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October 6, 2008

Franchise, a safer business

Filed under: Business,Toast Master — Tags: — Fei @ 10:38 pm

Thanks Mr. Toastmaster, fellow toastmasters, and honored guests.

Before I come to my topic today. Let’s have a recap of what I talked in my last speech.

In my last speech, I talked about the purpose of business: “to make money”. The purpose of work is not to work. You don’t want to work “in” your business, but to work “on” your business. Business is building a system, and once it’s ready, you can be eliminated. The key of business is leveraging. Leverage other people’s money, other people’s time.

I also talked why most small businesses fail. Because building a system is so damn hard. It’s too complicated. And the founders may not possess the credentials to build a business.


Building a system that nobody has ever done it before is hard. There’s no question about it. And I ask myself, do I want to build a system? Yah.. Do I have the capability to build one now? I look at myself… no… I have not experienced any real business myself. I don’t have the credentials. So, do I still try to build a new system that I don’t know how, and I have 99% of the chance to fail and end up with nothing. Or, do I put building a new business a side, for a moment, and try to improve my credentials, and increase my odds to be successful in the future. And I think it for a moment, and say, I want the latter.

Since building a brand new system is hard, how about building an existing system? The system is out there, you just need to implement it. In start-up world, idea is not important. What’s important is the team, the execution. If I can go through the system building process once, even though it’s not a new system. It is a good practice. But the problem is, where do I find an existing system to implement?

And I guess you all have figured out the answer. Franchise.

Franchise is a business model that the franchisor licenses proven methods of doing business to the franchisees in exchange for a recurring payment, fees, and a percentage of the sales or profits.

You see there are two parties here? The franchisor, and the franchisee. The franchisor, is a “real” business that I mentioned in my last speech. The franchisor creates systems. Once the system is successful, the franchisor just sits there, and collects fees. That money, is called passive income, because no active work is involved. On the other hand, the franchisees, implement a system. All the risks involving building a system are removed. The only remaining risk is execution. How well you execute the system, assuming the system works, decides how successful you are.

The key in a franchise business is duplication. The franchisor creates a successful system. How to duplicate the system in new areas? Conqure new land, spread throughout the country, throughout the world. Duplication is tedious. It does not contain any new ideas. You just do the exact same thing again and again. However the inside routine boredom of duplication hides the ultimate success. McDonalds is arguably the most successful franchise business in the world. You can find more McDonalds than any other restaurants in the world. That’s the success of duplication. Duplication is also critical outside the realm of franchise. One of the aspects Google emphasizes most is scalability. Everything has to scale. And scale is duplication. That makes google so successful.

What’s the unique benefit of franchise to a franchisee?

Well, as I said again and again. It provides a successful, duplicatable system. It provides a quick start. As a franchisee, you don’t need to learn how to run a business. It’s already there. You have the brand; you have sophisticated training systems; you have cookbooks for everything. You just execute the plan. Do you know how hard it is just to build a brand? When I say McDonalds hambegers, you all know what to expect, right? But when I say Fei’s hambegers, what do you think? Franshising saves you a lot of trouble, and removes a large portion of the risk.

However, as a franchisee, you don’t have total control on your business. You are stuck with the rules. This is actually a double edge sword. On the one hand, if you have a super bright idea, you cannot implement it. On the other hand, you can’t implement stupid ideas either. So it’s hard to say whether it’s good or not. But as a starter, maybe it’s better to play it safe.

As you can see, franchising a business is significantly safer than starting a new business. As a result… remember the fundamental financial principle? The higher the risk, the higher the return? The franchising business will not provide you the same financial reward as a successful start-up business. Not to mention, you need to pay a lot of money to the franchisor.

Franchising can be expensive. It may includes hundreds of thousands of dollors at start-up, and recurring annual license fees. Or, depending on the exact business, you may need to pay a portion of your sales or profit to the franchisor….. Plus, the company training, which you have to attend, may be expensive…

For me, how do I franchise? I don’t have that much money. What can I do? If you want to know more, come and listen to my next speech. “Personal franchise”.

Mr. Toastmaster.

Time: 7 minutes 24 seconds

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