Franchisees Buy Into a Risky Business

Most franchisers lend support, ranging from instructions on decorating the space to finding suppliers. So in comparison to starting a business from scratch, purchasing a franchise license would appear to smooth out some of the difficulties that budding entrepreneurs may otherwise face.

And as Moscows streets look increasingly similar to those of other large cities around the world, entrepreneurial spirits might be tempted to cash in on globalizations onslaught by becoming franchisees here.

U.S. fast food chain Subway (Subway.ru), ice cream giant Baskin Robbins (Baskinrobbins.ru) and others franchisers are already working with 3,000 franchisees -- both groups and individuals -- in Russia.

"The greatest benefit of franchising is that it offers a tested model," said Oganes Sarkisov, a specialist with the U.S. Embassys Commercial Service, who helps U.S. franchisers find potential franchisees in Russia.

Some licenses for opening a single franchise location cost as little as $6,000, but average prices fall in the $50,000 to $100,000 range, according to Sarkisov.
However, to date, few foreigners have become franchisees in Russia, even though they have the same rights as the countrys citizens to enter the industry, said Valery Perkov, chief manager of the Russian Association of Franchising.

The lack of a clear legal basis for regulating the growing industry may be one factor putting off foreigners.

"There is a commercial concession law that governs franchising in Russia, but there are no regulations that clarify how various agencies and organizations can apply this law. The tax authorities and banks do not know how to treat franchisees, [and] royalties are not defined," said Subway Russia representative Gennady Kochetkov.

"Small entrepreneurs from abroad are unprepared to deal with real estate problems and the other local realities of running a business," Kochetkov added.
Dealing with red tape hurdles can be particularly difficult for expat franchisees who also face problems estimating future profits. The lack of reliable statistics makes projections difficult, but many franchisees need to count on recouping the initial investment and generating profits in one to three years from starting the business.

Oleg Uritsky, a U.S. national of Russian descent, who owns the master license that allows him to market the Jani-King franchise (Jani-king.ru) to potential franchisees in Russia, has sold three licenses over the past few months.

One of the worlds largest commercial cleaning franchisers, Jani-King provides two weeks training and further business support in return for royalty payments of 10 percent of the franchisees monthly gross sales revenues.

But Uritsky has placed another seven potential candidates on the waiting list, until the companys new franchisees show results.

"One failure in the region can have drastic effects on the entire brand," said Vladislav Kochetkov, spokesperson for Magazin Gotovogo Biznesa, which brokers deals between buyers and sellers of franchises and existing businesses.

So, franchisers are cautious in granting licenses. They screen all potential franchisees to minimize the number of businesses that go under, dragging the brand down with them.
"Having entrepreneurial qualities and a strong footing always helps," said Kochetkov, "but it does not guarantee the right to acquire a franchise."

Experience in the relevant industry is necessary to open some franchise locations, like the local travel franchise Kuda.ru, Kochetkov said. Others, including local travel franchise Putyovochka, are willing to teach nonprofessionals the business. MGBs web site (Deloshop.com) lists Putyovochka locations for an initial investment of $15,000.

Access to real estate is another important factor.
"Do you have the space?" -- thats the first and "most painful" question Subways Kochetkov asks franchisee candidates applying to open a Moscow outlet of the brand. The red tape involved in renting quality space in Moscow makes some franchisers require candidates to already own or rent a suitable site.

Franchisers in Russia also review the background of potential franchisees to assess whether they are capable of conducting future business in a legal manner.
Despite the tough screening, franchisers are still attracting a great deal of interest, especially from potential franchisees who want to take various chains into the countrys regions.

"Right now, fast food is the most popular sector [with potential franchisees], followed by services and retail," said Natalya Kharatyan, of Expofar, which organizes Moscows Buy Brand exhibition (Buybrand.ru), bringing together franchisers and investors.