Monday, February 28, 2005

Do Franchise Royalties Hurt the Franchisee?

Many first time entrepreneurs feel that the added expense of franchise royalties will cut into their profits and make the business less attractive than if they were independent. The attached chart shows the impact a good franchise has on sales and profits.

Grand Opening Sales (and resulting profits) are usually higher for a franchise unit than an independent. After that, sales grow more rapidly thanks to a proven marketing plan, advertising programs that work, and help in choosing the right site for the venture. The franchise's training keeps the neophyte from going down many "dark alleys" that consume cash, time and energy. In addition, you gain name recognition and discounts on equipment, inventory and supplies---all adding to your bottom line. Over time, the independent business never catches up! If you don't have at least five years' experience managing a business similar to your new venture, a quality franchisor will be worth its weight in gold!

It's important that a buyer remembers his goal–-income drawn out of the business for personal and family needs. "What's in it for me?" should be the question. If sales of a franchise unit exceed a comparable independent by 35% to 50% (a very common scenario), if costs are 5% to 10% lower due to group purchasing power, then your profits should far exceed your competitor's. Don't be concerned about paying royalties. Determine that the operation's profits to you, the owner, will exceed what you could achieve as an independent, by more than the amount of the royalties. Remember, too, that when you decide to sell, you can expect to sell your unit more quickly and for a higher price than if you were offering to sell an independent business.

More proof that franchising is the best model for most entrepreneurs.

For more ideas on franchising, visit The Franchise Doctor's Website.

Tuesday, February 22, 2005

Why Should I Pay to Join a Franchise System?

Recently, a caller asked, "If I'm going to pay Royalties to a Franchise System, why do they insist that I pay an Initial Franchise Fee too?"

My answer went like this:
Most franchisors report that they're happy to break even each time that they get a new franchisee open. First there is the cost of advertising til they find an interested party. Then they must qualify the prospect and customize a territory and franchise license for them. Next comes site selection and oversight of their build out. Then training at headquarters for 1 or 2 weeks and visits by corporate staff during the grand opening.

This often consumes $15,000 to $30,000 which offsets licensing fees that are usually between $12,500 and $35,000.

While everyone hopes for a "great deal," if you are looking for a financially strong coach and mentor, you should understand that making profits through ongoing Royalties is the business model of most franchisors--not by profiting--nor losing every time a new unit is sold.

For more details on finding and evaluating franchise systems, visit The Franchise Doctor's website.

Wednesday, February 09, 2005

Finding a Dedicated Franchisor

As most of you know, The Franchise Doctor works with many successful businesses to develop their franchise programs. We help them decide what services to offer their franchisees and how much to charge those who join the system. We guide them through preparation of their Uniform Franchise Offering Circular (UFOC), their Franchise License (or contract) and spend hours formalizing their training manuals. This process usually takes 90 to 180 days and helps us really get to know our clients and their franchise opportunity.

I recently got a call from a local entrepreneur who's running a successful company and wanted to explore franchising his concept. When we met, I became enthusiastic when I learned that many of the critical factors we seek in a successful concept were present. The company had several years of profitability and good cash reserves. The franchisee can be home-based; requires less than $20,000 of equipment to get started; targets a large group of businesses; and the system
can be taught in a week-long training class.

After a couple hours exploring how we could work together to develop a great franchise system, the owner stated, "I don't want to work that hard. I'd rather just train a bunch of people & let them sort it out. I don't want to be responsible for their ongoing support."

It seems he'd run another company for many years and sold out with enough money to retire. Instead, he began his present company and built another successful venture. Now his financial security allows him to take time off for travel several times a year. He doesn't have the passion to be a mentor for dozens of new franchisees who are just beginning their companies.

I applauded his frankness and told him he should not try to get into franchising unless he's prepared to dedicate himself and his resources to the success of his franchisees.

While this is an unusual response from someone who called me regarding franchising, I wonder how many fledgling franchise systems are led by someone lacking the drive and energy to grow a system to 20, 50, 100 and more franchisees.

When you're searching for your franchise partner, be sure you closely evaluate the principals' dedication to mentoring you for the next 10 years. In most systems, you'll have an opportunity to talk directly to the President or Chief Operating Officer before you sign your license. Ask them their plans for the company for the next 10 years and be sure you get the commitment you demand before you join.

For additional details on how to evaluate a franchise system, check this article on our website: How to Evaluate a Franchise System.

Thursday, February 03, 2005

Franchise Doctor Checks In

Here it is! Based on many requests from our regular Newsletter readers and clients, we've decided to enter the world of Blogging!

We receive many great questions every day but our answers generally go only to the inquirer. Now, we'll take the time to post some of the best questions and responses here to allow a global universe to benefit from our exchanges.

We'll also post details about some of our favorite discoveries--young franchise companies that are just beginning to make their mark.

Our Goal is to provide "preventative medicine" to insure that, when you invest in your own franchise your net worth gets healthier.

Please check back regularly to view our progress.

If you've a question that demands an answer, feel free to post it now.