Monthly Archives: February 2013

Are Mandatory Marketing Fees Important to Your Decision?

A lot of franchise opportunities include a mandatory marketing requirement of some kind. Sometimes this means mandatory contributions to a marketing fund administered by the franchisor, either of a fixed amount of money or of a percentage of the gross revenues of the business. The franchisee may have no control over how these funds are spent.

For some people who are deciding on a franchise business opportunity, seeing the mandatory marketing requirement is a reason to look elsewhere. We hear people worry about having to put money into marketing at the beginning of their business, when money might be scarce. They don’t want to be committed to a certain amount, or they want to be able to choose how to spend their marketing dollars.

Is the mandatory marketing fund requirement really a problem?

Franchisee weighs in on mandatory marketing fees

We spoke to a franchisee in a weight loss program. “We have to devote 7% of our earnings to marketing,” she said. “We can decide how to spend it, in a sense, but we have to have approval from corporate, and we know our options are limited.”

For this franchisee, spending that money usually meant paying for the TV or radio time for commercials created by the franchisor.

“Sometimes we would have liked to be able to try something else – internet marketing, for example is something we wanted to do and couldn’t. I could let it be frustrating, but in my position…I just think of it as compliance. I couldn’t afford the quality of spots they send us as an individual business, so it’s a fair trade-off.”

That advantage of pooled funds is something you might not be able to appreciate until you’ve been in business for a while.

Think of the typical independent business.

When a new business starts up without the support of a franchisor, they usually find that advertising costs more than they originally thought. The price of a professional TV spot or website is often a surprise, and the price of broadcast advertising is almost always much more than people expect. What’s more, the rule of thumb is not to expect any results at all from a marketing initiative for the first five months. You might get results, but it’s gravy if you do. Instant results are not the reality of marketing.

The small business tries to cut corners, and their results are disappointing. At this point, many small business owners decide to forgo spending money on marketing until they make a profit. Without marketing, though, it’s hard to bring in customers.

It’s a catch-22 that explains why so many businesses end up closing their doors shortly after the business opens.

Franchises start out with the advantage of ongoing marketing campaigns and an existing well-respected brand. The day a new franchise business opens their doors, there are people who recognize their products and logo. Professional ad campaigns and slick ads are often available to new franchisees immediately – not when they have thousands of extra dollars to invest.

This is unquestionably one of the big advantages of opening a franchise business.

If the franchise you’re considering requires a mandatory marketing investment, look at the quality of their marketing and its appropriateness in your market. The weight loss franchisee we spoke with appreciated the lavish, celebrity-studded ad campaigns she got with her franchise and thought of ways to connect that brand awareness advertising with calls to action for her own franchise business location.

She also appreciated, after she had been in business for a while, the requirement that she do the marketing. “I wouldn’t have done it on my own,” she admits. “I’m too cheap!” In the long run, the investment has paid off for her.

Some Franchise Businesses Have Trusted Names: So What?

One of the things you buy when you buy a franchise business is a trusted name. True Value, a hardware chain owned by its 3,000 owner-operators (for this reason, True Value describes itself as a co-op rather than a franchise, but the process is essentially the same) is the third most-trusted name in its industry, right behind Big Box stores Lowe’s and Home Depot. Casey’s General Stores is on the Forbes list of Most Trustworthy Companies. A recent study found that Subway was the most trusted by American consumers when it comes to nutrition information. Pizza Hut has also made a Most Trusted list, and Merry Maids is mentioned regularly in home security tip lists as a safe option for nervous homeowners.

We could go on, but these examples should make the point: when franchisors say that buying a franchise lets you buy a “trusted name,” they’re correct. The question is, how much does it matter?

 Is the trusted name of a franchise a real benefit compared with starting up a business on your own?

Dr. Thomas D. Lacki is one of the many who have tried to quantify the value of trust. He points out that there are a lot of value-creating behaviors that are influenced by how much people trust a company:

  • We’re more likely to refer friends to a trusted company.
  • We’re more likely to buy from them a second time.
  • We’re more likely to stick with them in the future.

His extensive research has demonstrated that increasing a customer’s trust in a company can be worth billions in revenue for a large company, just because of these factors.

Those three customer behaviors are not the only business factors influenced by trust, though.

 

  • Price – A recent study in the United Kingdom found that a trusted company can charge 10% more for a product than a less trusted one. People simply aren’t willing to take a chance with a less trusted company unless they are getting such a bargain that they’re willing to take a chance.
  • Value – An Asian study found that companies spent five times as much on transactions with less-trusted vendors – not that they were willing to spend five times as much or that they ordered five times as much, but that they spent five times as much time and money on following up as they did with a trusted vendor. Clearly, a trusted vendor makes better financial sense, and those businesses will realize this.
  • Marketing – It’s an accepted principle in marketing that customers have to have contact with a company 7-12 times before taking action. With a trusted national company, your customer has already had enough contact. Instead of thinking, “Hey, a new pizza place… maybe I should try it” six times before taking the plunge, your customer is just as likely to think, “Oh, there’s a Little Caesar’s” and turn right into the parking lot. When it comes to the cost of marketing your new franchise, you may be able to get ten times the results right from the beginning, compared with the cost of marketing a brand-new business.

David Horsager, author of The Trust Edge, has estimated that a lack of trust doubles the cost of doing business, and a high level of trust generates three times the returns compared with a low level of trust.

After you’ve been in business for a while, you’ll earn the trust of your community. In the meantime, a franchise gives you a significant head start.

Close Your Eyes and Visualize Your Perfect Workday

How do I know if buying a particular franchise is going to make me happy? I know I want to affiliate myself with a franchise that is profitable. I know the franchise I choose should offer a service or a product that people really want to buy. I know I need to buy a franchise business that will evolve with an ever-changing marketplace. I know that. But, if I buy that franchise, will I really be happy? Will I wake up every morning and be excited about going to work? What I do know is to sustain my enthusiasm and give me a greater chance at success in franchising, I must be happy with my choice.

What do I want out of a franchise?

Look for the franchise opportunity that lets you tap into your strengths and passions. Will you feel fulfilled when you’ve helped your customers improve their lives? Do you want to escape the regular 9-5 atmosphere and do something exciting and new? Do you want to fuel a passion that’s been on the back burner for years? All of these are possible results of starting a franchise business – but each prospective franchisee may have a different goal. Think about the real goal of your franchise opportunity search.

Once you’ve thought about the results you want from your franchise, you’ll be closer to knowing what to look for in a business model. For instance, if you want a turn-key style business that gives you the time and money to travel, then you shouldn’t open a franchise that takes a lot of hands-on management on your part. And if you want a franchise where you find fulfillment by spending hours with the same client over a long period of time, fast food isn’t going to be right for you. The better you can align your goals for your franchise with the business model of a franchise, the better that franchise will be for you.

Visualize your perfect workday

Shut your eyes and imagine what your perfect workday would be like. Do you want to spend lots of time doing certain types of tasks, like working with vendors and managing personnel? Or do you prefer to spend more time at home with your family? These are integral concerns when thinking about franchising because each business model comes with different obligations and responsibilities.

You may have a specific industry in mind, either because you have experience with it or because it has always appealed to you. However, many successful franchisees are not passionate about or experienced in the industry they choose; success in franchising is often about skillful management.

Get as clear a mental image of your perfect business as you can. Write it down, sketch it out, or talk it through.

Now that you’ve got some direction in your search, use our Franchise Bulls Eye tool to narrow the field. The Franchise Bull’s Eye lets you plug in your preferred industry, location, and level of capital investment. With one click, you’ll get a list of all the franchises that meet your criteria.

Once you’ve got a list of franchises to look at, read each description thoroughly and look for keys to what you can expect from the franchisor—think about how their focus aligns with yours, or doesn’t. If it seems like the franchise will provide the results you’d like to achieve, then do some more digging. If not, quickly move on.

This process will help you keep the number of franchises you need to research to a manageable number and help you avoid the “analysis paralysis” that can result from just having too many choices.

Incorporate Your New Franchise Business

If your thinking about buying a franchise, you, undoubtedly, have a lot on your mind – and incorporation should be one of those things.

When you incorporate your new company, the business will become a legal entity and have its own identity. Just as though the business were a different person from you, you are responsible for what you do and the corporation will be responsible for what it does.

Why legally incorporate your new business? We don’t like to think about the worst case scenario when we’re beginning an exciting new venture, but doing so can actually make for a better start. Incorporating your new franchise business protects you in case the business fails, and also can shield your personal assets in case you are sued. There may also be tax advantages, depending on your state and your situation.

Some franchisors will ask you to incorporate before signing the franchise agreement. They encourage this not only for their protection – and yours – but because a corporation can seem more credible and more serious than an individual. The commitment involved in incorporating can make you seem like a more established business.

Some franchisors, on the other hand, may require you to pledge personal responsibility, whether you’re incorporated or not. This is a conversation you should have when you’re talking with different franchises and making your decision among the various franchise opportunities available to you.

Another factor that can influence your decision is where you’re getting the funds for your initial investment and your expenses until your franchise starts making money. That can be longer than you think. If you’re paying for everything yourself, you could lose your whole nest egg if your franchise went under. If you have investors, working out the legal details at the beginning will help protect both you and your investors.

Incorporating can also help you raise funds and find investors. Particularly in cases such as wellness franchise businesses or those involving children, where people might be more likely to bring legal claims against you, the legal protection of incorporation can make your company a more attractive investment.

Incorporating does have costs associated with it. You may want to talk with your CPA or other financial advisor about the costs and benefits of incorporating in your particular circumstances. Since these depend on the state you live in, the state where your franchise business operates (and many franchisees have locations in more than one state), the type of business you’re starting, and your personal financial situation, it’s impossible to make a general statement about the costs and benefits. In one case, incorporating might have tax advantages and in another it might increase your tax liabilities. There might also be advantages that would be small enough that they wouldn’t offset the extra costs and paperwork.

Discovering these costs and benefits and making a decision on incorporating should be part of your early planning.

Incorporation can be a relatively simple and easy process or it can be very complex, depending on your state’s rules and requirements and what type of company you’d like to start. The best way to start a company without running into any troubles down the line is to consult an attorney. Consulting an attorney who specializes in franchise law is an especially good move towards protecting yourself and your investment.