Costs and Advantages of Franchising

Franchising your business can be a great way to grow your brand, and for entrepreneurs looking for their next business opportunity, owning a franchise has a number of important advantages. If you currently own your own privately held business, or if you are someone who is exploring the possibility of franchise ownership, this edition of “Deal Talk” is for you. Patrick Le Feuvre is a Houston-based franchise area representative for Cartridge World — a highly successful global franchise serving both business clients and general consumers. Mr. Le Feuvre talks about how the franchisor makes their money and how the franchisee benefits (and succeeds) from their interdependence on other franchisees in the company.

Questions Answered For You

The first notion of being your own boss and being an independent owner is actually very antithetic to franchising because in franchising you are not an independent owner. You are an inter- dependent owner because you are part of a team. You've got peers like with my territory.

- Patrick Le Feuvre

Key Takeaways

  • Franchising is very different from other possible sources of revenue in that you need to follow the processes and the model of franchising in general.
  • What you get when you get into a franchise business is the operational support.
  • To go into franchising, you have to be the right kind of person, as it doesn’t suit everyone.
  • You become an inter-dependent owner because you are part of a team.

Read Full Interview


Jeff: If you're opening up new locations of your business to franchisees, or if you are a prospective business owner looking to purchase your first franchise and you want to improve sales, value, your lifestyle, and chances for long-term success, you've come to the right place.

From our studio in Southern California, with guest experts from across the country and around the world this is Deal Talk, brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.

Jeff: Welcome to the web's number one content source for you and all small business owners committed to building a great business you will want to eventually sell. On Deal Talk it's our mission to provide information and guidance from our growing list of trusted experts that you can use to help you build your bottom line and improve your company's value. Joining us to talk about how franchising can help you grow your company while providing your franchisees with the opportunity to own their own business while enjoying a comfortable living in the process is Patrick Le Feuvre, master franchisee at Cartridge World. Patrick, welcome to Deal Talk, it's good to have you.

Patrick: Thank you, good to be here too.

 

Jeff: Patrick, thanks so much. You've got a very, very exciting story to tell and we're going to learn a little bit about Cartridge World kind of sprinkled here and there within our conversation. But first of all I'd like it if you could tell us a little bit about yourself and exactly what you mean by master franchisee.

Patrick: Okay. My background has been in the hi-tech industry for 35-40 years. I worked for Texas Instruments in Europe and then Compaq computer. In 2007 I acquired territory for Cartridge World. And so the term master franchisee refers to the fact that the company in the US is organized with 20 master franchisees that own territories. My territory is Southeast Texas which goes from the Louisiana border to the Rio Grande Valley, and includes the hill country, Houston, Austin, San Antonio, etc. It's a 14 million people territory. And our job is to develop that territory. Some companies call my function area developer, but the difference is that usually area developers are employees of the company. In my case I own the territory so I purchased that territory. Does that make sense?

     

    Jeff: It does make sense. Do you own the entirety of all the shops and the territory, or you own a significant portion of those locations?

    Patrick: No, I actually do not own any location. Some masters around the country do. They may own a store or two. In my case I do not. My responsibility is to develop the territory. All the stores are owned by individual owners. And what I get in terms of revenue is royalties from these stores.

    Some companies call my function area developer, but the difference is that usually area developers are employees of the company. In my case I own the territory so I purchased that territory. Does that make sense?

      Jeff: Okay, very, very good. And we're going to talk about that here in just a second. But first of all just kind of a little information about Cartridge World, there are some areas of the country where maybe you don't necessarily have the penetration and so the brand may not be recognized. But Cartridge World as I understand it, Patrick, is a business that is essentially geared toward those companies and individuals who need to go in and get replacement parts, printer ink, and cartridges, and things like that for their computer printers, is that right?

      Patrick: Yes, that is correct. In fact it started as really a manufacturer of ink and printer cartridges in the 80's. It's evolved over the years tremendously. We offer today printing solutions in general that include not only the cartridges but we also sell printers. We provide what we call managed print services like Xerox does, for example. We do printer service and repair, and additional services, copying services, shredding, recycling, etc. So the offering has expanded a lot. And also what's somewhat unique is that we cater both to the retail business as well as B2B. So in other words we've got customers that are individual customers that come for their home needs. And we also have businesses of various sizes where we deliver to them.

       

      Jeff: And these are brick and mortar type shops that are located near shopping retail centers where people can walk up and they can take advantage of your services and products. And so really it's become a full service, a full line dealer of products and services, anything that you can think of that is printer-related, Cartridge World has it. I want to get into a discussion of franchising. You have been at this now for a while. You came over from another industry but certainly involved in franchising now for about almost eight, nine years as of this time. 

      But what I'd kind of like to find out from you, you come over from another industry, you're now involved in franchise operations. You've talked no doubt to business owners in your normal everyday conversations who own their own privately-held companies. With regard to franchising, however, let's talk about how franchising is different from being a private business owner?

      Patrick: Yes. Franchising is actually a way to get your product to the market. So if you're an entrepreneur that has an idea that offers services or products you need to be able to distribute that product, and you can do it by having your own business and developing everything yourself. You can do it by partnering with a big distributor. You can do it by selling through the Internet. Another way to do it is through franchising. Franchising provides a vehicle to the customer. At the end of the day, the only thing that's important is the customer to be satisfied with the product. So franchising is one vehicle to take your product to the end customer. And it is very different from the other possible revenues that I've described in the sense that if you're in franchising then you need to follow the processes and the model of franchising in general.

      Yes. Franchising is actually a way to get your product to the market. So if you're an entrepreneur that has an idea that offers services or products you need to be able to distribute that product, and you can do it by having your own business and developing everything yourself.

      Jeff: And so you really need to have kind of an open mind. You can't be too close-minded about how you go about your management and your ownership style as far as your business is concerned. Because if you come over from owning your own privately held business, your own company that you raised from the ground up and then you sell that company off and then you go to work owning a franchise location. It's a different animal altogether, as Patrick just mentioned. Let's talk about the costs involved now Patrick in terms of how much money it could cost someone to, for example, work for Cartridge World and take over a location or purchase a location. How different is the cost compared to owning one’s own business that he would have to go to everyday down at the corner shop or something like that. Is there a huge difference in the cost?

      Patrick: Yes. The cost in franchising can vary from very low startup investment for businesses that are home-based, etc. where you can get into franchising probably for $40,000-$50,000 up to millions of dollars, people that owned restaurant chains or whatever. So the cost can vary tremendously. In our business to start a Cartridge World store costs between $60,000 to $150,000 for your initial investment. We are looking for people that have a net worth between $200,000 and $400,000 and liquid capital of at least between $50,000 and $100,000.

       

      Jeff: And there are other costs that are involved too that private or independent businesses don't have. I'm talking about royalties and other types of fees. Can you explain what those royalties and fees are?

      Patrick: Yes. The notion of royalties and fees is the reason you get into franchising is because you want to get into a system that is already operating, that has all the processes and systems set-up, etc., and that provides assistance to you. And you actually pay for that in two ways. First when you start your store there's a franchise fee, and the franchise fee I would describe it as like if you join a country club it's the membership fee. So it's a one-time fee which in our case is $40,000 to $50,000. And then as you start operating you pay royalties. And your royalties once again can differ between the businesses. There are people that charge maybe five percent of your gross sales up to 10 percent in some systems. I don't encounter businesses where you pay more than 10 percent. Those are the two fees. And the royalties are there to basically what you buy there is the brand and the operating system and the processes. That's what you buy.

       

      Jeff: Okay. How much of what I bring in, my location in terms of revenue goes to the corporation then?

      Patrick: For Cartridge World it is six percent of your gross sales.

      The notion of royalties and fees is the reason you get into franchising is because you want to get into a system that is already operating, that has all the processes and systems set-up, etc., and that provides assistance to you. 

      Jeff: Six percent of gross sales, okay. So I would get to keep everything else. And so that actually sounds like it could work out well and particularly if you're in an area, you're working in a location that is established and that has a good reputation in the system for being a productive store you could really do nicely quite frankly. The one thing that I happen to believe that franchisees benefit from is from the marketing expertise and promotions and marketing communications expertise of the corporation and the assistance and the support that it gets from those people up above. Is that correct? Let's talk a little bit about how the company helps its independent franchise owners market their company, market their business there in their local areas?

      Patrick: Yes, that is very true. Once again what you get when you get into a franchise business is the operational support, and one of those is marketing. Now, once again the approach differs depending on the franchise companies. In our case we actually collect another percentage from the store owners that goes into a national advertising fund. Currently the store owners pay two percent of their sales, that accumulates at the national level and that money is spent for brand awareness, which of course is national, and can be spend also in regional activities. And thirdly is also spent in reimbursing local marketing activities that the stores do themselves and paying back in general about 50 percent of their marketing. It's money that's collected across the board. Everybody pays two percent, and then that money is spent nationally on behalf of the franchisee.

       

      Jeff: Everybody pitches in for a campaign that is essentially national marketing and promotion of Cartridge World. And then of course you're able to do your own local marketing and advertising as well. And so it makes perfect sense and I think that we've covered that very nicely. Patrick, what I'd like to do is take a small break and then when we come back I'd like to talk to you about maybe some common misconceptions that people have concerning ownership of a franchise. And we'd like to do that with you when we return with Patrick Le Feuvre, he's a master franchisee with Cartridge World in the Houston area of Texas, when Deal Talk continues in a moment.


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      I'm Jeff Allen with my guest Patrick Le Feuvre, master franchisee with Cartridge World. Patrick, I know that there are a number of things, curiosities that people have about owning a franchise location. And a lot of times, unfortunately, I think franchise business ownerships sometimes gets a bad name only because people tend to associate franchisees with fast food restaurants. And so people are like, "It's not really a business. You're just managing a bunch of kids." But that's not in fact true. Franchise businesses are in a wide variety of industries, and people do very nicely and make a very nice career out of owning a franchise and I know that you can attest to that. What are some of the other things that maybe you've heard people talk about in terms of franchises that are misconceptions? People may have a bad feeling about but maybe these things aren't true at all.

      Patrick: First as you mentioned there's a whole bunch of different businesses. The restaurant area is certainly a major player in franchising but it's far from being the only thing, and we are a good example because we certainly have nothing to do with food. Some of the misconception I think about what franchising is about comes partly from the way that people advertise that franchising. Because if you look anywhere it will tell you, be your own boss and have a great lifestyle, etc. This is not franchising. The first notion of being your own boss and being an independent owner is actually very antithetic to franchising because in franchising you are not an independent owner. You are an inter-dependent owner because you are part of a team. You've got peers like with my territory. I've got 20 some franchisees, we've got 500 in the US, and to a certain extent over a thousand across the world. And everything you do affects in a way all your peers. It is absolutely not an independent business, it is inter-dependent.

      The first notion of being your own boss and being an independent owner is actually very antithetic to franchising because in franchising you are not an independent owner.

      Jeff: I think that's a very, very important distinction, inter-dependent as oppose to independent. And I know that earlier in the program here a few minutes ago I actually did use the word independent when describing an owner. You've kind of corrected me on that, and that's because as you pointed out the owners work so closely with one another, or certainly can do that, and it's all for the benefit of their business really when you give that some thought. So that's a really important distinction to make here I think, Patrick. I've heard people say that when you run a franchise you're in essence a customer of the franchisor or the corporation. Is that true or false?

      Patrick: That is false too. I don't know if it's always the exception but it's certainly bad with presentation of the business because there are basically two models in franchising you can have, the home office and then dealing directly with the store owners. Or like us you can have the home office dealing with the master franchisees who are actually the franchisors and store owners. So we have a two-tier business. But in those cases the relationship between the home office, the franchisors and the store owners is collaborative relationships. 

       

      Jeff: Got it, okay.

      Patrick: The interest of these three groups have to be perfectly aligned and we all are strategic partners. In fact when I talk to my franchisees I don't talk to them as customers or whatever. There is no vendor customer relationship between them and us. We are strategic partners.

       

      Jeff: Okay, that makes perfect sense, and again it's a matter of working together all toward that common goal. You own the business, you're inter-dependent, you all work together, you're not in fact a customer of the franchisor so we've dispelled that myth altogether. Let's talk about the offerings inside the store. If I want to offer a new product or service at my location, what are the keys there in order to be able to do that? If you can tell us a little bit about how the franchisor works with the franchisees at the store level to roll out that new product or service once it's been approved for sale. 

      Patrick: Yes. There are basically three tests that a new offering has to pass to get offered to the customers. And actually this should true, I don't know if it is, but it should be true of any franchise system. The first one is, is that product or service providing value to the customers, that's the first one because at the end of the day if it does not then it shouldn't be there. The second one is, is it compatible with our brand standards. We're in the imaging business and if we were to sell ice cream tomorrow it might be beneficial to our customers but it doesn't fit into our brand. And the third test is can it be rolled out system-wide. This is very important precisely because we are franchising and franchising is about ensuring that the customer no matter where they go, which store owner they go through that they have a consistent experience. And so therefore we can't let one store owner deciding tomorrow to do this way and then the next guy does it this way. This is part of the franchising business is you have to follow the same processes, the same experience. 

      And this is why it is not independent business, because if you have your own independent business you can do whatever you want as long you pay your taxes through the IRS and don't do anything illegal, you're your own boss. In franchising you're not. You have to be part of the system. Now we do absolutely encourage creativity. You know McDonald's, the Big Mac was invented by the franchisee. So it's not like everything comes from the top, it goes two ways. But if a franchisee comes up with an idea it has to be vetted and approved, and tested. And once it has then it can be rolled out. But in order to be rolled out it needs to pass those three tests that I mentioned.

      This is very important precisely because we are franchising and franchising is about ensuring that the customer no matter where they go, which store owner they go through that they have a consistent experience.

      Jeff: Patrick, if you're talking to someone about running their own business and this might be a person of means. This could be an individual perhaps who would qualify to own a Cartridge World or any franchise operation, it doesn't matter what brand it is. What would you tell them that are the greatest advantages to franchise ownership perhaps over ownership of one’s own private business?

      Patrick: Well, there's not right and wrong here. I think what really matters is if someone goes into franchising they have to be the right kind of people to get into franchising. I think individual businesses are great for entrepreneurs, for people that really want to try things on their own. Franchising is right for people that want the help and the support of an organization. So it's all a question of what the needs of the owner are. For us, franchising is the way to do but once again it's all a question of what kind of strategy do you want to use to get your product to market.

       

      Jeff: And that could take probably some time really depending on the product or service in question, but again, it all just means a consistent experience for the customer whether you're talking about a service offering or a product for that matter.

      Patrick: Absolutely.

       

      Jeff: This is a question specific to Cartridge World. You and I had a chance to chat over the phone before we started the program today a little bit about all of the changes that have been going on at Cartridge World. This is a situation where you've got locations all over the world and I think they total 1,500 locations I think all across the globe or something close to that?

      Patrick: Yeah.

       I think what really matters is if someone goes into franchising they have to be the right kind of people to get into franchising. I think individual businesses are great for entrepreneurs, for people that really want to try things on their own.

      Jeff: All right. You're talking about a corporation that has had a major change with regard to how it does business, certainly its business model. Talk about where it was and where it is now.

      Patrick: It was started in the 80's by two guys that decided to re-manufacture cartridges and that was a brand new concept. Some people said that will never work. They were wrong obviously. And they ended up franchising the business in 1997 in Australia, they came from Australia, and then expanded in Europe, France, and the UK, and came to the US in 2003. In the US we've only been here for a little more than 10 years. The business has had different phases, grew very, very fast at first. And then the original founders of the company sold to a private equity group. We went through a period of much more growth, and recently a few months ago we were actually acquired by a company who is a manufacturer of one of the critical parts in the manufacturing of laser cartridges called the OPC. It stands for organic photo conductor which is the pipe that helps deposit the laser toner into the page when you print. They are actually the number one re-manufacturer of OPCs in the world, and the number two manufacturer at all of that part worldwide behind Canon. And the reason why they acquired Cartridge World is because they were looking at a distribution network for their product. They didn't have any presence outside of China. They're actually located in Zhuhai, China which is today the world's center of the imaging business. And they produced 60 million OPCs a month, so it's very, very big. And they're in the process right now of actually setting up supply chains for our product that will be all assembled in China and checked after it has gone through every phase of quality control, and shipped to the United States and the rest of the world. It's very exciting. 

      What has happened also over the years is our business that originally started mostly on the consumer side, people will come in to the store and reading the paper while their cartridge was re-manufactured, has tremendously evolved towards the B2B side. We used to be like 20 percent business and 80 percent consumer and this is today probably totally reversed where we do 80 percent business and 20 percent customer. And all the re-manufacturing, etc. of the product that used to be done in the back of the store more and more today we don't do that anymore. We have approved all of these vendors and now we're going to the next stage where we're actually going to have our own supply chain of product. And so therefore the type of operators of our stores has also changed drastically because we used to have people that got into the system because they were the tech people that like to get their hands dirty etc. And now there's a lot less of that and what we need are these people that are a lot more sales oriented, people that can go and acquire customers. Because once you acquire a business customer, if you do your job correctly they will stay with you.

       

      Jeff: I guess the final thing I'd like to do is just offer you a few seconds, if you'd like to go ahead and provide your contact information for anyone who might want more information for example on Cartridge World, or for those people who are maybe new to the idea of franchising and they're making some considerations. They're exactly sure which way to go, whether they hold on to their own privately-held business or maybe they sell it and go into a franchise opportunity and they'd like to reach out to you how can they contact you?

      Patrick: My name once again is Patrick Le Feuvre. My phone number is 713-785-4465. And the best way for people looking at franchising is to go to our website which is www.cartridgeworld.com. This is why we have a process that we follow, and it takes up to 90 days to get from the first contact to the award of a franchise.

      We have approved all of these vendors and now we're going to the next stage where we're actually going to have our own supply chain of product.

      Jeff: Once again, Patrick Le Feuvre I want to thank you so much for joining us today on Deal Talk, a great conversation indeed.

      Patrick: Thank you very much.

       

      Jeff: Patrick Le Feuvre, master franchisee with Cartridge World has been my guest.

      We hope you enjoyed this discussion and if you consult or work with business owners prior to, during, or after the transaction process and you'd like to join us as a future guest to share your expertise, contact me directly at 888-693-7834 extension 190, or you can email me at jeff@morganandwestfield.com. Deal Talk is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. Find out how Morgan & Westfield can help you at morganandwestfield.com. For everyone at Deal Talk I'm Jeff Allen, thanks again for listening. We'll talk again soon.

      While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.

       
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