How does a franchise business work

[Dubserve]

Hi

I was just wondering how for example starbucks, mac d and so on earn their money ? As far as i know it will cost you 1 million$ and then you can open your own mac donald, but afterwards should you then pay some of your income to mac d every year or ?

Cheers
Thomas

[kamakiri]

That is a huge question. For starters, Starbucks does not franchise it's shops, and you have to be extremely qualified to franchise a Mac. The franchise model has a ton of variables.

Mac, for example, makes relatively little money off the sales of hamburgers. It's franchisees make money off them, but the HQ makes money off rent. It purchases land and then rents it back to the shops.

Domino's pizza charges a flat 5.5% of sales as a royalty, and then an additional 2.5% for marketing, that pays for national TV commercials, internet, and ad campaigns.

As franchises gained popularity, more and more people tried to get into the game and you see the lower cost of entry/lower return franchises like piercing pagodas and any number of mall stalls. Sure you can make money with these, with most low start up cost franchises, you are essentially buying yourself a $40k a year job.

Did you have any specific questions?

[Dubserve]

The reason i ask Kamakiri is, that one of my friends have developed an unique massage technique, which works a lot better than the traditional massage!

So if we try to follow Robert Kiyosaki teori. He says keep your day time job and then build a business part time. So let's say first he teaches one person to do the same massage. They rent a place together, and do business for a while, doing good advertisement etc. and are saving some of their income to put in the business in the future. Then he teaches another person to do the same, and now they are three in that place doing the same massage, after a while they use their money starting a new place up and so on and so on (guess little 7 eleven).

So the question is just would it be possible to do something like that as a franchise ? or should he build it as a common business, where he gives the educated people the opportunity to get a full time job helping other people, at his business and give them a monthly payment, regardless of how many costumers there is...like an ordinary job ? And then develop it like for example 7 eleven.

Thanks N' Cheers

[kamakiri]

I can only recommended staying away from a franchise model for that business. The first step in developing a franchise system is to have a profitable franchise model. Without that, you bring nothing to the table. Everyone thinks that their ideas and techniques are the best, but the reality is that they all can't be the best.

I came over to Japan in the 90s to do franchise consulting, and know more about the business than most people should, so I do get a lot of requests to consult for other companies who are looking into franchising. I turn most of them down because the premise is so flawed it is a losing proposition.

Franchise law is more complicated than patents, copyright, and most others. Just google franchise litigation. My next consulting contract is for a law firm in the midst of litigation between a franchiser and their franchisees. Getting the proper paperwork alone is prohibitively expensive.

The bottom line is that any franchise needs a profitable business as a base to grow from, and since your buddy doesn't have that, it is a bad idea (today).

Now if you have stuck with me this far, here is what they should do. Get together an outline of the techniques, and hire a production studio or a camera man, buy a nice massage table, and put together a one hour DVD. Make a written guide teaching masseuse how to pick up clients (that didn't come out right, but you know what I mean), and make another guide on how to market your services (a $49 value as a FREE add on!). Sell the DVD's as a profitable home based business plan, or on-call massage service, and then try and get as many affiliates as you can.

The cost to produce the whole thing can easily be held to under $500, and probably a lot less. It also opens the door to volume 2,3... as if you have a remotely quality product, you can easily sell it to your customers.

[Dubserve]

Interesting thinking there Kamakiri. I don't understand what you mean with door 2,3 ?

I think what he had in mind was to develop a big chain of massage places within the next 10 to 15 years, so he and his partner would be the owners and then after 10 to 15 years stop working, and getting people to take care of the business for them. And then they would have their passive income.

He has been working with this technique for around 7 years now, and has developed it further in these 7 years, that is why he and i know that it actually works, and the costumers keep coming back. Now he wants to make it big and well known, and make a good passive profit out of it.

What do you think about the idea ? And do you have suggestions for a model for this business ?

Thanks a lot
Mr. T

[kamakiri]

I don't understand what you mean with door 2,3 ?

Not quite what I said. It opens the door, as in paves the way for other products. Massage DVD vol. 1, Vol 2, vol 3...

Ya. Now you are really moving into pie in the sky dreaming. 10 Year plan? You or anyone else is going to have real trouble holding to a 1 year plan, let alone a 10 year plan with the current questions about the economy. We are wasting out time even thinking about the franchise climate in 2 years, let alone 15.

The big money in franchising was made 20 years ago. Mac made many many millionaires. Domino's Pizza did as well. The people who qualified for a Domino's in 1983 and made $250,000 a year probably could not qualify for a Piercing Pagoda franchise today that only makes $40k.

Like I mentioned earlier. If that is the route he wants to take then he needs to get a storefront up and a profitable business running. Technique will get him nowhere though. Go out and rent Cocktail (the one with Tom Cruise). The details are not in the fancy storefront and equipment, it is in the towels, the daily business side of it. Cashflow, inventory, marketing, and accounting. The day to day details of running a business will trump good technique every time.

[Dubserve]

I see :-) So lets say that he just sticks to:

So if we try to follow Robert Kiyosaki teori. He says keep your day time job and then build a business part time. So let's say first he teaches one person to do the same massage. They rent a place together, and do business for a while, doing good advertisement etc. and are saving some of their income to put in the business in the future. Then he teaches another person to do the same, and now they are three in that place doing the same massage, after a while they use their money starting a new place up and so on and so on (guess little 7 eleven).

So building a network of massage places, What would your opinion be about that model then ?

Again i have to thank you Kamakiri for always saying what you mean, not a many people today are doing that.

[kamakiri]

Nope. I would not go that direction at all. Time is the only commodity that we are all give in equal amounts. Trading time for money, especially the $2-3 an hour (operating costs are high), is never a viable solution in my book. It is also not what Kiyosaki recommends. Kiyosaki does not mention to go out and get a second job (that is just a recipe for being tired all the time), which would be what your friend is looking at, he recommends getting a second line of passive income, ie MLM sales (which isn't really passive income, but that is another issue entirely).

Instead of finding the funds to lease a shop, building it out, and equipping it, setting up legal structure, getting licenses... (easily $50,000 investment), and pegging that on the chance that customers will come, why not go the DVD route.

Do a SWAT. Weigh the + and -. Do a DVD, a real muse. Having it on the net, selling itself is easy and takes no more investment or additional work to keep generating income. Make the sales, then develop a training class. Rent a room in the library, community center, anywhere, and a few massage tables and send out a direct mail or targeted aswords to people searching for massage training in your city. There are so many opportunities that clearly blow the pants off sitting in a massage shop trading your time for money.

The money is not in owning a massage place! That is an easy way to go broke. The money is in supplying others. Training the people who work in those places. There will always be a demand for that. If you r buddy is set on owning his own shop, then he needs to go back to school and learn how to operate a small business, not how to perfect his massage technique. The most important thing about running your own business is knowing how to run a business, not how to work in that business, because in order to grow that business, he needs to work on the business, and not in it.

[Dubserve]

Kamakiri you are the man!

What about the advertising for the DVD would you go for the internet there ? And do you agree that the price he should go for should be around 140$ ? for each DVD.

Cheers

Ps. Please let me know how everything goes with your new business and the other thing we where talking about, please fell free to send me an email any time. Im am still preparing my new business and i am looking forward ;-) I believe in it!

[camdengirl]

I think that's a great model which has been suggested - much more 4HWW than the original plan.

I think franchising this kind of business would be difficult because you would need to work out how people qualify for being franchise owners without quality slipping - would the massage therapists necessarily be the best people to run a business for example? Added to that franchisees would be expecting a high degree of support from the central company - a proven system of marketing, branding materials, diary system, possibly leads, advice on location, equipment etc.

We thought about franchising our service business and just decided against it based on quality control. We actually have lots of people who work on a subcontract basis and we do the central marketing and branding and cream % off the top of all fees. That might work in this case too?

[MikaT]

My business partner and I have been moving forward to change our life 4 hour style, when we ran into this Hair-Ex franchise, costs 80K to start and we both love hair. I am a certified weave queen and my partner is a licensed stylist. Do you think this business would fit in with the 4HWW model or should we go a whole nother direction? :confused:

[TimW]

Short of creating and patenting some new massage technique, I am unsure that you could even franchise the technique. Right now, there are a few Massage Envy locations in the Phoenix, AZ, area and I am pretty sure it's a franchise. What makes it a franchise is the business system, not necessarily the massage, thought it might be.

Never having been to one, I can't say if they only do one type, or have several types of massage (Swedish, sports, Shiatsu, etc.). But what makes it appealing to a franchisee are two things:

Brand
Marketing

McDonald's is a great example of these. Its niche was in creating a systematic way to produce the SAME product, EVERY time in EACH location. On the customer end, this was key. If there was any variation, it became just another hamburger joint.

Then with the system, which created the brand, they did the marketing, from which all franchisees benefited. Imagine each store having to create and place all their own marketing materials. "Embrace The Suck" doesn't even come close to what it would be like.

If your friend is dead-set on creating a franchise operation, which I think is very dicey, extremely complex and incredibly expensive on the front end, I'd say Kamakiri has a great idea.

Instead of teaching a couple of masseuses how to do his system for $X and get only a couple of locations, go direct to the end user for $Y and sell boatloads of DVDs.

That also requires MUCH less overhead and start up expense. Even if he bought all his own production equipment, he'd likely spend less than trying to open his own place and get a "franchise" agreement down solid.