Unlocking Franchise Economics: Pt 3

This is the third installment of a three part post entitled Unlocking Franchise Economics (see Part 1, see Part 2)

Have we ever wondered how the consumer views our real estate industry franchises? If we are going to unlock franchise economics and truly understand the value propositions inherent in franchising we must also see them (franchises) as the consumer sees them and we must ONLY value them as does the consumer.

If you were to create a list of distinctions…real ones…dynamic ones…that separate one franchise brand from another in the eyes of the only true client, the consumer, what would those distinctions be and how are they manifest in the process of transacting business?

Enjoy the PhotoBlog below. Read it carefully and ask yourself what might happen if the consumer could place all franchises into one blender and extract the best. What would the “best” be? What are the clear distinctions between franchise A, B and C?

If franchises have any value, and REALonomics believes they do, what is the empirical value to the consumer? Is franchise value a black-and-white proposition or, will we see living color coming out of the recession in 2009 and beyond? What changes do franchisors need to make to create distinction in local markets? Can distinction even be created and sustained? Do we need to blend the franchises? Do we need fewer franchises? Will franchises be blended out of economic necessity and through mergers and acquisitions?

If a Broker/Owner adopts a franchise model what is the set of “measureable” distinctions derrived from the relationship that will impact the consumer? Specifically, how do franchise distinctions create revenue for Broker/Owners in the crowded marketplace?

Related posts:

1. Unlocking Franchise Economics: Pt 2
2. Unlocking Franchise Economics: Pt 1
3. REALONOPOLY – Does Anyone Still Wanna Play this Old Game?

In this series of posts REALonomics has one primary objective it would like to accomplish on behalf of owners and that is as follows:

…to help owners unlock the door to franchise economics so that gain an understanding of the substantive value propositions that exist and how a franchise name and associated promises can be quantifed in real dollars that are converted to a profit equation that is greater than it would be if the brokerage firm operated without the franchise.

Franchising is an Add-On Toolkit, with Limitations

At its most fundamental economic level a real estate franchise is a brokerage toolkit. Yes, there are all sorts of issues such as marketing, relocation, referrals, training, conventions, etc. But for now, we are setting those aside. A real estate franchise is an economic toolkit, at least it should be. Franchisors spend a great deal of time butter-balling brands, numbers of offices, growth, name recognition, relocation, referrals, etc., and that is how most franchise sales people will present their proposition to an owner. It’s the owner’s responsibility to translate the presentation into real economic reality and performance and to insist that the franchisor do the same.

As a toolkit, there are some things a franchise can do, there are many things it cannot do and there are more things it does not want to do for a brokerage firm because to do them will harm the franchisor’s bottom line. Let me be clear on this last point. At some point in the franchise relationship, an owner may find the franchisor a competitor for market territory, referrals, relocation and even local business.

As owners, it is important to enter your franchise considerations with both feet firmly planted on the ground and your eyes wide open when you begin to consider both the limitations and the benefits of the franchise toolkit. Converting the tool kit into a quantifiable economic model is entirely another thing and in the end will prove to be the true test of the value to your brokerage.

When an owner considers franchising his/her brokerage firm, one of the highest considerations is the impact on agents and operating overhead. Make no mistake about it; a franchise decision will change the economic structure of the real estate company before it ever delivers a single penny of economic value. Overhead is going to increase immediately and not all agents and employees will perceive and measure value as an owner might. – Donald Teel, Realonomics

Bottom line: the tools provided by a franchisor should fill voids in the brokerage firm with real solutons that can be measured. The brokerage firm must know with certainty how the tools produce NEW ROI (more on this later) and finally, how the implementation of the franchise enlarges the company’s market position and growth opportunities. It is entirely possible that becoming a franchise may in fact diminish a firm’s market potential.

Understanding Owner & Franchisor’s Motivational Schemas

As with any business arrangement, understanding the motivations of the parties is critical so that each can build a workable blueprint. Franchisor are in it for the money. Since franchisors are in it for the money, so should the owner be! Business is conducted with a profit motive, although some brokerage firms are not necessarily profit driven.

If you franchise, you will spend a lot of time (perhaps years) in continued negotiations with the franchisor over myriad operating issues (we will get to this later, as well). Therefore, coming out of the chute, the owner needs to have a pristine understanding of what drives the franchisor’s model.

The Owner’s Schema. I never met an owner that didn’t love transactions. Typically, when an owner considers incorporating a franchise brand into his/her market model, transaction are a key motivator. The Franchisor knows this and the presentation is designed to convey a perception that once franchised, transaction counts will increase.

In addition, broker/owners want more market opportunities in terms of their ability to provide agents with services that will enhance recruiting. However, recruiting is a somewhat dying art and most metro markets are saturated with brokerage firms and agent, reducing the recruiting message to a simple message, “We pay you more.”

Some owners want and desperately need networking opportunities with other owners where they can exchange information, create idea forums and discover new ideas to improve the efficiency of their company. Franchisors can meet this need and most do a good job at creating opportunities for Broker/Owner exchanges.

Today technology and the Internet play an ever increasing roll in real estate brokerage business operations. This was not so true just 14 scant years ago when the first property listings found their way to the Internet and pagers found their way into the hands of agents.

Many brokerage firms are looking for technology solutions and the implementation and maintenance of these solutions can be incredibly expensive. Franchisors are finally beginning to see how technology can provide them with a lock on brokers. When considering a franchise Broker/Owners should have a complete understanding of what a particular technology solutions will create in terms of not only opportunities, but operating costs, maintanance, training and obsolescence. After all, it won’t be included in most franchises.

The Internet is separate from technology, in our opinion, and there will be a whole set of operating and branding requirements for the owner and his/her agents when it comes to utilizing the Internet. Do not assume that your website will automatically comply with the franchisors requirements…read that fine print. Franchisors are doing a much better job today with their technology and Internet delivery than were even five years ago. Most owners want more Internet traffic. Find out how the franchisor delivers Internet presence AND traffic.

The market is paramount to an owner. Almost every owner I have known in nearly 25 years shared the desire to see their company grow in size and market share. What owners may not realize is that “market” is a very important word to the franchisor and it is here where the greatest potential for conflict between owner and franchisor might arise.

Owners want to capture and control more market area horizontally whereas, many times, the franchise will contained highly defined and rigid definitions of “market area” that the owner may find restrictive. Will entering into the franchise agreement expand or contract the owner’s market opportunities? This is an all important question needing to be answered.

Owners are increasingly discovering that market definition in the franchise relationship can make or break them. Any and all attempts to block an owner’s legitimate rights to horizontal growth should be negotiated out of the franchise agreement. Retrictions and control of horizontal market expansion is a key to the franchisor’s economic model. Franchisors typically exercise control over expansion by denying use of marks, brands and branch offices unless they approve. – Donald Teel, REALonomics

Finally, profit is the end game for owners. Although the franchisor will state its strong support of owner profitability, what will happen to the relationship when losses mount for the owner. What specific economic support does the franchisor provide to failing brokerage firms in terms of fee reductions or set asides?

Franchisors should be required to specifically demonstrate with empirical data how the franchise will pay for itself and how long it will take before the relationship brings profit to the Owner when measured against all related expenses. In the opinion of REALonomics, this should be a warranted performance item, with franchisee recource. If they can’t or won’t do it, show the franchisor the door. After all, profit is the end game of business.

The Franchisor’s Schema. Real estate franchisors measure things with a different stick than do most broker/owners.

The king pin in the franchise economic model will always be the brokerage gross commission income (GCI). It is the primary calculator for the franchise payment stream. Franchisors are interested in GROSS as the number against which their multiplier is applied, whether it be 3, 6 or 8 percent. This is their great motivator. Forget the franchise fee of $15k, $25k, $30k or $50k because this number will pale over the long haul of 5-10 years (typical initial franchise term).

How an owner thinks about and treats the franchise effective fee rate in the accounting process is paramount to quantifying the franchise value. If you think of franchise fees as a cost of sale, that’s one thing. If you treat is as an expense item, that’s another. But if you view it and treat it as a business development and capital expansion cost, that’s entirely another matter.

Definitions do count and calling a franchise cost a “selling cost” may be a giant investment error. After all, what did the franchise have to do with the selling cost of your transactions and if it did contribute, how did it contribute? Can you specifically account for it as a selling cost? An expense? Franchising is a market and development cost. Think of it in terms of research and development.

Franchisors are also motivated by the durability of the brokerage firm when they award a franchise to and owner. This has to do with the history and good will of the company in the local market(s). From this a franchisor can deduce predictability and replication of fee payment.

Referrals and relocation leads are a huge part of any franchisors presentation. But, be careful, because most of the major franchisor are running the relocation and referral businesses under not so evident agreements and as separate profit centers. This is a political and economic playing field that is continually tilted by franchisors. It is not uncommon for one franchisor’s relocation lead to be given to a direct competitor operating in the same market as its franchisee.

Watch out when you weigh relocation and referrals as a part of your decision-making. Our advice, based upon your market location, is to consider whether these should be taken off the table as considerations in the value proposition. You’ll only be able to do that if you ask for and receive the referral and relocation statistics with detail. Do not predicate your decision to franchise your firm on empty promises relocation and referral leads.

An owner should explore franchise training programs, business planning and the host of other fringe benefits as well. These are a part of the toolkit…but will they be used and are they, in fact, cutting edge or shop worn?

Stay tuned for “Unlocking Franchise Economics: Part 3.”

Related posts:

1. Unlocking Franchise Economics: Pt 1
2. NEW Franchise Blender-Extractor Available for 2009 Holidays!
3. REALONOPOLY – Does Anyone Still Wanna Play this Old Game?

To be “REALonomical” actually means something. REALonomical enterprises recognize the facts surrounding their business models and how those facts play out in real world situations, producing predictable and sustainable ROI. REALonomical is a brokerage mind set and it has something to do with how we model the financial aspects of a company in light of the Third Economic Wave; The Consumer-Centric Era.

It was Once a Simple World

During the First and Second Economic Waves of the real estate industry the model math was fairly simple and easy to interpret. From this interpretation we developed strange economic terms we called “desk cost” and “per person productivity” (ppp). Such economic models delivered notions of profitability because we could run formulas for operating our “offices” and hypothetically project our margins. Our simple formulas appeared as:

Gross Commission Income (GCI) – Cost of Sale (COS) = Gross Company Dollar (GCD). From the GCD, expenses were paid and profit, if any, was realized.

It was a simple world then. Broker/Owners understood how to create profit. Physical space was a huge part of the formula and for many years “cyber” was something we read about in Batman comic books.

Too much of the real estate industry is still living in the former model while being confronted with the transformative power of the cyber model.

This is Now, Not Then

Today’s Broker/Owner faces declining GCI on a per transaction basis, increased COS, less GCD and much higher fixed operating cost. In addition, Broker/Owners generally speaking, have more competition, higher demand for technology solutions, rapidly changing markets and of course, the consumer and his/her/their insatiable appetite for online information, especially property information.

All of this demands a REALonomical mind set on the part of Broker/Owners. It’s an economic mentality that makes and breaks a contemporary brokerage firm. Becoming REALonomical involves:

1. having the correct playing pieces on the board, i.e., understanding what the real estate market is today, not yesterday;
2. having the contemporary tools to create direct relationships with consumers;
3. pointing the business execution strategy in the right direction;
4. setting the business into motion every day so that it produces daily net, net ROI profit

That’s right; the REALonomical mentality focuses the business on daily profitability. REALonomical isn’t meant to be just a clever word; it’s a business mentality that is a lot like the game of tennis; good players always win one point at a time. It’s the single point focus that makes all the difference. It’s essentially the mental toughness required to stay focused on the economics of the brokerage…EVERY DAY!

In tomorrow’s brokerage madness, the winners are going to be those who become REALonomical today; those who win one day at a time, one set at a time and one match at a time. We aren’t playing games, we are playing points.

Related posts:

1. The Third Economic Wave
2. REALONOPOLY – Does Anyone Still Wanna Play this Old Game?
3. The Second Economic Wave

“When I first saw the NASA photo, I knew instantly that is was cocaine embedded and growing in the Martian real estate,” said Marty Turf, Broker/Owner of Turf Realty in Miami, Florida. “NASA said it melted when they scooped it up…oh, come on…the wind blew it away, everyone knows what happens when you try to scoop up snow when the wind is gusting,” he replied, sniffing loudly to clear his sinuses.

NASA’s official response to the photo was, “it’s just ice.” Turf believes it is not ice but a sign of real estate recovery through new, highly innovative marketing approaches…in fact, he has approached the National Association of Realtors (NAR) with a proposal that would allow certain properties to be induced with approved narcotics in order to improve their value.

NAR Considers Several Proposals

Marty believes that real estate cocaine may provide a solution to the real estate market depression hitting Florida and the rest of the country. He is determined to seek approval from local and national authorities, such as NAR to hide (embed) cocaine in the soil of carefully selected distressed properties, thus increasing their street value (the house, you dummy! Not the cocaine!).

NAR gave no immediate or official response. But insiders tell us that NAR is reviewing a proposal from Mr. Turf. A former NAR official, wishing to remain anonymous, remarked, “This is the first glimpse of any new marketing strategy that could help bring the recovery we’re all looking for…I for one would favor seating a task force to look into the concept of marketing property that has been infused with prescription drugs but not cocaine, heroin and other hard drugs…this would allow property owners and their personal physicians some degree of anonymity under the physician/patient confidentiality ethic.”

NAR faces many obstacles as do Broker/Owners who are considering adoption of new, innovative and exciting marketing programs that move away from websites, real estate magazines and blogs. Since the Martian photo hit the Internet, ideas have been pouring into NAR to consider including traces of Prozac, Ambien and other prescription solutions as substitutes for Martian or other cocaine.

“Nothing could be more consumer-centric than this, let’s forget blogging and social media for just a minute or two and look at what people really want,” said Betchu A. Dime, one of the real estate industries preeminent bloggers on her blog www.WhiteXmas.com.

SNORT Speaks

One analysis submitted by the Washington based group known as the Strategic National Organization for Realty Transformation (SNORT) boldly proclaimed, “Property values could be immediately and substantially increased…almost overnight…creating a wave of new mortgages, inspections, title and escrow services and yes…a new round of wealth.”

SNORT‘s report also stated, “People who are standing in the way of this initiative proposed by Mr. Turf are standing in the way of a new real estate appreciation cycle that could escalate prices as much as 50 percent in just a matter of days.”

One Tampa homeowner declared, “We have all been funding NASA for years, it’s time we got something for our money…I’m in favor of cocaine marketing solutions!”

A Palm Beach condo developer had his own spin. “This could revolutionize the dying condo market, bring a whole new definition to ‘undivided interest’ and provide association members with new reasons to celebrate!”

SNORT’s Public Relations and Marketing Manager, Line S. Upsomemore, reports that phones were lighting up from cities around the country. “Most people just don’t care what it takes, they just want their property values high and the opportunity to find a buyer,” said Linus.

NAR could not be immediately reached for comment. No response is expected until after the 4th of July holiday weekend.

Related posts:

1. Market Bummer = Owner Ops
2. Tyranny of the Market – No Trespassing
3. REALonomics: Polling Market Trends