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"Dollar Signs": Opening A Franchise

Aired October 25, 2003 - 16:31   ET


ANDREA KOPPEL, CNN ANCHOR: Well, today on DOLLAR SIGNS, the pros and cons of opening a franchise. Our guests will hopefully tell you how to maximize the up sides and how you can be your own boss but with training, assistance, and built-in name recognition and minimizing the down sides. Franchisors have strict rules, and nothing, of course, is free.
Joining us to talk about franchises and small businesses is Catherine Siskos, associate editor with "Kiplinger's Personal Finance" magazine, and Andy Birol, owner of Birol Growth Consulting. Andy is a speaker/consultant for growing small businesses and author of "Focus, Accomplish, and Grow."

Andy, I know you have a good sense of humor, because you told my producer that your name is pronounced like "beer for all."


KOPPEL: Let me start with you, Catherine, and ask you to explain, sort of do a little franchise versus small business 101 for our viewers. What is the difference between the two?

CATHERINE SISKOS, "KIPLINGER'S PERSONAL FINANCE: Sure. A franchise is a license to run a business and collect the proceeds from that business for a set period of time, usually ten years. In addition, you get access to that company's industry expertise, to its brand name, to its patents, its trademarks, as well as its advertising and marketing departments. You don't actually own that business, so at the end of that ten-year term or however long the contract is for, you can either renew for another term, or you walk away from that business.

KOPPEL: Andy, is there a set amount of money that people need to kind of put aside if they're interested in buying a franchise?

BIROL: Well, there's certainly the monies that the organization, the franchisor, will require, but they should certainly also put aside at least a year and a half of earnings as well as a rainy day fund for enhancing or increasing the amount of marketing and sales support they're probably going to need to do. See, the issue with franchises and having been a marketing manager for one, is they're very, very good at getting you going, but they spend a lot of their time focusing on getting new people to become franchisees and often not enough time on growing the existing franchisees that often are still in business after a few years and need more help.

KOPPEL: All right, we have our first e-mail comes to us from Mark in Aurora, Illinois, and he writes, "Is there a consumer-report- type publication that rates various franchises in detail that would give a potential franchisee a heads up of who to work with and who not to. Just knowing the franchisee turnover rate for each company would be a good indicator."

Catherine or Andy?

BIROL: Catherine, why don't you get that?

SISKOS: The closest thing that comes to that is the National Association of Franchises and Dealers does have a rating system of franchises. Unfortunately, they've only approved something like 13 franchises. So actually, as far as I know, there is not consumer reports as this particular subscriber has asked for.

BIROL: There is a magazine, I believe, called "Franchising" and the International Franchise Association. But the interesting thing that I was getting to before is I think folks who are thinking about either starting their own business or starting a franchise should think long and hard about -- if they have an idea of their own and they have confidence in that idea, they may find that they can actually do better, because as Catherine pointed out, when you own your own business and don't start it up as a franchise, you're building equity, and you're building an asset value that is actually yours. So it's kind of an interesting choice you have to make there. Nice thing about a small business is you can truly do it your own way. And after it's started, you don't have to rely on the franchisor to boost you up if you get yourself going in the first place.

KOPPEL: Sure. OK, listen, we have our first phone call from Caroline in Oregon. Caroline, you're on the air with our guests. Please go ahead.

CALLER: Yes. I'm interested in finding out the basics of opening a franchise. I'm in a beautiful, touristy area, and I know it's going to happen. I know the name's coming. How do I get the opportunity to get that name? Where do I go? Who do I talk to? Basics.

SISKOS: Do you have a particular franchise in mind?

CALLER: I do. Jack in the Box.

SISKOS: Have you contacted the company and asked for its uniform franchise offering circular?

CALLER: I haven't. Now, uniform franchise?

SISKOS: Franchise Offering Circular. It's a document that pretty much spells out what the franchise is about. It also tells you all the fees, and it indicates whether or not there are any bankruptcies or litigation that concern franchisees, as well as the names of franchisees to contact, which you will almost certainly want to do to find out more about that franchise.

CALLER: Great. Thank you. BIROL: Caroline, what makes you interested in opening a Jack in the Box franchise?

CALLER: Because if you build it, they will come.

BIROL: It's interesting. Is it because of your own personal abilities to cook or to market or to identify that perfect location?

CALLER: The perfect location.

BIROL: OK, OK. Because maybe you should think also about putting up a restaurant of your own there and keeping all the money.

CALLER: I would love to do that, but I think that it's the name. I think that the -- just the wage earning and the marketing for as far as tourists go, it's a well-known place. The food, you know, they can go across the country and get the same thing.

BIROL: Well, see, this is an interesting example. One of the things I encourage business owners to do is to focus on what I would call your best and highest use, Caroline. If you look back and think about what you have done well and what you like to do, perhaps you may find that, in addition to doing the Jack in the Box, you may find that candidly, some of the very things that make you special and that you've done well in your past may help you to open your own business, because as Catherine is pointing out, there are some real challenges in working with a franchise. If you can get through the first year on your own with your own business, you may find you can really develop it into something on your own.

KOPPEL: OK. Caroline, thank you for calling us at DOLLAR SIGNS.

We're going to take another phone call. This one comes to us from Thad, who I believe is calling us from here in Georgia. Thad, please go ahead with your question.

CALLER: Yes. I'm preparing a company for potential major growth, and I was wondering if there's any resources out there to help me design a franchising system so people can address the major markets that are coming up in the near future.

BIROL: There's a lot of experience, a lot of folks out there that are franchise consultants. But what I would encourage you to do, Thad, is as you think about putting it together, one of the things you may find is, if you have a good business concept and you take all the precautions and get all the protection you need, you'll get it started. I would encourage you to put a lot of time into thinking through, about a year and a half down the road. Let's say you have 10 people, 15 people who are franchisees. How are you going to take them from where they are, let's say at half-a-million dollars a franchise and turn them into $2 million franchises? That's the step that often confounds and often leads to the demise of franchise organizations.

KOPPEL: All right, Andy, Catherine, if you could stand by, we are going to take more of your calls and e-mails next on DOLLAR SIGNS. And, of course, you can still send us your questions to, or you can give us a call. That number, right there on your screen: 1-800-807-2620. We'll be right back.


KOPPEL: On DOLLAR SIGNS today, whether and how to open a franchise. We're going to go back to our guests now, Catherine Siskos and Andy Birol.

And, guys, we're going to go to an e-mail from Doug in Dallas, Texas. And he writes, "Is there a way out of a franchise agreement if things don't pan out?" I guess it's good to look into the future.

SISKOS: You can try and sell that franchise agreement either back to the company or possibly to another buyer, but it would probably have to be approved by the franchisor.

KOPPEL: So it's not a guarantee once you sign the papers that you can get out of it until your agreement ends?

SISKOS: Exactly.

KOPPEL: Andy, do you have any thoughts?

BIROL: Well, that's kind of why I've been talking so much about really thinking through whether you want to -- if you have an idea and you feel that you can develop it, there's so many more advantages to having your own business. I understand the value of the brand, and the brand is never stronger than in the first year. But if you take a hard look at what parts of the business you feel you can do well -- for example, if you've always been a seller, you're someone who knows how to sell, you may find, since most franchises have trouble growing past their first year, that your sales abilities are really the thing that will make your franchise grow. If, on the other hand, you're somebody that's been more comfortable in the corporate world, and you've really never been out there and had to sell something to earn a mortgage or, you know, pay the car payment, you may find you're more comfortable with the structure even with the way it may tie your hands in working with a franchise.

KOPPEL: So the moral to this story is: Do some soul searching before you either get into a franchise or a small business.

We have another phone call. This one comes to us from Bill in Nevada. Bill, you're on DOLLAR SIGNS. Please go ahead with your question.

CALLER: Hi, you guys. Thanks very much for the forum.

KOPPEL: You're very welcome.


BIROL: Sure.

CALLER: This is very informative. My wife and I have previous sales experience over many years. We're about 40 years old. And with the recent advent of the discount sector of the retail market doing so well, we decided we'd open up our own dollar store, the 99 cent concept. We've been fortunate to circumvent the normal distribution channels, and we're not subject to having to buy the products at the -- most of the dollar stores are buying products for 60 and 70 cents, selling them for a dollar and squeezing the profit out of that small margin. But essentially, we're just trying to find out if we're on track, because we found out that there are dollar store developers out there, and they charge about twice as much as what it cost us to set up the store ourselves.

BIROL: Well, what I love about this, Bill, is that your best and highest use seems to include your ability to buy well. And as doing that, you're actually getting a better deal by doing it yourself than you are by paying the franchisor to do it for you.

CALLER: Correct. A lot of hours on the internet searching out special deals, bargains, people that are going out of business, so to speak. But what we found out is we filled our store, or derived enough stock to fill our store, for about one-third of what the normal distribution channels would have cost us. And so the startup goes from 60,000 to 20,000, and we were thinking that that reduces our risk. Again, just to let you know, we're also inclined to work our store ourselves and not necessarily hire out right away.

SISKOS: Great.

KOPPEL: Well, listen, Bill, good luck to you as you and your wife continue with your dollar store. Now I know what the mark-up is.

We have another phone call. This one comes to us from Muhammad in Illinois. Mohammed, please go ahead with a question for our guests.

CALLER: Hi. Thanks for having me on your show. I'm a physician here in Carbondale. I called a franchise company in order to open a branch of the franchise in my small town in Illinois, but the company said that the population is very small, or the majority of the population is poor. And that franchise won't run in that area. What should I do?

SISKOS: Have you asked them if they have other territories that you would consider that are near you?

CALLER: Well, that would be kind of out of the question for me, because I still want to continue my practice and want to live in my area.

BIROL: Muhammad, why don't you take a good look at all the different ways that you have connections in that community, and why don't you think about how you can take advantage of all the folks you know and all the different ways that you've touched them as a physician. And perhaps you can either replicate, imitate, or frankly, improve upon the franchise. If they're telling you they can't make their numbers work for them, they're telling you that you probably want to think hard about what you can do. And what I'm going to suggest here is that people right now in this country have either more money than time or more time than money. If they have more money than time, Muhammad, what can you sell them that they will buy because they're busy and because they need to turn to people all over the place to try to get their work done?


KOPPEL: Muhammad, you sound like a typical underachiever. You're a doctor, and you want to have a business. Good luck to you. I'm just teasing you.

CALLER: Thank you.

KOPPEL: We have another e-mail for our guests: "What is the best state in terms of taxes and other benefits? What are the other benefits to look at to start an internet-based retail business," from Naranaya.

BIROL: One of the things that I would suggest is that the taxes and the internet issues are not the right ones to be looking at. What I'd really encourage you to do, Naranaya, is to think through what exactly is the target market that you're trying to serve. Describe not only the company if it's a business to business, but also, the buyer that you're going after. And once you find that buyer, the prototypical buyer you're trying to get, define as much as you can what you're going to do to help that buyer reduce paying or achieve or enjoy opportunity. Because the issues around taxes and around technology are not the major factors you need to go after. The most important thing is to find people with paying that are willing -- or opportunity who are willing to turn to you for answers and ways to make them better.

SISKOS: Catherine, I would have thought that if it was an internet-based business, that that person wouldn't necessarily be paying taxes in the state. But I guess that is the case, huh?

KOPPEL: I don't know about internet businesses, but I do know that franchises often grumble about having to compete with internet- based businesses because they don't have the kind of costs that the franchises have.

OK. Well, Naranaya, thank you for your e-mail.

We'll be back with our guests in just a moment with more of your calls and e-mails after this break. We'll be right back.


KOPPEL: You are looking at live pictures of a home, if you were with us earlier in the hour that we were showing you that was threatened by flames in Waterman Canyon. Now, as you can see, the flames have actually reached the house. We've just panned away from it there. You can see the smoke in the canyon. You've got 2,000 firefighters in the Los Angeles, the greater Los Angeles region, fighting three separate fires, this one in Waterman Canyon, all due to those massive winds that are kicking up about 50 miles an hour in California. We will, of course, be following this story, and, of course, there's poor homeowners there in Waterman Canyon.

Back here at DOLLAR SIGNS. Catherine Siskos and Andy Birol are our guests today as we sort out the pros and cons of opening a franchise. We've got Bob in Pennsylvania who is on the phone.

Bob, and I understand you've got a question about loans and grants, kind of how to get started with the seed money.

CALLER: Yeah, that's correct. I'd like to know if there is any loans or low interest loans or grants to try. I'm trying to start a windshield auto glass business, and I was wondering where I would go to try to get a grant or a low-interest loan to start my business.

KOPPEL: Catherine?

SISKOS: Is this a franchise, or is this your own business that you're starting?

CALLER: No. It's been just my own business that I'm starting. I've been putting auto glass in for 20 years, and I decided to try and do it myself.

CALLER: Have you contacted your local lender to see whether or not you would qualify for a small business administration loan? They typically underwrite riskier loans that your local lender would not underwrite solely themselves. And actually, you would wind up paying a slightly lower interest rate than you would if you got the loan through your lender.

CALLER: I haven't tried to do anything yet. Go ahead.

KOPPEL: OK. I was just going to say that sounds like a place to start, Bob.

CALLER: It sounds like a good idea.

KOPPEL: OK, well, good luck to you.

CALLER: Thank you very much.

KOPPEL: We have an e-mail now that comes to us from Rishi Morla, and she writes or he writes, "What is the most common cause of contract termination, ending the franchisee contract early from the vantage point of the franchisee?"

BIROL: The funny line, from my experience, I was a marketing manager for a franchise organization, was our franchisees always used to say, "I thought I bought a franchise." And what always seems to happen is they kind of run out of gas. There's not the ability to continue to grow sales, get good people, and the franchise model works for the franchisor when many, many franchisees are doing really well. The franchise model works well for the franchisee when he or she is really able to start to build a recurring business. So what usually happens is costs begin to rise, revenues are stagnant, and the energy level of the franchisee begins to wane. And that brings me to a point I wanted to make. You know, being an entrepreneur, there's no need to get a license. You can't really get certified for it. So it comes down to the own passion and the own conviction that you need to have. And so often what happens in both franchisees as well as with business owners is they start to get ambivalent about their success. Their energy starts to go away, and that's why it's so critical that folks really dig deep, go back to what they're good at doing and what they like doing, because regardless of whether it's a franchisee or a small business, they really have to carry themselves forward. There's nowhere else to turn but to bring from within and really go out there every day and get new customers and good services and make sure you're treating your people well.

KOPPEL: Well, listen, on that note, Andy and Catherine, I want to thank you both for coming on DOLLAR SIGNS today.

Catherine Siskos and Andy Birol have been our guests. I hope our viewers were able to learn something. I certainly did about both franchising and owning a small business. Thank you both.

SISKOS: Thank you.

BIROL: You're welcome.

KOPPEL: Relive the high-flying hey day of the Concord next on "People in the News." Then more "CNN Live Saturday" at 6:00 p.m. Eastern. The amazing fire, as we've been showing you all afternoon in California. We're live on the scene as firefighters try to stop the wind-driven blaze. And then at 7:00 Eastern, "The Capital Gang" takes on the now famous Rumsfeld memo and Howard Dean's negative campaign ads. I'll be back after a quick break with today's top stories.


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