The Morning Eclipse

Sunday, May 03, 2009

Only take on risk, if you're getting paid for it.

In Robert Kiyosaki's Cashflow 101, he has this rule.

If you are going to take on a huge debt, make sure somebody else pays for it. If you are to take in personal debt, make sure it is small.

This is a very important and smart rule. In this age of hyper competition, you can't take on huge risks and expect to recoup the investment peacefully. People are just ready to pounce on you while you're spread thin. If you're in debt, you lose flexibility and cash.

One way to pass on the risk is franchising. It's the backdoor to expanding while retaining control. It has the same magic like an IPO.

A good example is this story.

There's a service company who wants to expand but doesn't have spare cash for the project. We'll call it Clueless Inc.

Clueless Inc. needs to expand because it has secured contract projects that require geographical reach. Expanding will immensely secure it future contracts and further enhance the company's capabilities.

However, such an undertaking will force it to take in huge debts. Borrowing is not an option since the board has just gone through a rough decade of lean business and heavy interest payments. The memory is too fresh and painful.

The board has heard of franchising mainly from popular media. The board understands the concept but the application is vague and murky. None of its shareholders have undergone a franchising agreement before. Furthermore, the board doesn't want to share its business secrets to other people. It fears the new franchisees may become future competitors.

This is the problem of Clueless Inc. and there is an answer to it!

The good news.

1. If Clueless Inc. franchises, it gets to expand without taking any financial risk. It means spending nothing to open new branches. No debt to pay and no monthly interest payments to worry about.

2. Franchising means, Clueless Inc. gets paid to open a new branch. The franchisee, happily, pays it to help him start "his" business. In name it may be his, but in operation, it must conform to Clueless Inc.'s system. Experience is never cheap!

The fear.

The fear is some day, the loyal franchisee will turn against its master and bite back. Clueless Inc. worries that it will be breeding future competitors to an already crowded industry.

First we take a look at the vitals of the business. These are:
1. Experience
2. Reliable suppliers
3. Volume of transaction
4. Project contracts
5. Brand
6. Reputation

It takes years and thousands of mistakes to build up the business know-how. No matter what the franchisee does, it will be decades behind the mother company.

Reliable suppliers
The franchisee can source its own suppliers but it cannot get Clueless Inc.'s suppliers. Clueless Inc. can hide the information from its franchisee.

Volume of transaction
The franchisee on its own, doesn't have volume to bring down its costs. On the other hand, Clueless Inc., already has volume and is now bigger thanks to the new branches.

Project contracts
These contracts are secured by the mother company and the franchisee has no part in it. It is therefore immensely difficult to even copy.

A franchisee cannot build a brand because it'll be expanding Clueless Inc.'s brand further while being a franchisee. It will have to start from zero when it opts to end its franchising contract.

Reputation takes time and has to be tested. Again, a new competitor will be decades behind.

To further abate its fear, Clueless Inc. can do the following.

1. Get smaller partners.
Never get bigger franchisee partners. To secure its control, financially smaller partners are all it needs.

2. Never be scared to remove errant franchisees
It is a privilege to be given a franchise. Once a franchisee breaches its contract, Clueless Inc. has to get a new franchisee for the area.

Clueless Inc.'s problem is very common. It can be applied to any business like a restaurant, barber shop or laundry service.

With Robert Kiyosaki's rule, any company can achieve bypassing risk and get paid for it.

It's now your turn to interpret the rule to your company.

Success is 1% inspiration and 99% perspiration. Never tire.



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