Monthly Archives: August 2014

The Franchise Model Makes a Difference

iStock_000036331162smallWe know the benefits of the franchise model for business: franchisees use a tried and true model for business, benefiting from the experience of the franchisor as well as the support and economies of scale that come with the franchise system.

But a new book called The Solution Revolution, by William D. Eggers and Paul MacMillan, sees more than this in the franchise model. They point out that franchise model allows businesses to run leaner. Removing the costly trial and error, streamlining operations, leveraging new technologies and group buying power — all these factors mean that a franchise can operate better, with fewer resources.

According to Eggers and MacMillan, “lean franchises have played a transformation role in developing countries, offering a sturdy ladder out of poverty.” One example is elementary education in Kenya.

Kenya began offering free primary schooling to children in 2003, but it didn’t work out well. Prior to this initiative, more than half of the kids who started primary school dropped out before finishing. Many more didn’t even start, because the cost of attending school was prohibitive for so many families. When — with a large infusion of donated cash — schools became free in 2003, 1.4 million more children entered Kenya’s primary school system. The average size of a primary school rose from 340 to 400 immediately, and within six months schools were running out of materials. Overcrowding was perceived as a problem, and there were not enough textbooks to go around.

The Brookings Institution reported that teacher truancy was a problem in the public schools, and Eggers and MacMillan quantified it, saying that “when teachers show up, they spend on average only 90 minutes of the day on instruction.” This may not be the only issue with the public schools, but it quickly became clear that Kenya’s free school plan was not sustainable.

What’s more, the free schools still weren’t actually free. Desk fees, exam fees, and other types of fees charged by the schools meant that parents paid more than $3.00 a month for free schooling. Franchise private schools began to pop up in Kenya. They charged $4.00 a month, and provided predictable, consistent education for the children enrolled there as students.

The teachers at the franchise private schools are less educated and less experienced than those at the public schools — but they can still be successful, because the schools start with a “school in a box” including all the curriculum and teacher training needed for a successful school. The franchisors provide support for everything from construction to marketing and parents pay by smartphone, making it easy to keep up the income stream.

Like many other franchise businesses, the franchise schools have proprietary software which helps the franchisees manage the school effectively even though they have no experience when they start. And as with many franchise businesses, the franchisees of Kenya’s burgeoning private schools have the satisfaction of knowing that they’re doing something that helps their communities.

Franchise business owners in the U.S. may not be part of such a revolutionary change, but the streamlined nature of the franchise business model makes it workable in many situations.

Best Franchises to Own

successSure, the best franchise business investment for you will depend on your management and operational skills, your passion, and people skills, as well as the market and the competitive landscape in your community. But are there some franchises that are just intrinsically better?

Our team at America’s Best Franchises has identified some of the Best Franchises to Own in 2014 by checking on a simple but powerful criterion: low, annual turnover ratios to the number of U.S. franchise outlets. We are featuring those franchises with stellar success rates into a special section — click on the link above or use our main navigation. We’ll be adding to the list over time.

What is a turnover ratio? “Turnover” refers to a franchise that simply terminates or ceases to continue operations for whatever the reason. For our purposes, the turnover ratio equals the average annual terminations and franchises that ceased to operate divided by the number of US franchise outlets for each of the last three reporting years.

It’s a simple measure for a complex phenomenon. After all, not all companies that close or experience cessation of business failed. Cessation of business could be a result of death of an owner or partner, health issues, or even a divorce. Some may simply choose to retire. In fact, a 2002 study found that fully one third of small businesses that close consider their business successful. They closed, but didn’t fail.

What’s more, when franchises fail, the reasons for failure can cover a wide range of possibilities. Some franchisees underestimate the amount of work and investment required to own and run a business successfully and fail through their own lack of preparation. There’s also the question of fit — one franchise might work well for one person but not for another, because of temperament or experience. The best franchise concepts work hard to choose franchisees who are likely to succeed, but, unfortunately, they can’t foresee every mismatch.

Still, numbers over time say something. The U.S. Bureau of Labor Statistics says that about half of all new businesses survive for five years and one third survive for ten years. They’ve seen about the same figures for decades and feel confident that this is the normal pattern.

Franchises with longevity have an advantage. Their business model and operations system has been tested over time. They’ve made mistakes along the way and worked out the kinks. New franchisees benefit from a system tried and now true. That reduces a lot of the trial and error that can eat up time and money in the early months (or years) of a new business. Franchisees also have support. Some of the businesses that go under after one or two years might have been able to succeed in the long run if the owner had received the kind of advice and encouragement a franchisee receives — not to mention the training and practical support in the form of marketing programs, national name recognition, and management software that many of our best franchises make available to new franchisees.

Nonetheless, any new business comes with some risk. Not all franchise businesses succeed. It is important, then, to identify franchise systems that historically have had a consistent growth pattern and low turnover ratio. It doesn’t necessarily mean your going to make a lot of money. It simply means the franchisor is good at identifying top franchisee candidates for their system, the business model is sound, and the system works in a variety of locales.

Anytime Fitness, for example, has a turnover rate of less than 2%, and Sport Clips has a turnover rate of less than 1%. These are impressive numbers.

If a franchise business beats the odds on business failure consistently, it’s clear that the franchise is doing something right. That’s why we want to single out these Best Franchises to Own. Visit our Best Franchises to Own – 2014 page to find the best franchise for you.

Service Franchise Business Opportunities

Increasingly, businesses in the U.S. are moving toward services, not goods. Many things that we used to buy as goods, such as music, newspapers, and movies, we now consume as services instead. We’re more willing to pay for services, too. Whether it’s a spray-on tan or financial counseling, Americans buy more services now than we did a decade or two ago. Forget good old American self-sufficiency – people in the U.S. are paying to be taken care of more now than we have since the beginning of automation.

How do you know if you’re suited to a service business?

The most obvious sign is that you love to help people. If you find that the satisfaction in your job is the opportunity to help and serve others, a service business is a natural fit. Many service franchises give franchisees the chance to manage the services rather than providing them directly, while other service-oriented franchise businesses let franchisees get hands-on with their clients.

What kind of service business is right for you?

Some service businesses provide direct physical help to customers. Spa services, personal training, and franchise businesses that care for seniors, kids, or pets are examples of these.

Other services focus on coaching, from life coaching to business coaching to financial coaching. These businesses involve consulting rather than hands-on service provision. Services like personal shopping and weight control counseling can also fall into this category.

The third category of service businesses includes companies that provide home renovation, cleaning services, home energy audits, and the like. These companies still provide services, but the services are not as personal and may be focused on customer’s homes or possessions rather than family members.

Here are just a few of our service franchise business opportunities:

Prime National Credit Repair
Prime National Credit Repair encourages franchisees who can develop relationships with clients and provide consulting, while the home office provides the technical services. Franchisees have the opportunity to help people who need to get their financial houses in order, without requiring any special experience or training.
Focal Point Coaching
Business coaching is a booming business, and Focal Point is an international company with proprietary coaching materials and intensive training. Focal Point franchisees work with small and medium businesses, including professionals and entrepreneurs. Since Focal Point offers coaching materials in 18 languages, bilingual franchisees can have special niche success.
Comfort Keepers
In-home health care is increasingly important for our aging population. Many seniors live far from family members and prefer to stay in their own homes. Comfort Keepers makes it possible. From companions to personal services such as hygiene and mobility to specialized dementia care, Comfort Keepers helps seniors and their caregivers.
College Nannies and Tutors
This innovative service franchise connects college students with families need nannies and tutors. The kids feel like they have a new big sister or brother, families have the confidence of carefully-vetted students, and franchisees have a steady stream of willing workers. College Nannies and Tutors is a cash-based business with the potential for part time or remote management.

Profits, Revenue, and Franchise Businesses

New business owners sometimes get confused about the difference between profits and revenues, even if they know the definitions of both words.

Here’s the basic explanation, to be sure we’re all on the same page.

You sell items that cost $10.00. Keeping the doors open – paying staff wages, rent, the electric bill, your marketing fees, and all other fixed costs – runs you an amazingly low $100 a day.

When you sell 10 of your items at $10.00 each, your revenue is equal to your costs.

However, you didn’t break even. The item has some cost – in this case, let’s imagine that it costs you $5.00 to make or buy the item. That means that each item, while it put a $10.00 bill in the cash register, only earns you $5.00. You must sell 20 items to break even each day.

If you sell 20 of your $10 items and take in $200.00, how much profit have you made?

None. You’ve covered your costs, but you have not made any profit. The 21st item you sell each day earns you $5.00 in profit.

It takes businesses some time to become profitable. Three to five years on average, in fact. Costs are nearly always higher than $100 a day, and your items may not be priced as high as $10.00 or have as high a markup as $5.00.
Sometimes business owners – franchisees or not – can get very focused on revenue and forget about profits. If you don’t keep close track of your costs, you can end up with plenty of revenue and no profit. To continue with our example, you might run a special buy one get one free promotion that brought lots of extra people into your shop and sell 60 items one day.

Let’s see how that works out:
• You gave 30 of the items away for free, so you took in $300.00.
• Your cost for 60 items is $300 ($5 x 60 =$300).
• Your fixed costs for the day were $100.

So you took in $300, which means your revenue was higher than on the day you sold 20 items. However, your costs were $400, so you actually lost money rather than earning anything on that day.

That’s fine if your special offer causes half those customers to come back three times a week and buy several of your items… but you can’t always predict the effects of the promotion before you spend. Being too cautious can keep you from growing to profitability, but being incautious can just eat up the profits.

As long as we work with small, round numbers, it’s pretty easy to see that revenue and profit are not the same thing. In real life, it’s not that simple. Costs come up in large, uneven numbers on different days and at different intervals. Items have different prices and different markups, and you have to make decisions on the fly.

All these things are true in every business. In a franchise business, however, you may pay a percentage of your revenue to your franchisor.

Not a percentage of the profits, but a percentage of the revenue.

Sometimes that can mean that the franchise may want to do things that increase revenue but don’t increase profits. Several fast food restaurants, for example, have gotten into disagreements with franchisees because they want to offer coupons and $1.00 deals. Those are perfect examples of promotions that raise revenues while reducing profits. The franchisors believe – on the basis of long experience – that the long term benefits are worth the short term investment. The franchisees aren’t so sure.

There’s no hard and fast rule, but having a clear understanding of the difference between revenue and profit can make your research into a franchise much more effective.