Franchise Flag Maker

For the last twenty-eight years, as a franchise attorney, author, instructor and recognized franchise expert, I’ve helped firms enter and prosper in the franchise industry – each hoping to become the next “McDonalds” of their respective industries. Along the way, I’ve met and worked with an interesting group of entrepreneurial founders. From apparel to water treatment, the franchised concepts were also incredibly diverse. Some of them interested me to the point where I considered buying a franchise myself. In two or three cases, talks were initiated to discuss the possibility, but never moved forward. I just couldn’t find the precise set of criteria to satisfy my exacting requirements. After all, I had advised hundreds of prospective franchise buyers, and developed sophisticated radar for detecting the good, the bad and the ugly in franchise investments.

In May of 2002, my life changed dramatically as I took the plunge and became a first-time franchise owner. I’d just completed a franchise development project for a San Francisco Peninsula company poised to enter franchising. They operated a very successful home improvement business that specialized in a unique niche. Targeting homes constructed in the 1960’s to the 1980’s having old, flat, ugly interior doors, this company replaced all interior doors in a home with new, freshly-painted raised panel designer doors, locksets and hinges. Their advertising mantra was “Replacing America’s 1.16 Billion Interior Doors.”

After interviewing a couple interested franchise candidates who didn’t sign up, the company became concerned about selling its first franchise. Selling the first one is usually the most challenging task facing any new franchise company. There are no other franchise owners a prospective buyer can talk to about financial performance, training, ongoing support and other franchise relationship issues. Because of this void, selling the first one is difficult. After I was repeatedly asked when they could expect to sell their first franchise, my hand finally jumped up and I volunteered for the assignment. After discussing the venture with my wife Linh Luu-Murphy, who agreed to take a hiatus from her successful Napa Valley foot reflexology massage business to help me, our franchise agreement was signed May 22, 2002.

Let’s consider the major assumptions and factors I evaluated in making my buying a franchise investment decision, and see how things worked out.

INDUSTRY TREND

As stated in the previous franchise article, a major issue is finding a franchise in a cutting-edge industry that is doing well currently and is projected to do well in the future despite any economic slowdown. From my experience in evaluating hundreds of franchises, I observed the home-improvement industry was a stable segment. People are always looking for ways to improve the appearance and value of their homes.

Unlike other home improvement companies that concentrate on a single, high ticket improvement (a kitchen remodel, for example, that can cost $50,000 and more), for a couple thousand dollars ($2,000 to $5,000), a homeowner can give every room in their entire home a major face lift by replacing their old, flat doors with new raised panel, designer doors. In the aftermath of the 9-11 attacks, and the country’s high security anxiety, I felt more people than ever would be nesting at home. A home typically represents the most valuable asset in a family’s portfolio. If the homeowner can be educated and motivated to improve the appearance and value of this asset, by making a reasonable investment, sales are easy.

Major home improvement chains, like Home Depot, realized this and were aggressively promoting interior door replacement. However, they were not organized to meet the needs of the target market in a cost-effective manner. The franchise company had discovered and perfected the “do-it-right” approach for this market, and actually welcomed competitive bids from the Home Depot and other large home improvement chains. In my estimation, all of this bode well for home improvements in general, and this franchise company in particular.

TOTAL INITIAL FRANCHISE INVESTMENT

The franchise company estimated initial franchise investment between $127,00 and $180,000 in its Franchise Offering Circular. Turned out, we came in below the low end of the range. Including the $20,000 in franchise fees and the $78,000 I used against a home equity line of credit, our total investment was just under $100,000. Incredibly, this was enough to get the business operational AND reach the critical break-even point where cash flow paid all the bills. As discussed in the other franchise article, reaching the break-even point in many businesses can take a year, two years or more.

Getting operational happened fairly quickly. From the time my wife Linh and I signed the franchise agreement at the end of May, 2002, secured the real estate in mid-July, 2002, completed improvements then training in August, 2002, and began operations like a rocket in the first week of September, 2002, about four months elapsed. We hit the break-even point in mid-October, 2002, just six weeks after operations started, and began to accumulate an ever-increasing balance in the business savings account.

When we sold our franchise in September of 2003, our interior door replacement business was rocking and rolling. Residential home owners negotiated for position on our six to eight week waiting list to get their old, ugly, flat interior doors replaced with new raised-panel, designer interior doors and shinny lock sets. The new owner paid $236,000 for our franchise, and we received $235,000 after escrow fees. Subtracting our $100,000 investment left a tidy $135,000 profit. Not bad for operating the business exactly one year, and this didn’t include operating monthly income before the business was sold.

REAL BUSINESS

We operated a retail business with a storefront, as opposed to a “work out of your home” operation.

FRANCHISE MANAGEMENT EXPERTISE

The management team of the franchisor had no past achievement and experience in operating a franchise company. They had just started the franchise company and were learning on the fly. That was definitely a major risk. However, I’d given them detailed seminars on how to operate a franchise company and manage franchise relationships based on my twenty-plus years of franchise industry expertise, and had every reason to believe they’d follow my advice. And, because I was their very first franchise, I also believed they would do everything it took to make us a success. My goal was to develop the first franchise from scratch, build it up, then either develop other franchises for them, or sell out – depending on what happened in the franchise relationship. We opted to sell out.

NORMAL WORKING HOURS AND DAYS; SUFFICIENT INCOME LEVEL – FRANCHISE PROFITS AND FRANCHISE PROFITABILITY

The nature of this business was a normal five-day, forty-hour workweek. Our business hours were 9A to 5P, Monday through Friday initially. After talking with the owner of the second franchise in early 2003, I discovered and copied his idea of a forty-hour work week spread over four, instead of five days.

Although this meant our employees needed to work four ten-hour days, they were very receptive to the idea. By starting on Monday and getting all door orders for the week installed by Thursday, everyone had a three day weekend every week, not just on an occasional holiday. Of course, I didn’t have to work ten hours a day. I arrived by 10 a.m. and usually finished by 4 p.m. – Monday through Thursday. Supervising four employees, working 24 hours a week and having 3-day weekends off every week – try finding that in another franchise!

What about the financial picture? Let’s take June of 2003, our tenth month
of operations when we started interviewing a number of interested buyers. Sales were $47,000 less expenses of $35,500, left an income that month of $11,500. Of course other months varied, and the business was still in the start-up development stage operating with only a single crew of four employees – but you get the idea. Using the results for June and multiplying by twelve for an annual result, we’d entered financial performance territory only enjoyed by a select group in the entire franchise industry.

MINIMUM NUMBER OF EMPLOYEES

Remember my key question here: can you operate the business with six or fewer employees? When we started business operations in September, 2002, we had two employees. A month later, we added another. When the business sold a year later, our crew consisted of one part-time and three full-time employees, plus me and my super-energetic wife, Linh Luu-Murphy.

LEASING AND LOCATION

Our interior door replacement business operated from a low rent commercial business zone, so high square foot rent and triple net leases were never a concern. The 7,200 square foot warehouse and retail showroom we settled on in San Carlos, CA, with rent starting at $0.65 per foot the first year, seemed almost too big (and expensive) initially. Cutting a rental check to the landlord for about $5,000 every month, by far our biggest initial operating expense, made my heart race while I thought “is this whole thing going to work and how long will it take to reach the break-even point?” But, as things turned out, our location was perfect, sales were never an issue, and we hit break-even just six weeks after operations started.

Due to the size of our facility and nature of the interior door replacement business, three crews were possible and bringing them online, one crew at a time, would double then ultimately triple sales. Also, because we were the first to enter the franchise system, we selected the very lucrative, exclusive territory that stretched from Palo Alto, CA all the way up to San Francisco, CA. Although we never expanded the business beyond a single crew, these “next steps” in the evolution of the business in such a prime territory were strong selling points. The new owner of our franchise ultimately took the next steps and with three crews enjoys weekly sales of $30K to $35K – which is over $1.5 million per year.

IMAGE AND LIFESTYLE

I didn’t need to flip burgers, scoop ice cream or clean restrooms. As a franchise co-owner, my principal job was creating and maintaining client relations. I placed ads designed by the franchise company, responded to customer phone calls, set up appointments, did estimates and sent out contracts. A lot of my working time was spent driving to customer’s homes, meeting with them over coffee, taking measurements of all their interior doors, going over the options and explaining our one week production cycle – picking up their old doors on a Monday and installing the new doors by Thursday.

Back at the office, I’d enter the estimate information in our computer and generate a contract proposal. Then I’d email or fax the contract to the customer and wait for their deposit. About 70% of the proposals turned into jobs. Customers called back, gave me their credit card billing information, faxed in the signed contract and I scheduled their production week. By the time we sold the business in September of 2003, residential homeowners negotiated for position on our six to eight week waiting list to get their interior doors replaced.

I also ordered the new doors, lock sets, hinges, paint and accessories. Finally, I paid the bills. It was a very efficient business, great cash flow, no billing and no waiting for payment. As I look back, I saw some very nice homes and met some very interesting people. The pickup, production, painting and installation process was handled directly by our employees under the supervision of our contractor, so I wasn’t involved in this aspect – although I did go out with our crew for about three months picking up and installing doors. That way, I understood the process firsthand, and this helped considerably in knowing how to bid jobs and cover contingencies in the contract.

TRUE FRANCHISE VALUE

My wife and I knew going in this franchise investment was not with an established ‘blue chip’ franchise company. After all, we’d purchased their very first franchise, becoming the ground breakers, the pioneers – willing to accept a much greater degree of risk than other franchise buyers. In return, we expected an adequate level of support from the franchise company. Virtually every new franchise company gives not only adequate, but extra support to its first franchise to compensate for that franchisee’s help in pioneering the new franchise system and the additional risk they’ve assumed. There’s also a self-interest in providing extra support – the future growth of the franchise network hinges on the success of the first franchise.

The ultimate test of franchise value came in November of 2002. I was en-route, driving our box van, jamb-packed with doors, power tools, lock sets, hinges, etc., headed to our biggest installation job yet, with our contractor, Scotty, who supervised our team and was our franchisor-approved manager. Everyone else was back at the shop, frantically cutting, sanding and painting the rest of the 100-plus doors scheduled for other jobs that week.

Knowing we had taken on the busiest week of our fledgling business, contractor Scotty complained all week about his wages, saying he wasn’t being paid enough. I’d explained, numerous times, our cash flow wouldn’t support any pay increases at the moment, that he’d only been working for us a little over two months, and his pay was exactly what he requested when we hired him. Scotty wasn’t listening and his complaints continued during our drive along El Camino Real to the client’s house. We were stopped at a red light, waiting to make a turn when Scotty abruptly announced “I’m out of here, I quit.” Opening the passenger door, he jumped out, and walked quickly down the sidewalk of El Camino Real, leaving me stranded in a van that’s a bit larger than a UPS delivery truck. Scotty believed he was indispensable and his theatrics were nothing but a hardball, power play for money.

Looking back at all those freshly painted doors in the van, I knew there was no way one person could install them. I completed my turn, pulled over, and called our shop with my cell phone. Our main door cutter and best employee, Brian, confirmed what I already knew. He could leave and meet me for the install, but that would throw off our entire schedule for the week.

Then, I remembered something important. “That’s why I bought a franchise,” I thought to myself, “we’re in business for ourselves, but not by ourselves.” Surely the franchise company would know exactly what to do, and help us, their very first franchise, deal with a problem that could cripple or kill our new business. They were just a short twenty-minute drive away, had multiple crews, etc. I called the founder, Mr. Interior Door himself.

The first thing Mike said, after I’d related my predicament was: “Do you think Scott will start a competing business?” I assured him that wasn’t even remotely possible. Starting a door business usually cost upwards of $350,000, requires a sizeable warehouse-showroom, power tools, delivery van and other things. Scotty, besides his tools, had no assets. He’d even moved into our warehouse from day one so he didn’t have to pay rent and lived paycheck to paycheck.

I quickly redirected Mike to the purpose of my call and asked for his advice and H-E-L-P. Perhaps a couple of his door installers for the rest of the week, at my expense? Answer – no. What about one person for the rest of the day? Answer – no. What about one person f
or just a couple hours? Same answer – no. Incredibly, Mr. Interior Door said he couldn’t spare even a single person (including himself) for a couple hours to help us out.

So, no help – but what about advice? Mike’s only advice: call all our customers, including the one I was en-route to, tell them we couldn’t make it this week and re-schedule all jobs forward a week. Since we’d already booked other jobs over the next two weeks, this would have been a disaster, not only to our cash flow (payroll, rent and supplier bills were due that week) but also for our customers who’d already scheduled time off work to be at their homes on the scheduled dates.

That’s when I realized we were in business for ourselves . . . and by ourselves. After thinking things over in the silent van, I called the shop and told Brian to meet me at the customer’s home for the installation. I figured at least we’d collect $4,000 doing this job and just have to see about the rest of the week. By the time Brian and I finished, the day was over. We arrived back at the shop at 4 p.m. – quitting time for our construction workers. Our door jobs for the next day were not even close to being finished. The crisis was finally upon us – should I follow Mike’s advice, call all our customers and try to reschedule for the following week?

Linh and I decided on a different approach. We held a little meeting, explained the situation, and asked our employees if they’d be willing to work overtime, so our new business wouldn’t go out of business. We also fully realized our employee’s concerns. They’d been working very hard that week to help us achieve our ambitious goal. Our team leader, Scotty, was history, and they all had families and responsibilities at home. Under normal circumstances we’d be up the proverbial creek without a paddle.

LINH LUU’S MANAGEMENT STYLE TO THE RESCUE

Fortunately, my wife’s management style was about to pay off. Born and raised in Vietnam, and used to working in a number of family-owned Asian businesses, Linh convinced me from the very beginning to treat our employees in Asian tradition, like members of our family. It was a very extended version of theory “Y” management style I’d studied in my graduate business classes. Everyday, we bought lunch for all employees and ate together, discussing what was new in their lives as well as exchanging door stories. We also provided soft drinks, coffee and snacks throughout the day at the shop. On birthdays, we’d take the person out to a movie of their choice and dinner afterwards.

Luckily, we didn’t have that many employees, but every month saw an ever-increasing total for these benefits on our profit and loss statement. I questioned Linh about it, reminding her Mr. Interior Door only provided employee meals once every couple months for a special occasion. Linh always had the same reply – “don’t worry, it’s the right thing to do and if we ever need them, they’ll be there for us.” As part of her management style, Linh also accompanied our crew on door installation days and hung doors right along side them. It was amazing to see this little Asian-American woman carry solid core doors that weighed as much as she did into the customer’s home, and install them right with our team – a definite morale booster. Linh told our crew “This boss likes to get involved.”

Linh’s management style kept our business in business and on track that November. All employees immediately agreed to work overtime. I ordered pizzas for everyone for dinner and they worked from 5 p.m. until 1 a.m. the next morning. This dedication repeated itself over the next two days, which is nothing short of incredible, given they all had to report back to work at 7 a.m. each morning. We completed all jobs scheduled for that week, collected our money and all customers were very satisfied. By the next week, the business was on track, humming along, and strengthened by overcoming the adversity.

SUMMARY

Looking back, we happened to be in the right place at the right time, and were willing to take a calculated risk. We didn’t rush in, took a lot of time evaluating many factors, and kept emotions out of the franchise investment decision – thus avoiding the three mistakes made by most franchise buyers.

It was definitely an effort getting the business established, finding the right location, the right workers, and navigating a new business on our own. But the challenges were a learning experience, and overcoming them was very rewarding. Although I’ve advised hundreds of individuals and firms about the in’s and out’s of franchising, the insights gained and lessons learned in operating my own franchise and interacting with the franchise company retooled my knowledge of franchise relationships.

© 2003-2008, Kevin B. Murphy, B.S., M.B.A., J.D. – all rights reserved

For more information, visit the Franchise Foundations website

 

Over the past ten years we have seen an explosion in internet advertising as everyone has jumped into using this fantastic new medium for promoting their product or services. A particular area which has had niche but heavy growth has been that of franchise advertising and there are now hundreds of sites across the globe dedicated to bringing franchise opportunities and franchise information to the masses.

Looking at these franchise directory portals we can see a huge variation in the information they have to offer and we can group these into the following.

Franchise directories – These function and serve solely to display franchise opportunities in a directory format and generally display logos and promotional materials in a categorised format.

Franchise information portals – These tend to go one step further than plain directories and also offer advice and articles to a prospective franchise seekers as well as a categorised list of franchises.

Franchise Resource Portals – These have all of the above features and more, offering franchise advice, franchise articles, dates of franchise exhibitions, reviews, categorised franchise opportunities, franchise news and web 2.0 user interaction.

We can look at the above in a staged way where 1 is a skeleton platform, building up to 3 which is a full bells and whistles platform. When looking at these franchise directory platforms one must remember that the main aim of the site owners is to have paying franchisors list their franchise on them, this is where the money comes from and why the site is in existence. So, you must remember that not necessarily all are ethical franchise directories and are happy to take on world + dog to advertise their franchise.

The trick to finding which an ethical directory is, is to look for what is called “Web 2.0″ features. These features would include comment areas under articles, forum areas and general networking areas that you can sign up too. Most franchise directories do not want these features as they know that they will get disgruntled ex-franchisees in there making remarks about the least ethical franchises on their directory but you will find the more ethical directories are happy for people to voice their opinions and happy to boot any less ethical franchises from the directory. Blog areas need to be considered also but in many cases they are there for show and SEO (search engine optimisation) purposes purely to add keyword rich content to the site so if they do have a blog area check for comments on them, if there are none then either the site does not have much traffic or the blog area is still there purely for promotional materials.

In the UK there is only one “ethical” directory and that can be found at The Franchise Shop (see sig below) it offers full web 2.0 services, experts sections and thousands of articles. Making it the UK’s #1 franchise directory. Take a look for yourself to judge what you think, is it just a directory or is is a web 2.0 franchise directory platform?

Before buying a franchise business there are a great number of things to consider. This article provides you with 10 factors you should look for from a franchise business that will help you avoid some of the major pitfalls.

The article is also known as Avoiding a RIYOT, the acronym RIYOT stands for REPENT IN YOUR OWN TIME. The point being, that if you pick the wrong franchise in haste you could be regretting the decision for a long time to come. We hope by reading this article we can stop at least a few people making a very costly error of judgement. Hope you find this useful.

This list has been compiled by a very experienced franchisee. All the information here is based on direct experience, near misses and the stories we have heard from the “trenches”.

- How would your franchise business be affected by economic cycles? (eg for example during a general economic downturn or worse a longer term recession).

All economies are cyclical and as you will be aware from experience there are times of prosperity (that can last many years) and there are times when global, national and local factors result in economic slowdowns (which can also last many years).

What impact will a change in the economy have on your prospective business? Typically luxury products and services, non-essential services and goods will suffer more than those seen as cost saving or essential items or services.

- How dependent is the franchise on area/socio-economic mix?

Most franchises start from a single business in a single area. The success of that initial operation and perhaps a subsequent pilot are often the basis for the entire franchise operation. However the area the business started in and the area you will operate the franchise in are likely to be different (different mix of houses to businesses, blue collar to white collar workers, high income to low income, different levels of competition etc). Evaluate the impact of these differences on the earning potential.

- Will the franchise operation as a whole survive if there is a change of ownership or change of management?

Some franchise operations only succeed due to the influence of the founder or the current owners or management team. What would be the impact of a change in the owner, manager of the business? Do you think the product and operating model would work equally well regardless of whom owned/operated the franchise group? A change of management may well have the effect of turning a well run business into a poorly run business.

- Does the franchisor have the right management structure in place to be proactive in developing the business?

New ideas and approaches to business are an essential and necessary function of the franchisors remit for the long term survival of the franchise. Ask about their experiences and how they intend to keep competitive over the long term? What ideas have they got for product/service growth? What flexibility will you have as a franchisee to change the product mix, marketing or pricing strategies?

- Profit margins must be high and above the normal levels if you are going to be able to pay the franchise fees as well as yourself.

When reviewing financial forecasts for the business you will need to establish the net profit after any franchise fees are paid. Often numbers are quoted that look great, but do not include the franchise fees you will be paying out monthly. Depending on the franchise these can include both fixed amounts and percentage fees based on turnover.

- The products or services on offer from the franchisor should have some element of uniqueness about them which is exclusive to the franchisor and ideally patented.

If your franchisor is not offering a unique product or service, then it is highly likely you will already have or will shortly be getting direct competition from other franchises, independent retailers and chain stores. Open a franchise magazine and you will see that many industries already have many franchise businesses in them (eg lawncare, property rental, food outlets etc) and they offer very similar products or services. Factor this in when looking at the income levels quoted by your franchisor, if a competitor opens next week will your income potential halve?

- Supermarkets are a great idea for most of us but you do not want to be in competition against them.

Supermarkets and big chain stores will reach into markets and niches that have a high degree of profitability and/or will build their customer numbers (eg photo processing, dry cleaning, newspapers, books, DVD’s etc). If there is enough profit supermarkets will look at any business opportunity and will often have the resources to enter the market. Many small businesses have closed due to the power of the supermarkets. Could this happen to your franchise?

- A good franchisor will permit you to speak to any of the franchisees he has up and running.

A good franchisor will give you a list of all franchises currently operating and you choose the people you wish to speak to. Due to the pressures of running a business, not all existing franchisees will be willing to see every potential new franchisee. Bear this in mind, but do try and speak to as many as possible ideally 5 or 6.

- Piloted and fully audited franchise operations give the best chance of success.

You can further help mitigate the risks of buying and operating a franchise by looking at BFA accredited franchises. For more details on membership status, please see the BFA website (http://www.thebfa.org/standards.asp). However this does not guarantee success and conversely less proven franchises can work very well. Furthermore the more established a franchise is the more of a premium you will have to pay for it.

- A good franchisor will encourage you to visit their HQ, they will encourage you to work with them for a day and they will give you all the information you ask for and will not pester you for a decision.

Ideally however your franchisor will go a stage further. If they truly want you to succeed they will vet your suitability as a franchisee (not just checking you have the money!!). We would suggest you to have a credit agency check out the Directors / Franchisor / key financial staff.

Please NOTE. This not an exhaustive list of the factors that make a good franchise, but should give you some key areas to look at. Take your time, take care and take advice (avoid a Riyot !!)