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Franchising: A lot of flops due to mistakes

Financial Times Deutschland:, So, 22.6.2003, 7:00
Without a functioning franchisor management and carefully selected franchisees the best business will not be successful. Play it again is only one example for such a scenario.

Aber die Sache wurde ein Flop. Die ersten Franchise-Nehmer waren nicht mit der nötigen Sorgfalt ausgewählt. Die Franchise-Zentrale in Offenbach expandierte zu schnell und machte strategische Fehler. Plötzlich ging dann kaum noch etwas: "Die Inhaber von Play it again Sports sackten noch das Geld von den Einsteigern ein - und machten sich genannt werden will. Die Konsequenz damals, in den 90er Jahren: Einige Gründer hatten viele Tausend Mark verloren und ein hoffnungsvoll begonnenes Franchise-Netz stand vor dem Aus. Nicht jeder ist wie McDonald’s. Das ist nicht der einzige Flop in der Franchise-Wirtschaft. Zwar behauptet fast jedes neue gegründete Unternehmen in diesem Geschäft: "Wir werden der nächste McDonald’s und machen unsere Partner reich." Aber bis dahin schaffen es viele nicht.

Everything could have worked out well. A new concept was supposed to be really successful for a niche: “Become a businessman – with Play it again Sports”, so it had been promisingly advertised. Their business idea: Trading with second hand sports goods. Nothing comparable had been on the market before and market research assured a lucrative business with merchandise like used skiing boots, footballs, tennis rackets, and kayaks.

But this idea turned into a flop. The first franchisees were not chosen with enough accurateness. The franchise head quarter in Offenbach, Germany expanded too fast and committed strategic mistakes. Suddenly, hardly anything seem to work: „The directors of Play it again Sports grabbed the money of new entrepreneurs. Back in the 90s it resulted in a disaster: few investors lost several thousand Deutsche Marks and the promising franchise network was faced with ruin. Not every franchise business is as successful as McDonald’s. That was not the only flop in the franchise industry. Almost every new enterprise in that sector claims that it was going to be the next McDonalds and would make their partners rich. But a lot of these enterprises do not manage to reach a certain level of success.

The advertising agency White Leon never succeeded to get more than a handful of franchisees on board – which was actually the total opposite of their ambitious plans. They founded the company with a low budget concept: “We will build up 480 small advertising agencies.” That was what the head quarter in Krefeld, Germany told prospective investors who intended to become franchisees. But White Lion did not even manage to reach the number of 10 franchisees and vanished from the market very soon. The challenging part of franchising lies within the head quarter. Franchising does not automatically award you with a pot of gold. The licensors will by no means provide a safety net, which prevents complete failures. Actually, franchise head quarters are full of possible professional mistakes. The typical source for faults: The head quarters support their franchisees inadequately. They do not care if they are establishing a foolproof and tested business system, which would lead their franchisees to the promised success.

“Many franchisors have not understood that franchising is to be considered an independent business model,” criticizes Hans Lang, advisor of the German Franchise Institute DFI (Deutsches Franchise-Institut DFI) in Munich. Instead of creating a system with which it was possible to open five new shops per week within a year, many a franchisor work in their own shop and attend to the customers. Bad partners are bad for everybody involved in the business. Besides, there is always the difficulty of choosing proper franchisees. A franchising concept does not necessarily suit every potential entrepreneur. “The most important aspect for a running system is to win well qualified investors,” explains Felix Peckert, consultant for the franchising branch in Bonn, Germany.

Often, these services are not accomplished. The sum of several 10,000 Euros franchising fee per one sold license makes the franchisors insatiable. Instead of looking for franchisees who will succeed on a long term basis, everybody is able to invest; it is only the matter of money. “Deficient partners harm the franchise company“, says Peckert. Additionally, a poorly managed franchise head quarter can jeopardize the whole company. The founders of Aneva, a business broker, had already been involved in some juridical affairs, which they did not tell their franchisees. Though at some point Aneva was not able to hide it anymore. More and more problems accumulated, the system Aneva imploded, and disappeared from the market. Optima landscaped roofs had to face similar problems. The system that worked with craftsmen had been doing successful business for more than a decade. Until the director of the company started to struggle: “A new franchising operation had to be established, regardless of the consequences”, tells Lang. Unfortunately, the director was not able to manage two franchise systems simultaneously. In consequence both systems had to shut down. Another flop: Whoever tried to click on links on the website of Expense Reduction Analysts (ERA) will only find dead ends. The company that focused on a cost reduction based advisory services has disappeared from the German market, nevertheless after few achievements: In the mid of the 90s the company covered about 100 franchisees. ERA with the head office in Munich, Germany, was about to reach the premier league in the consultancy business. However, nothing is left since the head quarter has missed managing the quick growth in a professional manner. Displeased franchisees came into conflict with the head office, many left the system, and in the end the quite successful brand ERA vanished entirely.

Some franchise holders crashed without warning when the system bombed: not only time and energy which are put into the franchising branch are lost. In addition, 5- to 6-digit amounts of money of franchising fees are gone with the wind without an adequate equivalent presented by the head office. “Many franchise systems are managed like chicken farms“, complains Hans Lang who knows these sceneries as best as one can do. He had been the executive director of the German Franchise Council (Deutscher Franchise Verband DFV) and the head of the DFI. His conclusion: modern executive instruments are hardly known in the franchise business. The system head quarters are often very badly managed. Most of the time, they are unable not establish a working process management for a dozen franchise holders who have all the same requirements.

In the current period of recession this can have dramatic effects, says Lang: “The crisis reveals mercilessly the weaknesses of badly managed systems.” More flops are likely though.

Cost for occupational training can be set off against tax liability – Federal Tax Court changes court rulings

Handelsblatt, Wed, January 8, 2003, 1:35pm
File reference: BFH: VI R 137 / 01; VI R 120 / 01
Good news for honest and tax-abiding citizens. The Federal Tax Court acknowledges that certain cost for occupational re-education can be set as professional expenses against tax liability. The Court now also applies the economical changes of the job market to the law.

Survey: Why Companies fail

By Hans Eschbach, Handelsblatt, Tuesday, January 7, 2003
The number of companies who grow broke is steadily increasing. The reasons for that can be found in the growing importance of international companies and economic downturn. Most problems, however, are homemade. If companies fail it is mostly because they did not do their homework properly. From analyzing and evaluation of 13 case studies this one of the conclusion that was to be drawn. […]

If a company decided to pull measurements in order to prevent a crisis, the start often delays because of missing figures. “Half of the companies did have neither sufficient liquidity planning nor early warning systems based on key data. Only every third company was able to present necessary figures on short notice.

“Especially in family businesses the health of the company is often assessed well respectively seen in a better light”, this is an experience that consultants regularly face. One reason is that these companies have surely fallen behind. Usually they have expanded very fast and purchased companies in a rush which were not integrated entirely. Mostly these purchases developed into a threat for their existence after the flourishing years of expansion. “Typically, companies which were used to act with the security of a strong background were hit by the recession. […]”

The feeling of security did not vanish although the crisis was tangible. If consultants suggested changes after analyzing the company, “every second company would hesitate to agree upon these changes.” It did not matter how big the dimension of crises was. In other words: usually they block because they are not ready to realize the dimension. Then, if decisions are made, they are almost always wrong: „They seek harmony and are tempted to delay decisions.” Sometimes they also act completely blind-fold in order to achieve fast and concrete success. These actions will, however, not last long because neither the employees’ opinions nor experience from other companies are considered.

How do companies end up in a crisis? Besides the lack of early warning systems most companies have to deal with fixed costs that are too high as well as unnecessary and complicated infrastructure which will have an impending effect on efficiency. “In two third of all cases these are the main problems.”

Another common mistake is a disposition system on a mainly turn over oriented commission basis. The sales force will sell the products at less than market value just to fulfill the company’s requirements. Furthermore it is not good if a company gives too much space for special requests. “We do everything for a low price.” It only costs time and resources.

Learned in the USA – Americans invented the Master of Business Administration (MBA)
Handelsblatt introduces the best programs

By Christopher Mohr – Handelsblatt, Tuesday, December 17, 2002
The Master of Business Administration was invented in the USA, and – if the international ranking lists are reliable – the most prestigious business schools are to be found at the other side of the ocean.

Anderson School at UCLA:
The University of California at Los Angeles, usually known as USLA, is one of the best universities in the USA. Its business school, the Anderson School at the UCLA, derives from the College of Commerce and was established in 1935. Today the Anderson School is famous for being the best technologically equipped business school in the USA.

Columbia Business School:
The Columbia Business School in New York (Manhattan) is not only geographically close to the most important financial and economic business centers of the world: Most of their guest lecturers work for Wall Street and top US companies who can also open doors for internships. It’s likely that they hire Columbia graduates.

Fuqua School of Business (Duke):
Students and prospective US employers count the Fuqua School of Business of the Duke University in Durham (North Carolina) as one of the 10 best business schools in the USA. Founded only in 1970, Fuqua is the youngest school among the list of top schools. Their facilities are exemplary. Besides their regular full time MBA program, Fuqua also others alternate programs. Their MBA-Cross Continent is based in Frankfurt a.M.

The University of Chicago Graduate School of Business:
The Graduate School of Business of the University of Chicago, founded in 1868, is the second oldest business school in the USA. In 1943 they offered the first MBA program and were seen as pioneers in that field. The GSB has not only grown numerous American top managers but also has so many Nobel prize winners as lecturers in economics like no other school worldwide. That explains why management theory stands out at the GSB.

Haas School of Business (UC Berkeley):
Berkeley, or better the University of California at Berkeley, is one of the most renowned universities of the USA: Their business school, the Haas School of Business, offers a small but exclusive MBA program (250 students) which is leading in the Western region of America.

Harvard Business School (HBS):
The HBS is the embodiment of business schools. Since decades their graduates take over the top management positions in America. They have developed the case study method which has shaped management education worldwide. Unfortunately the HBS have lost their reputation as best business school in the world in the last years. They are also known for their arrogance.

Johnson Graduate School of Management (Cornell University):
The Johnson Graduate School of Management of the Cornell University in Ithaca (state of New York) is one of the smaller business schools. Despite their isolated location they have managed to establish strong international connections.

Kellog Graduate School of Management (Northwestern University):
The J L Kellog Graduate School of Management, which belongs to the Northwestern University, had not been more than an obscure business school somewhere in the Middle West when Donald P. Jacobs was promoted to Dean in 1975. Today the Kellog Model is applied by many business schools in the US: Instead of competition and selection they emphasize on teamwork.

McCombs School of Business:
The McCombs School of Business belongs to the University of Texas, the only university in the Southern states which is in the top 20 of business schools. Their advantage: big business networking opportunities in Texas (patron Red McCombs spent $50 Mill for academic purposes) as well as in the high tech center Austin. The MBA program is rather inexpensive compared to other programs nationwide.

Sloan School of Management (MIT):
The Massachusetts Institute of Technology (MIT) is the most famous high tech college in the world. Most people do not know that the MIT already offered business trainings for engineers in 1914 and in 1925 they developed a Master program for management. Based on this Master program the Sloan School of Management developed. Today the MIT is a strong competitor of the neighboring Harvard Business School and well-known for their innovative approaches.

Stanford Graduate School of Business:
The Stanford Graduate School of Business can claim for themselves to be not only one of the most beautiful but also one of the best business schools in the world. They were able to utilize the nearby high tech center Silicon Valley as a forcing ground for young entrepreneurs.

Stern School of Business (New York University):
Similar to the Columbia Business School this school benefits from the nearby international financial heart in New York. “Financing” is one of the university’s strengths. In comparison to the other famous business schools in Europe and in the USA the Stern School of Business has the most female students.

The Tuck School of Business at Dartmouth:
The Tuck School of Business at Dartmouth offers the oldest business education program in the USA. The comparatively low number of MBA students and the isolated location of the campus allow personal contact to professors and lecturers.

The Wharton School of University of Pennsylvania in Philadelphia can be proud to be considered the best business school in the USA. Their program focuses mainly on international business and is therefore special in America. Wharton is huge business school considering the number of students as well as professors.