are 24 states in the United States that review franchise documents and require franchisors to register their offering before getting permission to offer franchises in their state. In the rest of the United States no regulator ever sees the franchise offering. Sometimes companies don’t offer franchises in the registration states because those states do not fit into their geographic strategy. But, if a franchisor is offering franchises all over the United States, except for the registration states, that may be an indication that their franchise would not meet the requirements of the registration states.

Learn what you can about their management and thoroughly research their background. You need to be very careful when you come upon opportunities that go out of their way to avoid the registration states. Your attorney can give you a list of the franchise registration states or you can contact the International Franchise Association at (202) 6288000 and their government relations department can provide you with a list. One final point that I think is worth making. I have to admit some bias toward membership in the International Franchise Association since I am on the Association’s Board of Directors; was chairman of the professional arm of the association, the Supplier Forum; and have been active in the organization for over fifteen years. Active member-

N E X T ST E P S

ship in the IFA by a franchisor, while not a guarantee that the franchisor is a worthwhile investment, is an indicator of a responsible franchise system. Active members have available to them training programs, networking opportunities and meetings in which they can exchange practices with other franchisors. I can’t imagine investing in a franchise system that was not an active member of the IFA. These are just a few questions you will need to assess in determining

whether the franchise is a scam. Your outside advisors will be able to help you put aside your entrepreneurial burn to get into the game and assist you in conducting a proper due diligence on the opportunity. Don’t get into a franchise unless you have the assistance of a qualified expert. The franchise salesman that has befriended you has the advantage of having been through the selling process hundreds of times. This is likely to be your first experience. —

TIPS FROM

Michael Seid is CEO of Michael Seid & Associates. www.msaworldwide.com

SCORE

FMM

Cultivating Confident Employees

Ask them to be responsible for progressively larger projects.

Use them as examples (in their presence) when describing to others how to do something.

Give them feedback at various times during a project—not just at its completion.

4 5

Send a note of praise to them or better still, to their direct boss.

Ask for their opinions and advice on matters not necessarily related to their normal duties.

Brought to you by SCORE “Counselors to America’s Small Business.” www.score.org/

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FRANCHISE TREND

Atlanta Bread —By Robert Pitts

NOT ONLY BREAD First-time franchisee draws upon experience to open Atlanta Bread

Atlanta Bread Company is one of the fastest growing, privately held, quickcasual Bakery Café concepts.

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Jamie Knight knows a little something about the business world. Having gone from bodybuilder/nutritional consultant to warehouse worker to owning his own commercial insurance and employee leasing firms, the 47-year-old entrepreneur has experienced all of the ups and downs that come with the territory. But it was the development and recent opening of his own Atlanta Bread franchise that forced him to draw upon his intellectual and emotional resources in unprecedented ways. Knight said his insurance and employee leasing work gave him exposure to a variety of businesses. He came to appreciate the way restaurants, in particular, tend to provide a consistent source of income. And it was during his frequent trips to his insurance office in Atlanta that Knight always seemed to find himself spending time at the airport’s Atlanta Bread restaurant. The Winter Haven native lamented the fact that nothing similar could be found in his hometown.

FRANCHISE TREND

[

Atlanta Bread has Franchised since 1995, the chain currently has more than 165 U.S. locations spanning 27 states.

]

FRANCHISE TREND

“

I kept saying to myself, ‘I wish somebody would do that.’ I got fed up with nobody else doing it. — Jamie Knight

“

Getting Started So Knight decided to do it himself, sold on the restaurant’s ambience and bolstered by research that showed Atlanta Bread franchises do extremely well in small cities like Winter Haven, population 29,000. Atlanta Bread had stiff underwriting criteria, according to Knight. The company required a non-refundable franchise fee of $40,000 and wanted to see a minimum net worth of $1 million. Executives also were a bit dubious about the market, but Knight assured them there was no reason to worry. Another concern for Atlanta Bread was Knight’s lack of prior restaurant experience, but the company was intrigued by the cross-marketing opportunities with his

other companies, Insure America and Employ America. Knight allayed Atlanta Bread’s fears by hiring an experienced manager to run the restaurant. Atlanta Bread requires site approval by its location committee, Knight said, and the company sent a representative from Atlanta to study the area for two days. Knight had wanted to put the restaurant in a suburban location near the city’s Cypress Gardens theme park, but Atlanta Bread advised a more urban location saying people tend to eat where they work, not where they live. The approved site is near the city’s downtown and in a shopping center across the street from a major retail power center featuring a Lowe’s home improvement center and a Macy’s department store, among other tenants.

Finding The Money Financing was the next hurdle to overcome, and Knight found out that restaurants are at the bottom of most banks’ commercial lending lists. Having a franchise operation only improves your odds slightly. The U.S. Small Business Administration offered low rates but high fees and a painfully complicated application process. Due to his high net worth, Knight was eventually turned down both by the SBA and many area banks. Knight said he could have just paid the $1 million tab to open his franchise by himself, but that just isn’t good business. He finally settled on a creative strategy by which he made a substantial deposit with a major bank at 4% interest and then took a line of credit at a lower rate of LIBOR plus 1.25%.

Getting It Open It took 2.5 years to open the Winter Haven Atlanta Bread franchise because contamination of the land on which it sits had to be remediated, Knight said. He doesn’t own the building or the land, but he negotiated a long-term lease and a generous buildout allowance from the shopping center developer. Dealing with the local government also was a challenge. Knight spent $20,000 on grease traps alone, and a snafu at the staff level almost cost him his signage after spending $20,000 there as well. Nevertheless, the

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FRANCHISE TREND

restaurant is open, and Knight estimates he’s No. 6 in the nation for gross revenues. Annual net revenues are estimated at $200,000. Knight employs a general manager, an assistant GM and a bakery manager, in addition to hourly-wage help. The GM earns a 5% bonus on net revenue every quarter if gross revenue targets are hit. After five years with the company, the GM will get 5% of the franchise in the form of stock. As time passes, the initial workforce of 80 employees could be whittled down to about 35 people, Knight estimates.

Advice The best part of the whole process, Knight said, was the feeling of satisfaction that came when the doors to his Atlanta Bread franchise were opened. “It’s the fact that it’s accepted, and people truly like the concept,” he said. But those who would follow in his footsteps should do an enormous amount of due diligence.” There should be a class on how to do a business plan.” And if you don’t have previous restaurant experience, “surround yourself with people who know what they’re doing,” he said.

“

Make sure it’s universally accepted and there’s a true market for it. — Jamie Knight

Managing the Restaurant Quality training, hiring key to solid operation

Managing an Atlanta Bread franchise is not a solo undertaking. Provided you’ve already qualified to be awarded a restaurant, you’ll get hands-on training during the company’s nine-week program in Georgia. “It’s the same training program the general managers go through. You become an expert in the Atlanta Bread system,” said Berry Chatas, general manager for the Atlanta Bread franchise in Winter Haven. To ensure quality service at the local restaurant, Chatas took 10 of his key employees and passed on the information he had received, training each of them to master one area of the operation and effectively supervise the rest of the staff. “To make sure you have a successful opening, you have to make sure your people are well-trained. You have to do quality hiring. You cannot just hire warm bodies,” he said, adding it pays dividends in the long run to spend more on good people. “If you try to go for the minimum wage, you’re going to get the fast-food employee.” The emphasis on professionalism is already manifesting itself

“

in positive feedback. “Our business consultant (from Atlanta Bread) told us we are his best store in the state of Florida,” Chatas said. “They say our store is the least complained-about store in the southeast quadrant. That shows how training is essential in the opening of the restaurant.”—FMM

Franchise owners at each Atlanta Bread location donate all unsold bakery items to local charities and shelters at the end of every business day.

www.franmarket.com

[ COVER STORY ]

â&#x20AC;&#x201D;By Helen Dixon and Barry Quinn

consider: The increasing popularity of franchising as a mechanism for growth over the last 40 years has seen it become an important topic in various disciplines, including marketing, economics and business theory. In the same way, e-commerce is rapidly becoming an important area as more and more firms venture onto the Internet. Essentially, these two business strategies could be regarded as being conflicting in nature, as franchising relies on the establishment of protected territories for its existence while e-commerce is inherently a distribution method that erodes boundaries and restrictions.

[ Franchising & INTERNET ]

consider: the internet has no boundaries and restrictions

The global nature of e-commerce and the way in which it allows firms to overcome traditional physical and geographical restrictions presents a significant challenge to franchise systems, which are typically dependent on the maintenance of strict territorial rights (by law if necessary) for their successful operation. Despite this, franchising firms are (or at least should be) keen to claim their share of the e-commerce cake, with most franchisors already reporting that they have a presence on the Internet. In addition, it is not just their products or services they are trying to promote, but their franchise concept as well. However, as well as reaping the usual benefits of the Internet that other businesses are boasting of, franchisors are at risk of the same difficulties – and then some. Unlike most organizations, franchisors have the precarious task of developing an Internet strategy that will avoid conflict with their franchisees and will not contravene the

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various regional competition laws, as well as their own franchise contracts. Consequently, franchisors are finding themselves at the mercy of additional organizational and legal complexities that other companies do not encounter. Another consideration when discussing the nexus between franchising and e-commerce is that e-commerce could theoretically eliminate the need for franchising, depending, of course, on the nature of the core product or service delivery.

Franchising and E-Commerce Facts At present, there is relatively little factual information available that discusses in detail the use of the Internet by franchising firms. Most of the literature that is available takes the form of short articles in publications aimed at the franchise industry rather than academic research. This may be a reflec-

tion of the relative immaturity of ecommerce within franchise systems. However, like most businesses, franchises can exploit Internet technologies in several ways to the advantage of franchisors, franchisees and customers. Indeed, some would hold that franchise systems are particularly suited to e-commerce because of their recognizable brand name and their established network of physical outlets. A recent survey shows that over 80 per cent of franchisors reported that they have already established a Web presence, with most of those who had not … intending to do so in the near future. Only a few of franchisors did not anticipate ever owning a Web site. This same survey also indicates that most franchisors stated that they used their Web site as a means of communicating with and attracting customers, which is consistent with the research on business Web sites in general. Over a quarter of franchisors reported that they provided customers with the facility to order goods and services online, although only half of these claimed that they could accept payment over the Internet. Rather than simply being an extension of their traditional advertising, franchisor Web sites can include many useful features, including a search facility to find details not only of products but also of individual franchise locations, as well as links to franchisee Web pages. In addition to using Web sites to attract customers, franchisors can and are using them to attract potential franchisees. “Franchisee solicitation Web sites,” as they are known, are an inexpensive yet effective way of publishing company information and franchise details, thereby quickly attracting interested applicants and eliminating unsuitable parties. Another way in which franchisors can make use of the Internet is in the dissemination of their training materials. This can allow franchisors to distribute their training information quickly, even to remote franchisees, at a relatively low cost. In addition, online testing and feedback

[ Franchising & INTERNET ] can assist the franchisor by providing timely assessment of the effectiveness of their training content and methods. Intranets are a particular aspect of Internet technology that can greatly benefit franchise systems, and a great percentage of franchisors report to having made use of this technology. These secure sites, which franchisees can access using passwords, can contain various features like noticeboards where franchisees can interact, electronic mail, newsletters, or operation manuals. Some franchise companies even provide their franchisees with the facilities for ordering supplies online or for calculating and paying their royalty fees, therefore simplifying many of the franchisees’ administrative tasks. However, one particularly interesting finding from a recent survey indicated that half of the franchisees questioned admitted that they never visited their franchisor’s Web site, and only a few claimed to visit it at least once a week. Others believe that, when making the move into e-commerce, franchisors need to set out certain goals in their overall strategy, including consistent

Franchisors must take into consideration the environment in which they are operating and the willingness of franchisees to co-operate when developing their Internet and e-commerce strategies. Some group the various business models that franchisors may adopt for Internet use and e-commerce into three broad categories: brochure-type Web sites used to disseminate product and service details; intranets providing restricted access to franchisees and/or employees; and extranets to facilitate B2B and B2C e-commerce activities. A brochure-type Web site should be relatively simple to establish and should increase franchisee satisfaction as it should direct potential customers to the physical franchise outlet. This can be contrasted with the difficulty of implementing a B2C e-commerce strategy, which can cause substantial friction within the franchise relationship and at times even result in legal action. One of the most problematic aspects of the nexus between franchising and e-commerce that has been discussed by some is the legal implica-

“A recent survey shows that over 80 per cent of franchisors reported that they have already established a Web presence...,” Web sites that are easily updated, coordination of domain names and proper and prompt delivery of products and services. Some caution: A proliferation of Web sites identified by a company’s name or variations of it confuses consumers and may dilute the brand, especially if the sites are inconsistent in appearance, content and function. A consistent and well-formulated strategy is also important if a franchisor is to remain on the right side of its franchisees, and indeed the law.

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tions of doing franchising business over the Internet. Like any firm venturing into cyberspace, franchisors need to be aware of the developing legislation regulating electronic commerce in general, including, for example, legislation addressing privacy, copyright, linking or “cybersquatting.” However, the contractual and often international nature of franchising leaves it in a more precarious position when it comes to online activity. For example, a franchisor who includes information about franchises that are available or

consider: bring more diverse products and services to the market for sale on their Web sites may find that they is contravening franchise laws in other regions, which tends be a particular problem in the US, considering the variations in individual state laws. By offering goods for sale online, franchisors may also find themselves violating cross-border competition laws or in breach of their own franchise contracts as regards territorial rights. This problem is exacerbated by the fact that e-commerce laws are still evolving, and many franchise contracts were established when the Internet was still in its infancy and do not deal directly with situations relating to ecommerce. Previous legal cases, particularly in the U.S., have shown that even though the franchise agreement does not specifically refer to the use of the Internet, franchisors may still be at risk from encroachment claims by their franchisees if they engage in e-commerce. There are three ways in which franchisors can handle online sales: the franchisor conducts e-commerce on its own, controlling and taking the revenue; the franchisor controls and conducts e-commerce with the participation of the franchisees; and the franchisees conduct e-commerce on their own, controlling and keeping the revenue. Some say that a franchise company can engage in e-commerce without involving its franchisees by offering a different product, using a different

[FRANCHISING & INTERNET] trademark, avoiding franchised territories or using alternate distribution channels. However, if an inclusive strategy is followed, franchisees can be involved by fulfilling orders, participating in servicing and returns or by receiving a share of the revenue, either through reverse royalties or a royalty pool. Allowing franchisees to engage in online selling on their own can result in significant problems in terms of inconsistency and conflict caused by franchisees infringing on each others’ territories. Many believe that a participation strategy is most beneficial to the franchise system. The terms of the franchise contract in relation to exclusivity and territorial rights will be a major contributing factor in the franchisor’s determination of which procedure to employ. Even if a franchisor is not involved in selling its products online, it still needs to establish a strategy for the operation of any Web sites. There are four models used by franchise systems: franchisees are allowed to set up their own Web sites using their own domain names; franchisees are forbidden from using the worldwide Web in any way connected with the franchise or its trademarks;

consider: a non-internet franchise business has too many limits

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franchisees can use the Internet but the content of their Web sites must be approved by the franchisor; and the franchisor controls the Web site but provides franchisees with their own Web pages within that site. Of these arrangements, most feel

chisees are regarded as providing more benefits than simply being a source of capital or other resources. Moreover, the very nature of the core product or service offering may in itself mitigate against the deployment of an Internetonly presence. The fast food sector is

“franchisors need to be aware of the developing legislation regulating electronic commerce in general...,” that the franchisor retaining central control of the Web site while providing pages for franchisees is probably the most constructive as it safeguards against the misuse of domain names and Web sites by franchisees and allows the online content to react quickly to changing market conditions. Despite the advantages and opportunities discussed above, it could be argued that rather than benefiting franchising, the Internet could lead to its eventual demise. If the majority of goods are to be bought on-line, the need for a high street presence to maintain and promote brand visibility will be less, and hence the attractiveness of franchising as a cost-effective means of achieving this. If franchising is used as a means of raising finance, as supporters of the resource-scarcity theory have argued, the low set-up costs of online retailing compared to traditional retailing should mean that companies could expand quickly and easily without the need to resort to franchising. However, some argue that franchising is more related to risk, low human capital and economies of scale, and believe that its position as an important growth strategy for retailers will remain secure. A theoretical perspective of franchising would also reject the notion that ecommerce could replace it, as fran-

an obvious case in point. There is no doubt that franchise systems can benefit from the same opportunities that the Internet holds for other businesses. However, the nature of the franchise contract may make e-commerce more complex and problematic for this sector than for non-franchised firms. As a result, not only do those franchisors who have already developed a successful “bricks and clicks” system enjoy a clear advantage over their competitors, some have even sold their online system design to other franchisors. While it is clear that franchisors need to retain control over Web sites and their content, they risk damaging their relationship with their franchisees if they exclude them completely from any online business, and could even face legal action if they are violating franchise or competition laws. As both Internet and franchise laws are still evolving, franchisors need to be constantly aware of how they may affect their operations.

To Find This Complete Study, Go To: www.emeraldinsight.com This article was excerpted from a white paper authored by: Helen Dixon and Barry Quinn.

I N T E R N ET

—By Lori Kiser Block

Looking for a Franchise... Check the Internet

How the Internet has Impacted Researching a Franchised Business for Purchase Not long ago, before everyone had access to that amazing and magical phenomenon called the Internet, people researching a franchise opportunity had to do it the old-fashioned way: Picking up the phone and then waiting for information to arrive via mail. Nowadays, the likeliest way to find information when an idea strikes is to research it on the Internet. Poof! Everything you could possibly want to know about a franchisor suddenly appears before your eyes. This has created some major changes in investigating franchises. Or has it? Most of us only recognize franchising because as we drive down Main Street, we recognize certain brands, like McDonald’s, Subway and Quick

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Oil Change. As the industry grows and matures, and the same Main Street looks homogenized, we have started to recognize more brands, and we have found a certain comfort in dealing with local companies that have a national connection. Enter the Internet – now your ability to learn about franchised businesses is limited only by the amount of time you want to spend reading about them. There are a multitude of franchised businesses, advertised on a multitude of Web sites. Google “franchise” and you’ll get over a hundred million options. Be more specific like “print shop franchise” and you get one and a half million links to opportunities. It’s a veritable feast of information – a “business owner wannabe’s” dream, or depending on your viewpoint … nightmare. Getting the information you want is easy. Click on the links to franchise directories and you will see a list of companies and their investments and other information for comparison. Then go to the Web site of the companies that look interesting and learn even more.

Detailed Research Pre-Internet, a prospective franchisee would need to request information from the franchisor. The information would include the UFOC (Uniform Franchise Offering Circular), a brochure listing the benefits of being a franchisee, and sometimes a short video. Getting the information wasn’t hard, but there was no immediate reward for your effort – you’d have to wait for the postman. You’ll still get this information when you contact a specific franchisor but you can learn much about a company from the Internet before you even take that step, such as:

1 How many current locations do they have? Many franchisors’ sites will list their current locations and some will have links to their franchisees’ personal sites.

2 What kind of marketing do they use? The Internet is directed at consumers as well as it is at a potential franchisee. Therefore you can get a feel for the

I N T E R N ET

type and amount of marketing a company does. Some sites even have links to TV and print ads right on their Web sites.

sole factors needed in making a good decision.

Everything that changes remains the same

Who are their competitors? You can find information not only on the company you are interested in but also similar businesses. Compare what they do alike and what they do differently to get a better overall picture of the specific industry.

What’s new in the company? Read the company’s press releases to learn what they have changed or what they are doing differently. Most companies will put out a news release when key personnel changes or when they have added to or altered the service or product.

How does the industry rank a franchisor? You can further refine your research by learning how a company is ranked by franchise-specific publications, such as the Entrepreneur magazine’s Franchise 500, which lists the top franchise companies each year and Franchise Business Review, which rates franchises by franchisee satisfaction.

Getting the publishable facts about a business is only a part of a candidate’s research process. A potential franchisee should go through a number of steps after researching a company and before making the final decision to buy a franchised business. These generally involve such items as requesting and reading the UFOC document, making several calls to the operations people in the franchise company to discuss the business in detail, calling a number of existing franchisees in the system to see how they feel about all aspects of the business, visiting one or more locations to learn about the business in person, and finally making a trip to see the franchise company personnel at their headquarters.

But wait; there’s still more

An equally large share of your decision will be based on your emotional, right-brained “gut feeling” about the franchise as with the logical, leftbrained focused characteristics of the business. The personality and culture of a franchise can impact your success and happiness as much as the ROI and hours worked.

Some of the questions you will ask yourself: 1 Am I willing to pound the pavement to

Who are the people running a franchise company? Google the names of the top personnel to learn what companies they came from and what other positions they have held.

What’s the bad news? You need to know the negative as well as the positive aspects of any business you are thinking of buying. Many disgruntled franchisees have started their own blog pages to detail what they didn’t like about a franchise company. One person’s negative experience shouldn’t dissuade you from doing further research on a company, but keep the complaint in mind and make sure you get your questions answered to your satisfaction. Research that may have taken months now takes minutes. All of these points are very important to finding the right opportunity, however they are not the

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find customers who will value my service?

Am I willing to accept the role and responsibility of hiring, training, managing and firing employees?

Is my family in agreement and completely aware of the commitment this will require for the first couple of years?

Do I have enough cash reserves to get through any rough spots? Additionally, great franchisors don’t simply award a franchise to just anyone who asks. There is a financial requirement to be met, a set of skill and personality traits to be matched to the company, and finally the franchisor must be convinced that the franchisee has what it takes to make the business a success. The last thing a franchise company wants to have show up in their UFOC document is a list of failed franchisees. The Internet has not only helped the potential franchisee find a greater number of franchised businesses to choose from, it also gives the franchisors a significantly greater number of highly qualified and motivated potential franchisees. The end result is that both – the potential franchisee and the franchisor – have more choices. If you are interested in becoming the owner of a franchised business, the Internet will certainly give you many ways to find out more about the company, its competitors and the franchise industry in general – all without leaving home. But even getting all of the facts about a business won’t prevent you from going through all of the emotions, excitement and stress of making the actual decision. With or without the Internet, that process remains unchanged. —FMM Lori Kiser Block is Vice President of FranChoice.

B U S I N E S S R E SO U R C E

ASBDC NETWORK

Association of Small Business Development Centers members as a national network deliver nationwide educational assistance to strengthen small/medium business management, thereby contributing to the growth of local, state and national economies.

•SBDCs

Small Business Development Centers Established through a public/private

help small businesses increase sales. SBDC in-depth clients* generated $6.1 billion in new sales in 2004.

•

SBDC clients’ sales grow faster. partnership by Congress in 1980, the Small businesses that received Small Business Development Center SBDC assistance experienced program is the most comprehensive, sales growth of 18.5% between efficient and effective business assis2003 and 2004 – compared to tance network in the nation. The mis6.6% for businesses in general. sion of the SBDC program is to help new entrepreneurs realize their SBDC clients create dream of business ownership and more businesses. existing businesses remain comMore than 60% of all THINGS TO KNOW petitive in the complex marketpre-venture SBDC place of an ever-changing global clients s started SBDC in-depth economy. 16,140 businesses. clients* generated Over 1100 local SBDC $6.1 billion in offices extend entrepreneurial SBDC clients find new sales education to meet small business out where to get needs, through free individual money. SBDCs Go on the counseling, training and research helped clients obtain web and visit assistance while serving over an estimated $2.6 asbdc-us.org 700,000 clients annually, creatbillion in financing ing over 74,000 new jobs, and in 2004. generating over $500,000,000 in combined new tax revenues for Small business owners the federal government and state govand aspiring entrepreneurs can go to ernments . their local SBDCs for free, face-toface business consulting and at-cost training on writing business plans, accessing capital, marketing, regulatory compliance, international trade and more. The SBDCs are a partnership The ASBDC (Association of Small that includes Congress, the U.S. Small Business Development Centers) repreBusiness Administration (SBA), the sents the collective interest of private sector, and the colleges, univerAmerica’s Small Business sities and state governments that manDevelopment Center Network. age SBDCs across the nation. ASBDC seeks to improve the SBDC national network by promoting, Source of Statistics: SBA; and the “Economic Impact of Small Business Development Center Counseling Activities informing, and supporting the work of in the United States: 2003-2004,” by Professor James J. all state SBDC programs. ASBDC

•

ASBDC Mission Statement

Chocolate Empire Company Martha Flechas, owner Assisted by the SBDC in Miami

Client Profile Entrepreneur Creates an Empire of Chocolate: When Martha Flechas came to the United States in 1997, she made it her personal goal to own a company. Toward this end, in June 2003, she began attending classes put on by the Small Business Development Center at FAU`s Miami Office. At the same time, she discovered the art of producing different sorts of chocolate products from someone with whom she attended church. Among the products she imagined selling: chocolate souvenirs for all occasions. Today she does just that, as owner and operator of her own company, Chocolate Empire, Inc. While taking SBDC classes to increase her knowledge of small business operation, Martha met with Certified Business Analyst Nancy Orozco. During their first meeting, Nancy advised her to concentrate her marketing and manufacturing efforts on just one of her current products, the chocolate souvenirs. This allowed Martha to focus her efforts on growing her business more efficiently. Sales have steadily increased and now Martha has two private investors willing to provide the financial injection her business needs to move to a commercial location and grow.

Chrisman of Mississippi State University

www.franmarket.com

N E X T ST E P S

YOU MADE IT

GROW now its time to go! — By Howard Bassuk

this race to reach a finish line. It’s so easy to lose focus on the finish line. Life ow vividly you remember it. To you, the today has taken on such a “hurried” tone that time to memories of when you started your business reflect and measure results can disappear. In the franseem as if they happened only yesterday. You tic and frenetic world that we live in, its often diffican remember the day that you decided to go cult to stop, take a deep breath, and reflect on where into business, and the day that you signed we are, and what we’ve done. your franchise agreement, and then your first lease. You Yet that moment of reflection that allows you to remember that after feeling as you had waited forever; analyze where you are, and where you are going, is your businesses’ equipment was finally delivered. critical. It allows you to take stock your goals and You remember the worries too. You smile to yourhow to achieve them. After all, without self as you remember the first time you knowing where your destination is, it’s had a bad day, when just about everything impossible to know whether you’ve arrived. seemed to go wrong. You laugh aloud as THINGS TO KNOW So, you just keep right on running! You you remember wondering whether things run and run until you realize that you have would ever get better, and whether you “For many forgotten where you were trying to go. had done the right thing by going into successful Perhaps its time for you to take it a little business. entrepreneurs, easier, or perhaps its time to turn the busiAnd then you remember the day you it’s very hard ness over to the kids. Maybe its time for you realized your business was going to be for them to know to exit your business completely… to cash successful. You still remember the feeling in your chips and go home! when to let go…,” of exhilaration that swept over you when I knew a manager whose daily schedule you realized that you had succeeded. It included 30 minutes labeled “time to think”. ARE YOU READY? seemed that almost magically the question He told me that without this daily half hour, that you had to answer had shifted from he often forgot the big picture goals of what “will I make it,” to “how big do I want this he was trying to accomplish, and what business to become?” options he had that would give him the best chance

You remember it all, and so much more! Phew! Time flies by. The days, months and years blend together until they coalesce into a singular fabric whose threads are indistinguishable. You realize that you have had to run so fast, and so hard for so long, that you forgot that you started

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of reaching his objectives. If you don’t have 30 minutes, at least take a minute or two. It doesn’t matter whether you are just starting your business, or whether you have been in business for many years. Maybe you haven’t had the chance before, but take that time now. Look back to where you started, look at where you are, and once again ask yourself “where do I want to be, and how do I want my business to end up”? You may realize that you’ve already built the business you set out to build, in those early years. You are a success! Your business

N E X T ST E P S

has grown. You and those around you have prospered. You find yourself asking yourself, “what should I do now”? Suddenly, it comes to you as clearly as any vision you’ve ever had. You see the future in front of you, and you know what you want to do next. You realize, almost anti-climactically…. The business is a success, now its time to go! For many successful entrepreneurs, it’s very hard for them to know when to let go, cash in their chips, and leave the table. After all, our businesses are a huge part of our lives. Our identities, egos, dreams, hopes and even fears, are interwoven into our businesses. So, how do we know when to leave? How do we know when the party is over? It’s not easy, but you need a strategy. Like the entry strategy that helped you identify the business that you wanted to start, and the success strategy that showed you how to grow to reach your dreams, there is a third strategy that is necessary for every successful entrepreneur ….an exit strategy. An exit strategy is a plan that you develop identify when, and how, to leave your business. Don’t have one? OOOPS! Stop now and think about it. You should have one. Ha…”Not for me” you say. “I’m just starting my business and I need to stay focused on the here and now.” You assure yourself you’ll worry about what’s going to happen later….later! Stop, and reconsider. You should think about what your real goals are, and how best to achieve them. When is the best time to think about an exit strategy? The best time is actually before you buy the business you eventually choose to be your vehicle that will get you to your goal. Even though your goals can, and likely will, change over time, you should still create a list of things that you want your business to easily facilitate when it is time for you to exit. If your goal is to someday sell your business, there are things you need to think about right now!

Here are some of the questions you should answer to successfully create your exit strategy, whenever you choose the time to exit.

Many buyers like the idea of working in small white collar businesses where they can use the expertise they acquired in corporate America. This can be great way to be in business, but can also be terrible if you’re not clear on what your exit strategy should be. Keep in mind that if your business is heavily dependent on your individual personal skills, it may diminish its salability when its time for you to leave. If you’re not there, and the business depends on your special skills, what will the value of your business be? It could be much less than you will actually need.

2. Cash out or Cash Flow out? 1. Can I get out, or will they have to carry me out?

This question is one that is key to many people’s long term decisions. Ask yourself what types of business will make it easiest for you to exit.

Do you want a business where you will ultimately sell, or would you prefer a business where you can back away from the day to day operations, yet take advantage of the cash flow that the business can create? In some businesses, the cash flow from your business will far outstrip the

www.franmarket.com

N E X T ST E P S

income you can make by investing the money you get from it when you sell. Under those circumstances, you may prefer to exit your business without actually selling it. This means you will need a business that you can own, but not have to run personally. If so, make sure your business will not need you to be there in order for it to function. Make sure that your business is conducive to hiring managers who can take over the management of your business. Also make sure that the business itself can support such a middle level of management.

3. Are your kids in your business’s future plans? Many of us dream of having a business where our kids will someday succeed us. If your kids are very young when you buy your business, it may well be impractical for you to factor them into any exit strategy plan. However, if your kids are more mature, you probably know a lot about the type

of business that would suit them as well as the kind of business that would suit you. Be sure that the business you love, can be a business that they love.

4. What will my business allow me to do in terms of flexibility? You don’t necessarily need to sell your business in order for you to achieve freedom. Many of the same issues that are part of whether you may want to keep a business for its cash flow, also go into planning for a business that will give you security and freedom.

5. How much money will I need in order to exit in comfort? Some people are so focused on getting into businesses that they don’t ask themselves “which business is best to get me where I want to go”. If you need a substantial amount of money from the sale of your business, make sure that the business you choose will

accommodate the growth required to get you to the point where you can sell.

6. When will I leave? Some businesses take less time to build than others. However, they may not always be as “sexy” or as much “fun” as another business you could also own. However, if your goal is to, get to the point where you have an exit option as quickly as possible, the “glamorous” choice may not be the best one for you! Does my franchise help me when it comes time to get out? Some franchisors do a wonderful job of helping to find you buyers when you are ready to exit. They will actively work to help you find someone to take your place. Generally, franchisors that do this, have been in business for a while, and have both the time and the resources to devote to helping you to find a replacement for yourself. These franchises tend to be more mature than high growth franchises, so while they have successful franchisees that are looking to exit, they may not have a lot of new locations for you if are still looking to build your business. In some cases, franchisors are looking to buy back franchises from successful franchisees. If your business has grown to the point where it has a defined and evolved management hierarchy, the franchisor may feel it can run the business well by using the management you already have in place. Consider this possibility when you buy a business, particularly if you are buying an existing chain of locations that you may want to have a ready buyer for. I have heard it said that all businesses are cyclical, and that all businesses have their ups and downs. If you prescribe to this notion, it is all the more important for you to have a plan about how you should exit. However, irrespective of why you plan to exit your business, remember that if you don’t have a plan that will help you recognize the finish line, you should plan on a very long race. —FMM Used with permission. Howard Bassuk of FranNet.

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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 over 200 million users 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. 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 #

Country or RegionInternet Users

1 2 3 4 5 6

United States China Japan India Germany United Kingdom

7 8 9 10

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

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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.

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. — continued on page 53

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B U S I N E S S R E SO U R C E

Franchise Magazine Ad To Come

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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.

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 men-

toring 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

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

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. — continued on page 54 www.franmarket.com

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 deferrals, 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. 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, — continued on page 56

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B U S I N E S S

B U I

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]SUCCESS

STORY

TIPS FROM

SCORE

SCORE Serves up Valuable Advice to Franchising Newcomer in St. Paul, MN In the past few years, thousands of workers in the Internet industry have had their lives turned upside down. Twin Cities resident Dan Vansteenburg was determined not to be one of them. Concerned that the impending loss of his company’s largest client in December 2000 foretold an uncertain future, Dan began thinking about other career opportunities. The solution appeared as he was making arrangements for a lunchtime meeting using the on-line menu of Jimmy John’s, a fast-growing chain of deli sandwich shops. The Web site’s ad for new franchise owners piqued his interest, and he eagerly began learning all he could about the organization. Dan’s brother-in-law, David Hustrulid, shared his enthusiasm and agreed to be his partner in pursuing the opportunity.

Exemplary Leadership

Give employees their freedom. Communicate the goals and let them figure out how to reach those goals. They want control over their working lives.

Create an environment that encourages energy and spirit. That leads to happy customers.

Although Dan’s initial plan to locate a Jimmy John’s franchise in the mammoth Mall of America did not work out, he found a promising strip mall location in the nearby suburb of Roseville. Following Ken’s advice, Dan and David managed to have their store up and running in August 2001—three months after Jimmy John’s approved the location, and half the typical time required by new franchises. This move saved them thousands of dollars in start-up costs and potential lost sales.

Strive to help employees feel that when they have accomplished the business’s goals, they have also accomplished their own personal goals.

Create a sense of meaningful purpose. Most workers want to feel they are engaged in something “larger than themselves.”

The new Jimmy John’s was an immediate hit with hungry Roseville workers, and with Dan and David’s bottom line. The partners exceeded their first-year projections by $250,000, enabling them to open two additional franchises in the St. Paul area during 2002.

Recognize that leadership means responsibility and stewardship. “Leadership is not rank, privileges, titles, or money,” says management thinker Peter F. Drucker.

A self-described “natural researcher,” Dan visited the SCORE Web site to find information on business start-ups, and to identify a local expert in franchise operations. The near-perfect match was Ken Fischer, who had owned two McDonalds restaurants for several years. Although Ken lived 90 minutes away, he gladly counseled Dan via phone and email. They discussed the franchise agreement, the support Jimmy John’s would provide, location selection criteria, and calculating break-even counts. Ken also directed Dan to other resources in Twin Cities, which aided in the development of his business plan and a successful application for an SBA-backed loan.

Dan finally met his SCORE counselor face-to-face not long after the first restaurant opened. When there’s a question or he needs some advice, Dan knows that Ken is only a call or email away. “I’m thankful for having the assurance and perspective of someone who understands franchising, and has been through the process before,” Dan says. “Ken’s experience and wisdom were invaluable every step of the way.”

Brought to you by SCORE “Counselors to America’s Small Business.” www.score.org/

For more success stories, see www.score.org www.franmarket.com

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 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.

— continued on page 58

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sons, 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

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, poi-

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 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 — continued on page 60

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B U S I N E S S

B U I

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]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 wanted to start a business that would make a difference in their community, so they decided to open a franchise of Sylvan Learning Centers. First, the Johnsons needed to convince Sylvan’s corporate officials that Oklahoma’s third largest city qualified for a franchise. A demographic review indicated Lawton was a viable location, and the third Sylvan Learning Center in Oklahoma opened its doors to the young students in the community. As a former school administrator who worked with community education, Howard knew all about SCORE and the services the organization provides to new entrepreneurs. He wasn’t expecting any surprises when he called his local chapter. However, he received one when he heard a familiar voice over the phone. “The man who picked up the phone turned out to be Vic Yarborough, my family’s next-door neighbor when I was growing up,” Howard says with a smile. 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. 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 says he is also very happy about reconnecting with an old friend. For more success stories, see www.score.org www.franmarket.com

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

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 – 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

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– 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.

LLCs and LLPs – 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.

Writing a Business Plan 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 lender or investor wants to see. • A business plan serves as an assessment tool for the owner. 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. You can find the nearest SBDC at: www.sba.gov/sbdc/. The nearest SCORE chapter can be located at www.score.org. 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 state-

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ments, 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.

Creating an Innovative Business Environment

Concluding Statement

Show your employees that you think of innovation as an ongoing process. Some ideas will work and many won’t. Keep experimenting.

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

Listen, listen, listen. Innovation is a collaborative process.

Be open to “accidents,” the unexpected connections that spark new ideas. Inspiration comes from everywhere— often from outside your own field.

Draw on your own employees—they know the company’s problems and goals best. This is probably one time you don’t need outside consultants.

Be patient. Creativity can’t be hurried.

Development Center representative. 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. For more Small Business information, visit the Web site at: www.sba.gov —FMM

Brought to you by SCORE “Counselors to America’s Small Business.” www.score.org/

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Managing Virtual Relationships

Make sure you’re up to speed. Good hardware, software and training are the tools you need to make virtual relationships work.

Structure your workday so information can be easily shared, discussed and exchanged.

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Don’t let the technology get in the way. If email technology isn’t working, quickly default to the phone or a letter. Remember, people do business with people— not machines. Always keep up with your networking contacts. You’ll need another set of skills when you use nontraditional means to communicate: writing must be concise and thoughts must be closely linked.

Brought to you by SCORE “Counselors to America’s Small Business.” www.score.org/

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[ CLOSINGQUOTES ] Quotes From Famous Business People

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Never invest in a business you cannot understand. —Warren Buffett

—Les Brown

Never continue in a job you don’t enjoy. If you’re happy in what you’re doing, you’ll like yourself, you’ll have inner peace. And if you have that, along with physical health, you will have had more success than you could possibly have imagined.

The way to get started is to quit talking and begin doing. —Walt Disney

Good leadership consists of showing average people how to do the work of superior people. —John D. Rockefeller

Never share your business dreams with those who can’t dream. — George W. Byfield

—Rodan of Alexandria

Every time we’ve moved ahead in IBM, it was because someone was willing to take a chance, put his head on the block, and try something new. —Thomas J. Watson

Never discourage anyone who continually makes progress, no matter how slow. —Plato

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 Schwab

If you can’t feed a hundred people, then feed just one. —Mother Teresa

The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty. —Sir Winston Churchill Spring 06

problems and you show them the solutions they will be moved to act. —Bill Gates

Doing the best at this moment puts you in the best place for the next moment.

You must take action now that will move you towards your goals. Develop a sense of urgency in your life.

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I believe that if you show people the

see your“Ifselfyouasdon’t a winner, then you cannot perform as a winner.

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—Zig Ziglar

—Oprah Winfrey

Change is the law of life. And those who look only to the past or present are certain to miss the future. —John F. Kennedy

A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large. —Henry Ford