Can You Profit as a Franchise Pioneer?
BusinessWeek Article Features Blue MauMau Members
Editor's note: We like it when the franchise stories of our members get out to the mass media. And this time four of our own made BusinessWeek's pages today. — And thank you for mentioning BlueMauMau. We want the word about us to get out to entrepreneuers and franchisees.
Blue MauMau members and ex-franchisees Karen McGinn and Gene Bowen, as well as attorney Michael Webster and IdeaFarm's Sean Kelly were interviewed for a BusinessWeek article asking the question:
The answer. Karen McGinn and Gene Bowen bought an unproven new eBay drop-off concept called iSold It. And they never turned a profit.
Franchise Cautionary Tale of iSold It Reaches BusinessWeek
(FranchisePick.Com) FranchisePick.com and other blogs have been reporting the story of the troubled eBay dropoff franchise segment in general and segment leader iSold It in particular since early this year. So far the mainstream media and business press, including many that eagerly hyped the flawed concept, have been slow to to cover the story or to warn prospective franchisees of the risks associated with this controversial venture. That could, however, be changing.
Earlier this week I was interviewed by BusinessWeek reporter Douglas MacMillan for the story (Can You Profit as a Franchise Pioneer?) that appeared online today.
The article includes the story of Karen McGinn and Gene Bowen, failed iSold It franchisees who started the amitheonlyone.org site to warn others:
In 2005, business partners and first-time franchise operators Karen McGinn and Gene Bowen bought an iSold It eBay(EBAY) drop-off franchise and opened it in a storefront on a busy street in Woodstock, Ga., about 30 miles from Atlanta. At the time, the Solana Beach (Calif.)-based franchisor, which also lists items on marketplaces such as uBid (UBHI) and Amazon (AMZN), had a novel concept, but it would soon spawn its share of imitators in pursuit of its promising, untapped market: people who want to sell their stuff but don’t want to go online to do so.
For McGinn and Bowen, starting an iSold It was relatively inexpensive—about $150,000 to get a store up and running, compared with the $500,000 to $1 million price tag of the average McDonald’s (MCD). Plus, the pair says company executives told them in person and in conference calls that their stores would be profitable within three months of opening. ISold It Chief Executive Officer Ken Sully denies that any iSold It representative made earnings estimates.
The pair says it never turned a profit. “The problem is, the whole concept doesn’t work,” says McGinn. Having to auction off a wide variety of items on eBay made it hard to compete with sellers who specialized in one category, she says. To make matters worse, each new drop-off store that opened was a new source of competition, since most buyers shop online, not locally. Instead of earning money, the pair ended up spending $1,500 to $3,000 a month to keep the business going.
Long Odds, Lots of Competition
And finally, when they replaced iSold It’s software system with a new system—citing its unreliability—the franchisor terminated their franchise agreement explaining they had violated its terms. The process took less than seven months, and the pair estimates it spent between $300,000 and $350,000 in total—including fees for legal counsel.
Few franchisees fall as hard or as fast as McGinn and Bowen did, but their story could serve as a warning for prospective franchisees who assume that a new franchise is a sure bet….
Sold in Distress
“These franchisees are basically going into an unproven, high-risk venture, yet they’re also saddled with the fees and loss of autonomy and freedom associated with franchising,” says Sean Kelly, a franchise consultant with Leola (Pa.)-based Idea Farm and operator of the blog Franchise Pick. ISold It, for example, had been in business only a few months before selling its first franchise. For pioneer franchisees, one question looms large: What is the potential for profit? As McGinn and Bowen found out, it’s not an easy question to answer.
To date, nearly 600 iSold It stores have opened—but more than 60 have closed or been sold in distress. The company halted the sale of new franchise units in the U.S. this year, and CEO Sully issued a letter to franchisees stating that the company “has not been profitable since 2004,” and that “We do not feel comfortable selling any new franchises until we get the failure rate lower.”
That caused Entrepreneur magazine, which had bestowed the franchise with the title of “Top New Franchise of 2007,” to remove it from its online list in June. And in July, franchise owners received a revised version of the company’s Uniform Franchise Offering Circular (UFOC)—the central document in a franchise contract. In boldface underlined type on the second page, the document reads: “The iSold It franchise system is still new and unproven…. We cannot and do not guarantee that your store will be profitable.”
FranchisePick.Com contributor Michael Webster offered the moral of the story: Do your homework, and consult a professional before venturing into unknown territory.
For the best advice, consult an attorney who specializes in franchising. These professionals will help translate a prospective franchise’s UFOC and find the red flags often buried in its fine print. “The major problem is that nobody ever reads these,” says attorney Webster. The UFOC contains a list of contacts for existing franchisees and ones who have gone out of business. Webster says it’s worth calling current and former owners to hear their stories, as well as working in an existing store for a few weeks to help evaluate potential (see BusinessWeek.com, 4/12/05, “Extending the Front Lines of Franchising”).
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