Mission #2-5 Weighing Your Options In Franchising

Objectives:

• To consider franchising options in your industry.
• To consider the pros and cons of partnerships. What do you bring to the table and what do you need to be successful?
• To understand the importance of hiring a capable legal and accounting support staff to protect your investments.

Background:

Suppose that you could become a successful entrepreneur without doing all of the research work and preparation that has been talked about in earlier missions.

The person who has been so kind to do this work for you is a franchisor and it is his or her objective to convince you to buy his or her franchise. In most cases, a franchise is a "ready to go" business. In exchange for your money, the franchisor sets up a business for you and trains you in that business.

There are more than 320,000 franchises in the U.S., in 75 different industries. The International Franchise Association says that one out of 12 retail businesses in the U.S. is a franchised business. Somebody must be doing something right.

There are between 2,500 and 5,000 different franchisors offering the entire gamut of business possibilities.

Do you want to own a muffler shop, deliver balloons or clean carpets?

Do you want to collect bills, prepare taxes, find people dates, make donuts or sell vitamins?

It would be difficult to think of a business that someone has not tried to franchise. Should you consider a franchise? Certainly, you should.

The concept is valid and has been proven successful. Certainly, if you want to start a gourmet coffee shop, you should "research" all of the franchisors offering gourmet coffee shops. Unfortunately, you can't get away from the word "research." Franchises are one more important field for you to include in your researching efforts.

What is a franchisor offering? A franchisor is offering the claim of a fully developed business concept. She has successfully tested the concept. And, that she has boiled that concept down to its basic elements to template that can be successfully replicated.

All the rules for buying any business still apply when considering a franchise. You must do the research. You must study the industry. You must identify and apply the business style and attitudes of successful operators.

Pete Gets A Bright Idea

At some time in the past, a budding franchisor, let's call him Pete, was queuing to buy a few stamps at the post office. He was tenth in line. Poor Pete had to bite his nails because one of the people in front of him had poor language skills and was trying to buy multiple money orders.

"I think that I am to want to buy a note for my payments that is somehow guaranteed?" To which the harried postal worker says "What?" and the question is repeated a few times until the postal worker deciphers the request.

Next, Pete has to wait another five minutes while a sweet woman tries to buy a savings bond while telling her life story to the clerk.

"My grandchild who is very active and a wonderful little girl who lives with her mother in Buffalo, but..."

Of course, the woman also wants to know about interest rates but, unfortunately, it is difficult for her to hear the answer from the postal clerk.

"What, what, what did you say, young man?"

Also, in front of exasperated Pete, is a scruffy young man who is trying to send poorly wrapped packages with the contents already half falling out without any custom's forms to Oslo, Norway.

Rather than getting mad, Pete gets an idea. If he is a business person who is fed up with the postal service, maybe other businesses are also?

Pete sees a need and formulates a business concept. Why not a private postal service with customized services to meet the diverse needs of private and corporate postal patrons, where someone who just wants to buy stamps can be in and out quickly? To the mailing services he adds gift and package wrapping, 24-hour post office boxes, copying, mail drops, fax and notary services, courier services, rubber stamps, secretarial services, etc.

The idea for the "Pete's Postage Post" franchise seems sound. Pete sets-up a prototype operation; he works out the bugs in the prototype and the franchise starts to make money. Pete starts three more Pete's Postage Post shops and sells three others and all seven shops seem to be successful.

Pete's Postage Post

Sally's pet peeve just happens to be waiting in line at the post office. So, when Sally attends a large franchise exposition in her area, she is intrigued when she hears about Pete's Postage Post. There has to be a better way and there is: Pete's Postage Post. Pete seems like a nice guy and a good businessman. Pete gives Sally a beautiful package of materials extolling the bright future of the company and she also receives copies of the FTC (Federal Trade Commission) franchise disclosure forms. Pete gives Sally the names and phone numbers of all current franchisees. Sally also asks for and receives the names of two people who almost bought but didn't buy franchises.

Sally is a smart girl and does her research. She visits several Pete's Postage shops and speaks in depth with the franchisees. She even voluntarily works at a store for a full week. She speaks with many area businesspeople about the need for a private postal/business service outlet. Pete is able to promise Sally a large exclusive area and he gives Sally the right to open two more Pete's Postage Posts at a sharp discount from the standard franchise fee. For his role as franchisor, Pete receives 3% of gross sales, he explains to Sally that his success depends on her success.

As a Master Warrior, you are always thinking. Think about the small businesses in your area that are successful. Why? Is it the product, the selection, the location, the owner, the manager, the employees? What about the marginal businesses? How could they be made better? Think of yourself as a consultant. What recommendations would you make to the owners and managers?

Sally enjoys volume discounts on purchasing and advertising through the Pete's Postage Post family. Pete offers full training to Sally and her staff. The parent company helps Sally find a viable location, obtain a favorable lease and set up the shop. Also, the parent company sends Sally two professional "Openers," experts at store openings and promotion. These openers will work with Sally for her first six weeks in business.

Sally needs $50,000 to buy a Pete's Postage Post franchise. Half of the money goes to setting up the business and training her and the other half goes to the parent company, the franchisor. Sally has $15,000 saved. She borrows $5,000 from her parents; she borrows $15,000 from the bank and $15,000 from the parent company. Sally buys a franchise and prospers.

Jiffy Jeff's Postal Centers

Sometimes, franchising isn't a good idea.

Percy can't seem to hold a regular 9 to 5 job and so he decides to start his own business. He attends the annual franchise opportunity expo and he is also impressed with the postal/business center concept. Percy talks to Pete who emphasizes hard work and strict standards. In reality, Percy was hoping to start the business and then hire some type of manager to oversee day-to-day operations. Pete says that he would be reluctant to work with such an absentee owner arrangement. Percy then, in a snit, tells Pete that he will be reluctant to give him his $50,000.

Percy then walks to a neighboring booth at the expo and meets Jeff of Jiffy Jeff's Postal Centers.

Jeff seems to Percy to be much more agreeable. Jeff says to Percy that he can pick his own location and choose from a variety of store layouts. The best part is that a Jiffy Jeff franchise only costs $30,000 upfront in cash. Best of all, there is no continuing royalty fee to be paid by Percy to Jeff. What a deal! Percy can't wait to sign his check and the 20-year franchisee contract and get his Jiffy Jeff franchise going.

Percy must quickly pick a store location because he learns that the Jiffy Jeff equipment that he ordered, retail value of $60,000, is scheduled to be delivered in three weeks. Percy can't get the store ready in time. It seems that Percy has found a vacant inexpensive store to rent but the contractors he's hired won't work in that crime ridden neighborhood after dark.

Because his store isn't ready, Percy is forced to put all the Jiffy Jeff equipment into a temporary storage warehouse. But the warehouse owner won't give him $60,000 worth of fire and theft insurance coverage on his Jiffy Jeff equipment because the equipment has an actual replacement value of only $9,000.

Jiffy Jeff tells Percy not to worry about small things like the discrepancy in equipment prices.

Jiffy Jeff warns Percy that he'd better get the store ready fast because the minimum $4,000 worth of paper and supplies that Percy contracted to purchase each month from the Jiffy Jeff parent company will start delivery in another week.

Again, too late, and after the fact, Percy learns that he could have bought the same supplies independently for under $2,500. Percy is furious and demands to speak directly with Jiffy Jeff. Instead, Percy's call is routed to the complaint department and the phone is answered by someone with the strange name of Knuckles. Well, Percy will still be in his fifties when his 20-year contract with Jiffy Jeff expires.

There are franchises like Pete's and there are franchises like Jeff's. Only your research will lead you to one and shield you from the other.

Here are a few of the many factors to consider when researching a franchise:

If you don't need a partner, why have a partner? If you don't need the handholding of a franchisor, why buy a franchise?

Story:

The Lopez Goff Gallery

Sheila Goff's interest in becoming a partner in the gallery presented a new set of questions for Ana to consider. Ana would be giving up some autonomy but, at the same time, she would be gaining both financial support and Sheila's contacts with the moneyed elite of the city.

From her military experience and her work at the museum, Ana, like Sheila, knew how to get questions answered and things done. When you have a question, ask a person who knows the answer or can find the answer for you. When Ana wanted research materials, she asked the reference librarians. When Ana had questions about a partnership, she called a lawyer.

She called a friend, Dick Simmons, a lawyer and trustee of the museum. Ana explained to Dick her plans and progress to date.

Dick seemed impressed, "Certainly, Ana, a partnership with Mrs. Goff sounds beneficial. But the first thing you must decide in forming a partnership is the objective of each partner. What do you feel are Mrs. Goff's objectives?"

Ana thought for a moment, "Well, I can certainly say that Sheila's primary motivations are not financial."

"That's agreed. So, what do you think she is looking for?" Dick wondered.

"I would say that Sheila is a patron of the arts," Ana said, "And, I would say that she is interested in exploring the commercial side of the arts, that she is interested in the prestige potential of the gallery business and that she would, primarily, be involved in helping with the shows."

Dick noted, "Money wouldn't be a motivation then?"

"Well," Ana hesitated, "I really couldn't say that either. Sheila is a successful businesswoman in her own right and she isn't someone who would just throw money away."

Dick played the role of advisor, "Ana, could you work with Sheila Goff?"

"Yes, I think I could."

Dick urged her to proceed forward, "Well, then, have you given any thought to what her capital contribution would be and what percentage of the total value of the gallery this contribution would represent?"

"Well, Dick, that's what I'm asking you."

Dick couldn't answer this one, "Ana, you have to answer this question yourself. How much money are you going to need? You must have a good idea by now."

Ana had a good idea, "Exclusive of the money necessary to rehab and equip the gallery, which I would estimate at $50,000, I would say that I would need another $50,000 for inventory, salary and operating expenses for the first six months."

Dick quickly totaled, "You need $100,000, then. How much do you have?"

"I have about $26,000 in the bank."

"But," Dick proceeded, "you need this money for your own living expenses. So, you really have little, if any, capital to commit to the gallery. Your contribution is your idea, your business plan, your education, your expertise, your ambition and your willingness to devote full time to the venture."

Ana smiled in agreement, "Yes, I like that. That's right."

Dick summarized, "Well, if you need $100,000, you've answered your own question. You asked for $100,000. Now, is $100,000 equal to 50% of the business?"

"If I give up 50%, that means that we are equal owners, correct?" Ana wanted to be sure.

"Yes."

Ana wanted to know, "Could I instead ask for $80,000 and give 40% of the business and retain operational control?"

Dick nodded, "Ana, you can negotiate anything you want. You can make this partnership anything you want."

"I think I'll try the $80,000, 40%."

"Fine, now, how about a buy-back provision?" Dick asked.

This was a new one on Ana, "Dick, I'm really a novice at this. Can you explain a buy-back?"

Dick did, "Well, let's presume that you are going to put your heart and soul into this business. At first you struggle a little but you keep pushing, you become a success. At some point in the future, as the managing partner, you might want to buy back Mrs. Goff's interest in the business. At a fair profit, of course."

"You can do that?"

Dick reiterated, "Again, you can do just about anything legal you like. You just have to have the specifics spelled out in the partnership agreement."

"That's very interesting. I'll think about that. Dick, would you be willing to handle the paper work for me?"

Dick was willing, "Well, the normal cost of incorporating a business and writing a partnership agreement contract would be between $2,000 and $3,000. I'm sure I could do a little better for you."

Does it make sense for you to bring in a wealthy, skilled or network connected partner? At what price? What are the terms? Will you still be the boss or just working for someone else? You can get into a deal but think like a Green Beret, how can you get out?

Ana considered her options before her next meeting at the gallery site with Sheila. Ana recognized that she really didn't have multiple options but one clear choice. An association with Sheila Goff was too good an opportunity to pass up. The only question was could a deal be struck with which Ana could work.

Ana and Sheila met for a discussion prior to their appointment with Mr. Lansing at the gallery site. Ana outlines her $80,000, 40% proposal. Ana has a new business plan drawn up with her $100,000 budget reduced to $80,000; $30,000 for renovations and gallery fixtures/equipment and $50,000 for initial operating expenses.

Sheila was her usual, no nonsense self, "Well, Ana, I think that we can meet somewhere on these figures. Are you sure that the gallery can be run for six months on $50,000?"

Ana had an answer, "Well, most of the limited edition graphics will be rented on the 90 day approval basis as I've explained and the original work will be on consignment directly from the artists or their agents."

Sheila was quickly learning the business, "So, the inventory really isn't costing us much if anything?"

"Yes, that's right", continued Ana. "Most of the expense will be for rent, utilities, mailings and salaries. We'll pay my salary and the salary of one full-time assistant who'll work as a salesperson and framer. Then, we'll have two part-time assistants, who also need to be paid."

Sheila quickly ran through the numbers in her mind, "Well, from your numbers here, I think you still might be cutting it close at $50,000."

Ana answered correctly, "Sheila, let's not forget that we should be selling and making a profit during those six months. We hope that most of the $50,000 will remain in reserve."

Sheila went on to her next issue, "Yes, I'm sure we will make a profit. Now, the $30,000 in renovations and fixtures. Let's suppose that I am able to persuade Metropolitan to make the leasehold improvements for us. Let's suppose that I make the argument to them that we are turning unproductive space to profitable space and that in return we expect the space to be finished to our specifications. Let's say that I'd accept the responsibility to see that it is done. And, in addition, I put up the $50,000 in seed capital. Am I still entitled to 40% equity position?"

Ana repeated the deal, "You rehab the gallery. You provide the fixing, the lighting, and so on, etc. You pay for the initial legal and accounting work. And, you contribute the initial $50,000 in seed capital."

Sheila gave an added assurance, "Well, Ana, let's put it this way. I will see that the gallery is operational. Out of the $50,000 will come the legal and accounting and start up costs. I'm sure I can convince Metropolitan not to require a security deposit, so we have only the first month's rent to pay which, by the way, I see as $1,300 a month, about $8.00 a foot. And, the $50,000 will be written as my loan to the gallery."

Ana didn't understand this part, "The $50,000 will be a loan?"

Sheila knew business, "Yes, I would expect to be repaid the entire $50,000 from profits before you or I take any partnership profits."

Ana had to think, "That's a hard bargain, Sheila."

Sheila didn't argue. "Only business, Ana. You'll notice that I didn't say anything about interest. Anyway, the renovations I envision for our basement to gallery transformation will far exceed the $30,000."

Ana laughed, "Now, I have a proposal for you. I would like the option of buying back your interest with a reasonable profit to you, of course."

Now, Sheila had to think, "Oh, I'd have to think about that Ana. Would the buy-back be reciprocal? Could I buy you out also?"

"Well, Sheila, I guess we both have a lot to iron out, yet."

Ana and Sheila meet at the proposed gallery site where they are met by a delegation led by Mr. Lansing and the building's manager, the building manager's secretary, and the chief custodian for the building.

Sheila wastes little time in getting to her points. She precedes her requests with a brief explanation of how the gallery will turn vacant unproductive space into long term profitable space for Metropolitan. In return, she expects a single concession from Metropolitan. She wants the space to be rehabbed to meet the specifications of the renovation architect she will hire.

Mr. Lansing, pen flying, responds, "Mrs. Goff, you may be asking Metropolitan to commit to quite a sum of money. It was our understanding that the space would be leased "as is". I'll have to get approvals for this."

"From whom, Mr. Lansing?"

"Well, the 337 Sturgess Realty Trust is the owner and..."

"And, Jason Goff is the trustee?"

"Yes, but..."

"Go for your approvals, Mr. Lansing. The hallway entrance and staircase from Sturgess must be approved. We expect signage on Sturgess Avenue. Any problems with these requests?"

Mr. Lansing saw no point in contradicting the boss's wife. "With the approvals, you can have anything you want, Mrs. Goff."

This sounded like what Sheila wanted to hear, "And, Mr. Lansing, when can we expect this work to be completed?"

Mr. Lansing maneuvered to cover himself, "First, Mrs. Goff, we have to have your architect's renderings. Then, we have to put the work to bid. Then, we have to select a contractor and supervise the work. Then..."

Sheila interrupted what she didn't want to hear, "Excuse me, Mr. Lansing, this work is your province. I only want to know how long."

Mr. Lansing had no choice but to commit himself, "Two months to three months from when we have your renderings and floor plans."

"Ana, what do you think?"

"Two months is fine, Sheila."

Sheila seemed content, "Very well. Ana and I will meet with the architects immediately. You can expect their plans within ten days, and, then, we expect the work to commence under your supervision, Mr. Lansing."

Mr. Lansing almost did a sort of sweeping bow, "Of course, Mrs. Goff."

Mr. Lansing appeared to be a man working under protest, but at the same time, it was apparent that, barring an act of God, the work would be done as promised. Sheila wanted her gallery. Ana wanted her gallery. Jason Goff wanted Sheila Goff to be happy. Mr. Lansing wanted his vice-presidency.

Sheila put Ana in touch with Davis and Associates, architects. Ana learned that Davis and Associates did quite a bit of work for Metropolitan and that their draftsmen were at her disposal.

Sheila gave Ana her marching orders. "Ana, just tell them what we want and that we expect working plans back in fifteen days. That will give us time to review and correct before we give the final plans to Mr. Lansing."

Ana, as she had now come to expect, found the staff at Davis & Associates quite accommodating. They decided on white sheet-rocked walls, recessed and spot lighting, commercial carpeting, moveable display panels, picture hanging molding along the ceiling, an order desk, a framing area, a conference area, and a canopy over the rear door. All was duly noted. A sign for Sturgess Avenue reflecting the new name, THE LOPEZ GOFF GALLERY, above the words "Dealers in the Contemporary Arts," was to be erected.

With extensive back and forth modifications, Ana and Sheila approved the plans, which were forwarded to Mr. Lansing. Work on the gallery space commenced quickly.

At this point, with the 60/40 partnership papers and corporate papers drafted without a buy-back provision and with $50,000 deposited in the new gallery checking account, Ana left her job at the museum. She decided against another National Guard enlistment. Ana would need all her time to prepare for the gallery opening.

Operational Limitations:

• Never think of a franchise as an easier way to go. It is a different form of business ownership with its own unique pros and cons.
• You still have to work hard, provide a quality product and love your customer.
• A franchise can get your business open fast but there is a price. In effect, the franchisor becomes your partner. Be sure that an attorney reviews all contracts and any and all documents to be signed. Be absolutely sure that you fully understand all the clauses and addendums. It is your responsibility to understand these agreements.
• Think long and hard about partnerships. What does a partner bring to the table? Are you better going alone? Don't forget to negotiate a buy back agreement, if possible.

Seeds for thought:

• What is a franchise?
• What type of support can you expect from a franchisor?
• What percentage of total retail sales are related to franchises?
• What would you consider to be the advantages of dealing with a franchisor like Pete?
• What would you think would be the ramifications of dealing with a franchisor like Jiffy Jeff?
• In forming a partnership, what issues must be resolved?
• Where did Ana go for advice on forming a partnership?
• What were Sheila's reasons for joining the partnership?
• What is a buy-back agreement?
• What characteristics of a successful businessperson did Sheila exhibit?

Jargon:

Buy Back - Gives a seller the option to buy back a business at a pre-determined price.

Cake Walk - easy to do.

Downtime - Periods when equipment isn't available.

Draw a line in the sand - Final negotiating position.

Going great guns - Everything going as planned.

Leasehold improvements - Repairs and improvements made by the tenant or landlord in connection with the signing of a lease.

Making waves - Causing trouble.

Nonprofit - A corporation where none of the shareholders or trustees share in profits or loses. Exempt from corporate income taxes and donations may be tax deductible.

Patent - Secures for an inventor, the exclusive right to make, use and sell an invention for a specific period of time.

Peak period - The busiest time.

Press release - An announcement providing information to the press. Press releases can publicize good news such as positive earnings and new product or service launches. Press release can provide case arguments and explanations for bad news.

Sales Tax. A city or state tax on retail products based on a set percentage of retail cost.

Question and Answers

What are the three principles for business success?

1. Offer a quality product or service that the market demands and charge a fair price.

2. Appreciate your customer. Say thank you and always ask for more business.

3. Copy success. Find people who are already successfully doing what you want to do and do what they are doing.

What are the 10 most important words in selling?

Know your customers, know your product, ask all to buy.

Isn't the SCORE program just as good as the system you teach?

The SCORE program of the Small Business Administration matches new business owners with retired executives. SCORE has helped a lot of people but maybe you can do even better.

Unfortunately, you may be a dress shop owner and be matched with a former peanut farmer. Obviously, if you are a dress shop owner and can find a retired dress shop owner to be your mentor, you'd be better off. The Master Small Business Course teaches you how to find a mentor from your own industry and establish a solid relationship. You are a warrior. You can go into the marketplace and find your own support team.

Action Plan:

• Even if you have little interest in franchising, find franchises that are associated with your industry. Look at their websites and write for materials. Can you visit any franchisee locations? Learn from multiple sources. What do you want to learn about your business? That's easy, everything.

Support:

• How to franchise your business
• Franchising.com
• Franchise.com
• Franchising Information Resources
• International Franchising Association
• Entrepreneur.com on franchising

Inspirational Insights: