Inside Job: Home-Based Franchising

Their Idea, Your Sweat Equity

Had enough of the rat race? Maybe it's time to start your own business -- and many people have had success opening shop from within their homes. In our Inside Job special feature, we've gathered information you can use to learn the ins and outs of doing a home-based business right.

Interesting in exploring franchise options for home-based businesses? Michael H. Seid , managing director of franchise advisory firm MSA Associates, co-wrote "Franchising for Dummies" (For Dummies, 2006) with Wendy's founder Dave Thomas. He tackled questions and shared opinions in this online discussion.

For more on entrepreneurism, visit last year's Small Business 101 special feature. And there is plenty more information on jobs and careers in our online Jobs section .

The transcript follows below.

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Washington, D.C.: Do certain businesses gravitate toward certain parts of the country?

Michael Seid: Yes and no. Ice cream for example should sell better in the south but the ice cream capital of the world is still Boston. Obviously those things that work best in retirement communities do better in Phoenix and Florida than they would in places where people don't retire. I think it is an industry by industry determination.

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Fairfax, Va.: In reading the introduction, I am curious how you could have co-written a For Dummies book with Dave Thomas who's been dead for four years?

Michael Seid: Dave and I had a great relationship and he left me with a crystal ball that I held onto as I wrote the book. He had nothing else going on at the time and between jobs in heaven setting up new and wonderfully beneficial ideas, he gave me his wisdom.

Truthfully, Dave could not participate in the 2nd edition of the book that just came out. I kept in the book those ideas and comments of his that were still timely and removed those that did not work four years later. Dave and I were in since on so many issues that I hope I did him justice in the new version. I will ask him next time I see him - hopefully many years from now.

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St. Louis, Missouri: Based on your knowledge of this topic, if you were going to start a new home based business, what would it be and why?

Michael Seid: I personally like anything to do with children and taking care of the aging population today. While the traditional care giver for children and parents has been the non-working spouse and traditionally therefore the wife, the roles have changes with the two family income requirement. Look at this area for opportunities also because the cost of investment may be lower than fixed locations.

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Alexandria, Va.: What is the most profitable home-based business that you know of?

Michael Seid: That is really subjective and I do not think an endorsement of any one franchise is appropriate. It depends on the market you are in and a lot of factors.

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Arlington, Va. : How much start-up money should I expect to need to get a good franchise off the ground? And if I don't have it in cash on hand, where are some good places to find funding?

Michael Seid: The answer depends on the business you are looking to invest in as a franchisee. There are many systems that require as little as $50,000 or less and also those that require many millions in invested capital.

The SBA programs are good sources of funding. Many franchisers have developed relationships for leasing programs and funding for their franchisees. Minority funding is available for women and other classes of investors.

The use of family, friends and second mortgages are good sources. I always warn franchisees not to lose sight of family matters and not risk retirement funds or college funds on investment in a franchise.

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Springdale, Md.: Any thoughts about the rise in home-based online travel franchises? (e.g. Magic Johnson, American Express, and the list goes on)

Michael Seid: The travel industry has obviously been put under pressure in the past few years. Many of the franchises have been under a lot of stress and some have converted to specialized travel services. I don't think that this will change and indeed, will likely increase as businesses and individuals book their travel on line with the Orbitz of the world or directly through the air liens and cruise line sites directly.

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Bethesda, Md. : What are your tips for evaluating potential franchise opportunities?

Michael Seid: Take your time. There are over 120 distinct lines of business that are being franchised today. In Franchising for Dummies which I wrote with the late Dave Thomas from Wendy's, which just came out in its second edition this month, we provide a long list of sources for information about what opportunities are available and a process for evaluating a franchise. There is also a work book in the CD called Making the Franchise Decision that provides a guide to the questions you should be asking franchisers to help you make your evaluation.

The most important tip is to pick a business that you like and one that fits your lifestyle and that of your family. Read about the industries you are interested in, regardless of the company, and make certain it has legs and is growing and stable. Once you have locked down on a few industries you like, drill down to the companies in that industry that are franchising and see which ones meet your economic capabilities. There is a lot of information available today on the web about most companies today - and its generally free. Do your homework on the companies you are interested in before you contact the franchiser. Check with the California State web site that publishes UFOCs for free and get a copy of their UFOC. Understand the offering and see if it fits for you. Once you are in contact with the franchiser - meet with them and begin to understand the opportunity and their resources and history in providing their franchisees the required service. Contact the other franchisees in the system and talked to them about the opportunity and their "happiness" as franchises. Hire a great franchisee lawyer (not uncle Alex or aunt Jane who did your last house closing) and let them help you work through the details. Take your time - you should not be in a rush and should not pick a business based on emotions or the fact that the franchise salesperson appears to care about you. The do, but they also care about their commission check if you make an investment.

Lifestyle for you and your family, an industry that is stable and growing, a franchiser with experience and a great track record for support to its franchisees, a franchise system without significant litigation, an investment you can afford and a potential income stream that will meet your expectations and needs. That is the high points to consider.

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Washington, D.C.: How do you get a sense of whether a work-at-home business is a good idea? For instance, I believe I could put together excellent gift baskets, but surely there's so much competition in many of these industries that there's not much point in trying... Or, to take the question a little further: What is more important, the idea or the execution?

Michael Seid: Ideas are everywhere. Some are good, some are great even and many are not. Franchisers that are offering opportunities based on ideas only and have not opened and operated location successfully for an extended period of time and often in more than one market should be looked at skeptically. Franchisees are not supposed to be the franchiser's guinea pig. Franchisers need to have the experience necessary to guide the franchisee. So, which is more important - its always the execution.

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Washington, D.C.: How can I tell the good work-at-home franchise ideas from the scams?

Michael Seid: There are many franchise opportunities that use home offices as their primary place of business. Home offices are perfect for many of the franchises that are involved in the trades, Internet sales or other e-commerce activities. It is not unusual or difficult to locate those opportunities that allow you to office from home.

The franchiser will be providing you a copy of their UFOC - the Uniform Franchise Offering Circular. In Item 20 of that book you will find a list of franchisees currently in the franchisers system and those that have left in the past twelve months. You should use that list to contact as many franchisees and former franchisees as you feel is necessary for you to get a sense of how well they have done, whether the franchiser has met their commitments and of course, did they make the type of money they were expecting. Other sections of the UFOC are also important. Some franchisers also publish in Item 19 what is called an Earnings Claim. That section, if information is provided will give you some understanding of the economics of the opportunity.

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Bethesda, Md.: What is the one key piece of advice that you would offer someone that is starting a home-based business?

Michael Seid: Make certain that you can work alone and unsupervised. Make certain that you have a space set up that your family respects as your office. Make certain that you have a franchiser that support a home business environment.

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Bethesda, Md.: What was it like working with Dave Thomas? He seemed like a smart businessman and a gentleman, though that may have just been a marketing persona. What different strengths did he bring to the book?

Michael Seid: Dave was a wonderful man and a mentor. He was by no stretch of the imagination a figure head or an advertising persona. He built and developed a tremendous business and put together a very strong management team. I think it is clear that the fact that he is not around today is one of the reasons you see issues coming up at Wendy's. He respected his staff and associates and knew how to lead. A terrific person and a great leader.

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Washington, D.C. : I'd like to look into a business in job-seeker assistance -- writing resumes, cover letters, etc. Are there good franchise brands for such things that I might look into or should I just "go it alone" so to speak?

Michael Seid: You have me at a loss on that one.

Go to www.franchise.org the IFA's web site and see what opportunities are there. Also, in my book there are close to 30 lead generation sites on the CD and they will have more information on opportunities.

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Alexandria, Va. : I remember reading an article not long ago about how some franchisers -- even legitimate businesses like Subway -- have such onerous terms for dealing with them that it is very difficult to earn money unless you are running them as real estate businesses. I know we are talking home-based businesses here, so the general question is: What are some warning flags when looking at a prospect?

Michael Seid: I don't think I agree with your premise. Most franchisers put in restricted terms to protect the brand and therefore the other franchisees in the system.

You should see what there turn over rate is in their UFOC - look at Item 20 and discuss the franchiser/franchisee relationship with the other franchisees and former franchisees in the system. There names and contact information is published also in Item 20.

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D.C. area: What are the benefits of investing in a home-based franchise as opposed to going into business for yourself? Just curious ...

Michael Seid: The same benefits of going into any franchise and there are many.

The brand

National Accounts

A system for doing the business

An understanding of the investment

Guidance on making sales

An understanding of the services to be provided

Training

Continuing support from the franchiser

Continuing support from a network of other franchisees

A higher valuation of the business with a good brand should you look to sell your franchise

Going it alone can be a great way to go and can be successful. However, franchising provides some structure and support and brand recognition that a new independent operation many not have for a long time.

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Michael Seid:

Here are some links to the IFA site at www.franchise.org that might be beneficial.

Their opportunities listing is at

http://opportunities.franchise.org/Public/Index.aspx

Information on MinorityFran can be found at

http://franchise.timberlakepublishing.com/content.asp?contentid=949

They have published a Diversity Guide, but its more for those already in franchising:

http://www.franchise.org/files/Diversity%20Guide%20final.pdf

For veterans you will find information at VetFran. VetFran now has 227 participating companies (and can be accessed by clicking on "Franchising for Veterans" on the home page. 612 franchises have been sold through the program since 2004, 150-plus are in the "pipeline."

My firm and a few others also sponsor a Veterans Scholarship program to pay for college for veterans. Information is available at the IFA's Education foundation.

There is a free online course available "Franchising Basics," designed to help anyone who is not familiar with the sector on the IFA site.

Also the International Franchise Expo at the D.C. Convention Center will be from March 30-April 1. Link follows:

http://www.franchiseexpo.com/

I hope this provides some more information.

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Northeast Washington, D.C.: How do you decide when to expand?

Michael Seid: As a potential franchiser that is a difficult assessment to make by yourself. You should have a feasibility assessment done prior to expanding regardless of whether it by franchising or some other method of expansion. My firm and others do that type of assessment as part of our services.

You can also get a sense of the criteria used in making that evaluation by looking at Chapter 14 of my book (the 2nd edition)

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Anonymous: Have you invested in a franchise yourself?

Michael Seid: Over time - yes I have been a successful franchiser and franchisee.

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Northeast Washington, D.C.: A few years ago when Curves was first gearing up I talked to my mate about starting a franchise. I didn't want to run it, I just had the seed money. He didn't think it was a business that could sustain itself (he had an MBA, so I felt he had greater knowledge of the actual nuts and bolts of startups etc. than I did). Now, here it is 3 years later and I'm seeing a Curves on every corner. How do you move from the gut instinct of a good idea to actually owning a business? I've had some other good ideas that I haven't acted on that I have seen other people execute. I have one last "good" idea and more money to invest than I had in previous years.

Michael Seid: You move from idea to implementation. There are a lot of good ideas that don't work in the real world. Take your idea and start the business. Run it for a while, expand the number of locations and prove it in several markets. That is the secret - just do it. Don't expect to jump from good idea into becoming a successful franchise system. Shear size does not mean that it is a successful venture at the franchisee level. A lot of franchise systems grow large but do not do a particularly good job in returning an investment or the franchisees so getting a location or two up and running and proving the idea is key.

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Michael Seid: In answer to a previous question about whether I have invested in franchises - I thought I should give you some idea of two investment and why they worked out or are working out.

One was Supercuts - a fragmented market that had lots of staying power and a staple for every consumer. That market is still doing very well.

Another more recent investment would be in a company called Pump It Up - Pumpitupparty.com. This is a children's inflatable party concept which is growing quickly and finding its niche in the party and children's recreation area. It servers the parents who are with a lack of time want to give their children a good event or encourage them to get the cardio system in motion.

Just my views on how I looked at two of our investments.

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Maryland: How do you determine which businesses are truly legit? How do you distinguish what and what not to bite?

Michael Seid: Do your research. Read everything you can about the company and the industry it is in on line. Get copies of their UFOCs and review them carefully regarding litigation and turnover. Talk to franchisees in the system and those who left the system. Look closely at the background of the executives and see what shape the franchise system they used to work in is doing. Don't get too excited by what the franchise sales broker or the franchise salesman has to say. They are paid to sell franchises and have the franchiser's interests first in their mind and want to make a commission on the sale. Look at the dummies book in the CD and print off a copy of the make the franchise decision work book. That will give you a path to take also.

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Michael Seid: As this session winds down, if you have other questions, please email those to me at mseid@msaworldwide.com and I will try to get back to you. Also, there are many articles and presentations that might answer some of your questions on our web site at www.msaworldwide.com.

I hope this session has been beneficial to you. I will be on line until it ends at 2 PM EST for additional questions.

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