April 2015 Archives

In this video Candace Couture, director of franchise admissions at Planet Fitness, discusses her role in selling franchises and new franchise locations, and to approve new franchise locations for existing franchisees looking to open up new locations.

Planet Fitness has 536 locations currently; and is looking to open over 100 more this year. Right now they operate in 47 states right now. Candace has to tell whether or not an area is going to work demographically before a franchise location can be sold, so she uses the SCOUT software to run comprehensive demographic analysis, looking mainly at population in an area of 1-3-5 mile radius.

She also looks at highly Hispanic markets because they have worked very well for the company, so they look at race and ethnicity. Planet Fitness typically works well in a median level income market so they are making sure that the income levels aren't so high that the area wouldn't make sense.

SCOUT also interfaces with the Planet Fitness billing software which is very important because with the company's expansion across the country they are starting to go into markets and open up locations closer to each other so want to make sure they are not cannibalizing on each other.

And with the ability to interface with the Planet Fitness billing software, an employee can basically click on a star on the map of any location and populate the map with all Planet Fitness members so it's crucial for the company to have that data.

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Everyone has their own opinion of the "franchise" concept in America.

Some argue that franchises are leading to the extinction of mom and pop shops, dissolving the local micro-cultures and communities that make our towns and cities unique.

While this idea may have validity, I believe that franchises are the new mom and pop shop.

Here are seven reasons why Mom and Pop are increasingly interested in the franchise option:

1) Buy with bargaining power

Independent operators have limited buying power. With an unknown brand and the buying power of one, it is a challenge to negotiate rates for purchasing inventory, supplies, and anything else needed to run the business.

Franchisors, who have a well-established brand and tens to thousands of locations, have the ability to negotiate bulk prices and share these reduced rates with franchisees. Moreover, vendors often view franchise customers as dependable long-term clients, making them more inclined to cut deals and extend credit to franchisees.

2) Ease of navigating government regulations

Understanding the laws and regulations that come along with opening a new business can be a tedious process. Depending on your city and state, you are likely required to adhere to different building codes, marketing laws, employment laws, workplace safety laws, environmental regulations, and more. (Some of these can be found on the SBA website.)

Acquiring the necessary legal consultation and learning to structure your business to comply with these regulations will eat up time and resources, franchises already offer functional business models, making it faster and easier to open up your doors.

3) Accessibility of peer support

A successful entrepreneur has a strong support system of mentors, consultants, and helpful peers. Independent owners may gain this through friends or membership in the chamber of commerce and other business organizations.

But, franchisees inherently amass a huge network of supporters through the franchise system. Whether it be through fellow franchisees, company conventions, or online support groups, the franchise owner has many forums to direct questions toward from people who have likely experienced similar issues and problems.

4) Availability of capital

Knowing that insufficient capital is a recurring reason why small businesses fail, finding adequate financing to build and operate a business is instrumental in the startup process.

Entrepreneurs with little experience frequently learn that securing a sizable loan can be difficult without a financial history to ensure profitability. Franchisors, on the other hand, oftentimes have relationships with lenders who perceive a diminished risk of lending to franchisees because of the brand recognition, documented financial history, and proven business model provided to them.

Another accelerator in the franchise loaning process, the Franchise Registry was developed in 2012 by the IFA and Consumer's Bank Association to give loan officers access to detailed financial information, allowing them to make faster, more informed decisions on lending to franchisees.

These resources and relationships make the loaning process much more efficient than it is for sole business owners.

5) Design & Marketing Costs

Branding has become an increasingly expensive task in the digital age for two reasons- for initial brand development and for ongoing marketing expenses. For example, in Santa Barbara, every business must submit their storefront logo design to a sign committee, which determines whether or not it is appropriate for public display and is consistent with the city vision.

For this process, business owners must allocate a budget for a graphic designer to assist them with developing proper signage and branding. Additionally, with the onset of the "digital age," business owners aren't able to simply put out a yellow page ad anymore. You must be seen and found on a myriad of different channels.

This means strategic advertisements, social media advertising, publishing on local directories, and building and managing business profiles on review sites like Yelp. Whether this entails hiring a social media marketer or paying for services like reputation monitoring and business listings management, a proactive marketing approach can be costly and time-consuming.

Franchisees are able to save on these expenses as their brand is already developed and they are usually supported by regional or national multi-million dollar advertising campaigns. As day-to-day marketing strategy is not a constant worry, the franchisee has more time to focus on running an efficient business.

6) Expandability

The franchise model itself is designed to be easily replicable. Mom and Pop shops do not have this luxury, and owners often have a difficult time maintaining consistency and quality when opening up multiple storefronts.

If a franchisee wants to expand and open a new location, the process is streamlined so that the equipment, supplies, and inventory needed to do so are either outlined or provided. This scalability is extremely appealing for entrepreneurs who foresee themselves managing multiple businesses.

7) Ability to resell

Generally, there comes a time where an entrepreneur wants to move on to new opportunities or retire and sell the business. If successfully developed over the years, a mom and pop shop can sell and be extremely profitable. However, the overall demand to buy into a franchise is much higher than it is for purchasing an independent business.

The power of names like Wendy's or Pizza Hut is a major selling point to potential buyers, who value the customer loyalty and familiarity associated with nationally recognized brands. While it is possible to sell a small business, selling a piece of a franchise will likely result in a much larger pool of interested buyers and a faster sale.

I believe that these are just seven of many reasons why the popularity of the franchise model for small businesses is growing exponentially.

It seems somewhat of an obvious choice for many aspiring entrepreneurs.

It's not that the mom and pop business model is dead, its just that these small business owners are now buying into the value of a franchise model and see the benefits of building their own business as part of a larger brand.

What do you think, is a franchise the best choice for those who want to start their own local business?

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Keeping a business running requires a lot of moving pieces. Good management, employee satisfaction, effective marketing, high sales, and client satisfaction are just a few of those pieces.

Juggling it all takes a lot of work, and that is why the quality and happiness of your employees can sometimes be seen as the most important factor behind a successful enterprise. Making sure your employees are doing their best work goes far beyond hiring the right talent. You need to make sure that talent is being put to use in the right places.

One essential tool for talent management is the performance review, but it needs to be used correctly in order to reach its full potential.

Here are nine ways to conduct more effective performance reviews:

1. Use a form to gather feedback - When collecting feedback from the employee's superiors and subordinates, use a form that asks specific questions and provides some multiple choice answers and some room for free form reviews. This will make it easier for the people filling them out as well as easier for you to provide the feedback to the employee.

2. Always start and end with positive feedback - Sometimes when providing evaluations to employees, managers focus on the negative areas that need improvement. But it is important to start and end with some positive feedback so that your employee feels valued, even if he is imperfect.

3. Provide specific examples - Always use specific examples in your feedback of both the positive and negative work the employee has done. This will make the critique more effective and give the employee assurance that it is based on the employee's work and not someone's bias or personal feelings.

4. Go up the ladder and down - It is very important to give subordinates the chance to review their superiors, as well as vice versa. How a manager runs his team and how that team feels about the manager is just as important as how the manager feels about his team.

5. Encourage questions - If the performance review doesn't include time for questions, it can feel like a lecture instead of a discussion. Your employee will probably have questions during the review, as well as afterwards. Encourage him to ask both so that he can move forward and improve his work.

6. Focus on behavior over attitude - It might seem like attitude is important - and it is - but because it is so subjective, it is not good to talk about it in a performance review. Don't say "You don't seem to care about showing up late." Say, "We have noticed you often show up late."

7. Be prepared and professional - Don't squeeze in a performance review when you don't have the time. Schedule the appointment in advance, meet in a private office, and don't accept non-urgent interruptions. Allow for more time than you expect and have written reviews from co-workers and superiors in front of you. Do not go off the cuff.

8. Do not argue with the employee - Arguments sometimes crop up in reviews because the employee feels as though she is put on the defensive. If the employee tries to argue with you about something you say, try to shift the argument into a conversation.

9. Look towards the future, not the past - Although the conversation will be largely based on past events, you should focus on ways to improve for the future. You are not seeking retribution for missed deadlines, you are seeking to ensure there are no more of them. Make this clear to the employee as well by talking about the future more than the past.

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If you are selling your franchise, then you probably are subject to capital gains taxes. As a general rule, the sale of property subjects the seller to capital gains taxes.

However, exception to this general rule may apply if you are using the money to purchase another franchise business, if the sale applies for a "1031 exchange" you may be able defer losses or gains if you purchase like-kind property within a specified period of time after the sale.

The details are complicated and here is a general overview.

First, the 1031 exchange definition is complicated; however, the Internal Revenue Service Code states, in relevant part, that "no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment".

The definition of "like-kind" property is crucial to a determination of whether a transaction qualifies. Certain kinds of property are specifically excluded from qualifying for a 1031 exchange.

According to the IRS Code, the following types of property are disqualified:

(i) Stock in trade or other property held primarily for sale;

(ii) Stocks, bonds, or notes;

(iii) Other securities or evidences of indebtedness or interest;

(iv) Interests in a partnership;

(v) Certificates of trust or beneficial interests; or

(vi) Choses in action.

In order to better understand how a 1031 exchange works, consider the following example. Imagine that you own a rental property in Indiana that was originally purchased for $50,000. Since the purchase, you have completed $20,000 worth of improvements on the property, however, the property has also depreciated by $10,000.

Imagine further that you now wish to sell the property. The sale of the property grosses $145,000 with selling expenses of $10,000. The profit from the sale of the rental property would normally be subject to capital gains taxes totaling $14,800 if you are in the 25 percent, or higher, tax bracket. If, however, the sale qualifies for a 1031 exchange, you will be able to hold onto the $14,800 that you would have paid in capital gains taxes, interest free, until such time as you sell the replacement property.

(At 3.5 percent interest, that reflects a savings of $518 per year, or $2,590 over a five year period of time. Of course, if the $14,800 you held onto as a result of using a 1031 exchange is investment in a higher yielding investment, your savings will increase accordingly.)

The replacement property must be one of like-kind. In the above example, this means you cannot purchase a property in which you plan to live to replace a rental property. In addition, the replacement property must be purchased within 180 days after the sale of the original property to meet the 1031 exchange definition.

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Here is an email I recently received.

Note that I live in Maryland, USA and not Ontario, Canada.

Chem-Dry, the world's largest and highest rated carpet and upholstery cleaning franchise system with 3,500 units in 35 countries, has recently opened new territories and will be exhibiting and recruiting new franchisees at the show.

The show is being held at THE INTERNATIONAL CENTRE in Mississauga, Ontario on September 7^th and 8^th. ChemDry has been ranked the #1 carpet cleaning franchise by Entrepreneur magazine for 25 consecutive years.

With our proprietary hot carbonating extraction cleaning process and ongoing marketing and operational support, ChemDry is a franchisor that helps you grow.

We offer in-house financing with as little as $9,995 down and total investment starting at $41,000.We also deliver top-line results.

Check out our average franchise sales numbers:

Usually, I would simply look up the franchisor's FDD and compare this earning's claim with the Item 19 claim.

But, this is a much more difficult case. I don't know much about the Ontario Franchise Disclosure law - except Webster tells me it that it is for lawyers and not franchise investors.

So, I looked up the Item 19 for Chem-Dry in the US, How Much Can I Make.

First, the Item 19 is not based on the franchise owner's reported profit and loss statements.

"HRI does not currently require all Chem-Dry business franchise owners to provide periodic revenue and other financial reports concerning their franchises.

In February, 2013, HRI conducted a system-wide survey requesting that all franchise owners provide certain financial and other information relating to the operation of their Chem-Dry business franchises during 2012.

As of December 31,2012. HRI had 1,081 franchise owners who operated 2,039 Chem-Dry business franchises.

Of those, 211 franchise owners (the "Responding Franchise Owners"), who collectively own 475 Chem-Dry business franchises, and who have owned their businesses at least 2 years, provided complete 2012 financial information in response to the survey and operated those franchises throughout all of 2012."

Second, and it gets more tangled, here is the chart from the survey, click on it to expand it.

The average revenue number reported from the US survey as representative to Ontario prospects is the same: $111,184!

It is it all all plausible that the 211 franchisees who completed the Chem-Dry survey in 2012 forms a reasonable basis to tell a prospect in Ontario what he or she might make?

Perhaps some franchise attorney in Ontario can tell me?

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Since the inception of the WOTC program in the late nineties, lawmakers have remolded the framework and refocused objectives to encompass a greater target audience but because the program as a whole is still underutilized, several misconceptions remain.

The program as a whole has dual, complementary objectives. By enabling individuals dependent on government assistance to find gainful employment, it will subsequently reduce the financial burden on the U.S. economy.

Program success is demonstrated by the over 6 million success stories where jobs are secured by those previously on Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP - or food stamps), Supplemental Security Income (SSI), or other programs.

Because the program has, indeed, been successful, lawmakers have frequently changed the framework to allow the arm of WOTC to reach more than the originally indicated target groups. Years ago, WOTC was referred to commonly as the "welfare and felon credit."

Although applicable at the time, employers may now also receive a federal credit for hiring a variety of Veterans, disadvantaged youth or someone living in an economically depressed area of the country. By only looking at WOTC as the welfare and felon credit, you could prevent yourself from realizing greater benefits. Likewise, using any version of the appropriate screening forms other than the most recent available will prevent the recognition of your eligible employees.

WOTC is a point-of-hire incentive, meaning that applicants must be screened for eligibility prior to employment. Therefore, you unfortunately cannot screen your current workforce. Nor can you dismiss your staff, rehire them and then screen - which is a common question to sales agents and another misunderstanding of the program. At that point, they are considered prior hires, which are disqualified.

If you've previously dismissed participating in this incentive because you don't believe you hire ex-offenders or food stamp recipients, you may be missing out on substantial federal tax benefits.

Make sure you are taking full advantage of the WOTC program, and in some states, the piggy-back credits that allow additional rewards.

To maximize the degree of your savings, speak with a WOTC consultant about your incentive involvement today.

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For a complete and detailed listing of each federally recognized target group, visit our website at www.taxcreditco.com.

Market share is your piece of the pie. It is important to investment banks, your partner, your sales team and your growth. But what is that pie and how do you calculate your slice?

Although market share is likely the single most important marketing metric, there is no generally accepted best method for calculating it.

There are however three common ways to measure it:

• Dollars or Revenue collected: The owner of Coffee & Tea, a boutique coffee shop, is located in central Manhattan where people spent $10 million dollars at cafe's last year. Coffee & Tea made $1 million dollars during that time. They have 10% market share. (1,000,000/10,000,000 = 0.10).
• Customers served: High-End Remodeling, Inc. has a trade area that covers 10 square miles around their office. They serve the well-to-do housing market. That area includes 100,000 housing units but only 10% are homes that are worth more than $1 million dollars. That means 10,000 housing units are potential customers to High-End Remodeling. The company currently does remodeling for 1,500 homes in that area giving them a 15% market share. (1,500/10,000 = 0.15)
• Volume or Unit sales: Westside Auto Dealership determines that there we're 50,000 cars sold last year in their market. Of those, Westside Auto sold 8,000 cars giving them a 16% market share. (8,000/50,000 = 0.16)

In the U.S. you can get data on the size of the entire pie by looking at the US Census FactFinder. Here you can find the dollars spent for your product or service, by geography, by year.

Depending on what data is available to you, use any, or all of these methods to determine your piece of the pie.

What other methods do you use to calculate your market share?

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What was in the air yesterday?

Two people called to discuss converting their business to the franchise model (which, considering my business, is not unusual) and both wanted to offer very low franchise fees. That's discouraging because I don't think they are doing the research necessary to be a really good, sustainable franchisor.

Let's look at both sides of that decision.

The potential franchisors said they were offering part time or adjunct businesses to people who weren't "professional business people" and so, couldn't afford a higher price.

They also felt that they could award more franchises at the lower price. On face value, those seem to be sound reasons. But let's look deeper. Franchise fees are a combination of value statement, practical cost containment and marketability.

We'll address the marketability first.

Many new franchisors do only this step without realizing what goes into the price and we will address that next. When you are shopping franchise fees look beyond your direct competitors.

When people look at franchises they look at several different verticals that share a common start-up cost, so you need to look beyond your market and see what's out there. Once you know what the market will bear, you have to look at the components of those fees.

The franchise fee is a buy-in fee. The franchisee gets the right to use the brand, marks and system of the franchisor for a defined time, so long as he abides by the system rules. As it gains fame and following, its value increases. That takes time and huge market share to move the proverbial needle.

The second component is cost containment and this one takes work. The franchisor has to determine the opportunity cost for selling the franchise. The opportunity cost includes the marketing costs, sales costs (commissions/bonuses, pro rata payroll costs, broker fees, etc.) and training costs, including a pro rata share of the trainer(s) payroll, training material, space rental if needed and start-up materials.

Think it through, price it out: You might not make money on franchise sales, but you shouldn't lose money. Now that you know what goes into a fee structure, let's look at the downside of low ones.

1) The perceived value of the brand is diminished by the lower price. No matter how you justify it, the perception is that the franchise not only costs less, it is worth less. Even if a part-time business, the brand has value.

2) Low barriers to entry are also low barriers to exit. If the franchisee is not significantly vested in the franchise, it will be too easy to walk away the moment things get tough. At the very least, it will be too easy to drop at renewals.

That means the franchisor constantly to pay full opportunity costs to keep franchise levels steady - there are no economies of scale. You will also have to disclose your turnover for years, and that can deter sales.

3) If your franchise fee does not cover your opportunity costs, you will start every franchise relationship at a loss. Before you decide to do this, calculate how long the average franchisee will take to ramp up, pay adequate royalties and offset the initial loss. If you sell several at once, can your company absorb the loss? Can you wait that long? And will the lower cost result in enough sales volume to offset the amount of time you wait to be positive on that investment?

4) No matter the size and return of the franchise, be sure to choose only those candidates who embrace your values, respect your system and have a true commitment. Every time you bring in a franchisee that is not qualified or dedicated, you wound the brand and the good franchisees you do have. That will drive out those good folks fairly soon. Bottom line: Price yourself in a way that makes financial sense for you, creates value for the franchisee and markets the respectability of the brand.

Think long-term and be proud of what you built. If you are not ready for that, you might not be ready for franchising.

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