The guys welcome franchise owner Michael Davis to discuss his Cartridge World franchise and his experience as a franchise owner. They also answer the question, "How worried should I be about the arbitration clause in my employee agreement and does this force me to only arbitration?"
Full Podcast Transcript
NASIR: Welcome to Legally Sound Smart Business.
This is Nasir Pasha.
MATT: And this is Matt Staub.
NASIR: And thank you for joining us. This is our business legal podcast where we cover business in the news and also answer some of your business legal questions that you, the listener, can submit to email@example.com.
Here we go! Mid-week, I wonder is US won their game yesterday. I predict not, unfortunately.
MATT: Wow. What a terrible way to start off the episode.
NASIR: I know, it’s a downer. Well, hopefully, I’m just proven wrong.
MATT: Yeah, I hope so. Our audience is going to stop listening too, unless we have a lot of audience listeners in Belgium.
NASIR: Yeah, they’ll be depressed and won’t want to listen to our show.
MATT: That’s fine.
NASIR: I think our show is uplifting. Anyway, I think we have a good topic today because we have franchise owners as clients and we cover franchises all the time on our podcast. We get questions like this but today we actually brought in a franchise owner, Michael Davis. He’s the owner of a Cartridge World franchise in Atlanta, Georgia.
Michael, welcome to the program.
MICHAEL: Thank you, gentlemen. Glad to be here!
NASIR: Yeah, absolutely. You know, we’ve talked about in the past how other franchise owners can have an effect on the franchise itself. It comes with the good and the bad, right? I mean, there was this one case we covered in New York where there was a Domino’s franchisee who stupidly fired all his employees for an illegal reason and, of course, had to bring them back and so forth. But those kind of things can have a negative effect but, at the same time, your successes also have a positive effect as well.
Michael, why don’t you tell us a little bit about the franchise world in general and this little kind of secret family that I think a lot of people aren’t aware of?
Again, my name’s Michael Davis and I’m the owner of Cartridge World. We’re the world’s largest remanufacturer of ink cartridges – up to 30 percent less than the national big buck stores. There’s 1,400 of us globally. We’ve been around for six or seven years.
Now, the beauty of franchises, much like you said, is you’ve got a known brand entity which you don’t have to build over time. It’s already there. You already have a support system from corporate in terms of marketing, operational, and other experience sets. The other parts you also have which you alluded to a few moments ago were business partners rather than franchisers who are going through the exact same experience you are that perhaps have different experience set that you. Really, you’re business partners. So, if you’ve got a situation like the pizza franchise you talked about, that’s a business partner of yours even if they’re across town because they’re damaging your brand.
One wrong customer experience, they’ll tell ten people. One great customer experience, they might tell one person. You really can’t put a cost on that because, in the franchise business, the cost of new customer acquisition is huge but a damage control that you have to do from a bad experience from a franchise partner across town is priceless in a negative way.
I’m a big advocate of franchisers because you have much of it already done. What you have to do as a franchise or within that structure, you have all that support and experience to figure out what is your unique brand going to be in your community. How are you going to differentiate yourselves in your ten miles of your graphic area? Are you going to partner with schools? Are you going to partner with non-profits and churches and do fundraising? How are you going to reach out to the B2B community as well as the local municipalities for business? That’s all you have to do as compared to being a non-franchiser where really you’re on your own. You’re on your own starting it, developing supplier relationship, marketing, et cetera. And then, when you have challenges, you can’t go to a master franchise or other franchisers – “How did you solve this problem? How did you get through this? Run a business solution?”
MATT: Michael, you mentioned something about the geographical area. There’s a lot of franchises, obviously, and I’ve noticed here in San Diego, there will be maybe ten different locations for one franchise but they’re all in different areas. Are there other locations near you? Is there any of your competition or is it more of a camaraderie thing and you guys all try to work together?
MICHAEL: Well, each franchiser does it differently. I mean, generally, from a physical location perspective, they generally have a geographic radius – 5 miles, 10 miles, et cetera – depending on geographical density where they want you to specifically locate. Some franchisers don’t want you marketing in certain places.
In the case of our business, we have the location restriction because I don’t have another franchise within 15 miles of me geographically which is great because most people are not going to drive more than 5 to 10 miles anyway. So, I don’t have that challenge but we also can market anywhere. I have customers that are everywhere from a delivery perspective because, for our business customers, we do free delivery. I deliver wherever. For that matter, I have customers even as far out as San Diego from the east coast from me that we dropship to so I can work with anyone. I don’t have that restriction.
The real heart of your question from a franchiser than of an entrepreneur.
NASIR: You were mentioning how this geographic location and a lot of these items are restricted in the actual franchise agreement and that’s something that is presented right up front, definitely oftentimes is reviewed by an attorney or maybe not. A lot of times, you can just read it to yourself so long as you understand the terms but sometimes these documents can be pretty lengthy.
Michael, why don’t you talk about that? What was the process like actually setting up and starting up this franchise – everything from how you chose this particular franchise and financing it and then also going through the process of that franchise agreement?
MICHAEL: Sure. I look at myself now after 27 years in corporate life as being a corporate refugee. I left corporate, got my executive’s MBA, goes out of business school and started working with startups and became an entrepreneur. I look for different business ideas for a lot of reasons I’d mentioned before I chose a franchise. I started looking at food franchises and I really quickly eliminated that because there’s a whole lot of extra regulation, licensing, and the margins tend to be thinner because the food is perishable.
I came across the Cartridge World, worked for HP. I was very interested in the ink industry. The ink industry has huge margins, as we all know. It’s one of the few products that is a consumable where you have to have it. It’s the largest expense for really any business office supply. Everyone’s a potential customer. But, more importantly, all of us know that, through the original equipment manufacturer buying stuff some the large manufacturers, we’re already paying too much.
From a selling perspective, you’ve already got a pain point. We’re coming in with an alternative – green, we manufacture one, same ink, high quality, works just as well as what you might buy from an HP or another vendor – but we’re coming in at 30 percent less. So, I looked at this opportunity and said, “Gosh, I’m dealing with something really important to customers, something which they’re already paying for but people don’t know they’re paying too much, and my opening pitch is: ‘Are you interested in saving up to 30 percent on your ink cartridges?’” Also, it’s green and that’s becoming a larger and larger decision-making point for many people for purchases so it’s not a tough sell. Nine out of ten people here say, “Yes, I’m interested,” and that tenth person, you say, “Let me know someone who you could refer me to who is interested in saving 30 percent on their ink purchases.” From that, I think I found a great opportunity that’s growing.
First, before you do anything, you need to get an attorney for any franchise type of play you’re going to do. Cartridge World, like many of the other franchise operators through their websites, have a fairly generous amount of information about the process and the steps. But, like anything, besides your internet research, the best intel you get are going into a couple of different locations – the same with experiences – and then really talking to, having a cup of coffee with the others and picking their brains. They are the ones who are going to tell you what’s real and separate that from the marketing hype and the propaganda you’d get from a website or talking to someone in corporate or a master franchiser.
What I also did was I also spoke with franchise brokers are really got an experience about are these franchisors selling? If they’re selling, why are they selling? And got really some of the financial ratios and some of the other internal stuff and franchise brokers so I really knew beyond the business answers I could get for corporate. What’s really going on for the health of the franchise? Is it a franchise system that’s growing? Is it a franchise system where you have lots of operators that are new, ecstatic? Where are they going with their direction? And I kind of weaved that with financial stuff from the internet, other information about the industry, where the industry is going, from other franchise stuff and then articles in a lot of the entrepreneur small business magazines that every year rates franchises for how good are they and where they’re going. And then, what are your financing options? The financial industry right now is fairly full and capricious for those of us who are entrepreneurs who don’t have perfect credit. So, I went a different route with that using this company called CatchFire Funding to do all the administrative and governance work for leveraging what I had in my corporate 401k for all those years and then forming a company and using those moneys to build a qualified retirement plan which shields me from taxes and then really use that as the initial investment for the franchise fee to buy the equipment and, really, for the first six to nine months of operating income to start the business. And then, basically, they’ll file returns for you and you maintain your retirement program by putting money back into it and growing the business.
I was really grateful that I came across that because what I’d been able to do as a new business is really eliminate the service that I have to pay – six percent or ten percent – on barring the initial seed money and got that and my retirement income and use that tax-free.
You mentioned the franchise agreement. That is a heavily slanted document, of course, to the franchiser and they are very long, very boring, and very tedious, and that’s why you need your attorney to go through it.
NASIR: And, a lot of times, they’re non-negotiable.
MICHAEL: Exactly. In Cartridge World, it’s really very different.
You’ve got a small corporate entity, Cartridge World North America, and we have master franchisers that own defensible territory and you enter into that franchise agreement with that franchiser.
In our case, we’ve got a great franchiser that is responsible for Georgia and half of Tennessee. Our FTD is signed with him and his wife and we work with them primarily and then they have the relationship with corporate and a lot of things you’re saying aren’t negotiable. How much money and royalties – that’s not negotiable. How much of royalty goes to marketing fund – that’s not negotiable. The look and feel of your establishment inside – that’s not negotiable. We’re also grateful that they had a real estate person because corporate leases are tricky. Finding that location that’s right for your brand is tricky. So, they had a great real estate guy that helped me find locations based on what’s worked in the past and they also did the fun part of negotiating release and all the variables with commercial leases to get me in the right space and that’s the other advantage of the franchise network. I’d mentioned the marketing, the operations support; also, there’s logistical real estate support because, with franchise, it’s all about location. So, I had assistants from A to Z for all of that.
And then, the other thing I think that’s great, if I could add one more thing to answer your question, it’s that there’s huge repositories of internet where you’ve got experiential best practice templates for anything you can think of from A to Z that have the combined network there that you can leverage and create your own brand while consistent with what the brand wants you to do as an individual franchise.
NASIR: Yeah, absolutely. Michael mentions the support that a franchise can provide to you. I’ve seen franchises that do lease negotiation, like you mentioned, legal support, training, of course, and things like that. That’s definitely something to look out for before choosing your franchise, if that’s what you’re looking into.
NASIR: Let’s get to our question of the day. I know we have a pretty decent one, I think. What do we have, Matt?
MATT: “How worried should I be about the arbitration clause in my employee agreement and does this force me to only arbitration?” This comes from someone in Santa Rosa, California.
NASIR: Yeah, we’ve talked about arbitration in the past. I can’t remember if I’ve discussed this before but I’m personally not a fan of arbitration in general – even for my businesses, except in the case when you’re dealing with employees.
One of the biggest advantage of arbitration is it’s private and, a lot of times, when you get into a dispute with your employee, things can get nasty sometimes and things that you may not want to be put out in the public can keep it private. But, beyond that, arbitration, people think that it’s cheaper and faster, and it can be but it’s not necessarily true. And so, I tend to shy away from that.
MATT: I’m in the same boat. I mean, there are cases in California with employees being able to get around us in certain situations but I like to have this in there as well for the employees, if I was the employer, just because it is private and you can get it resolved – hopefully in an easier fashion than the other route. But, at the end of the day, you’re still going to kind of run into the same issues – whether there’s the arbitration clause or not – just that, if an X employee wants to cause troubles for you, it’s going to happen either way so I don’t know if you can really get around that. I don’t know if the arbitration clause is going to make it any easier for you if someone has ideas and they just want to go for it.
NASIR: That’s definitely true.
Michael, from your business perspective, any experience with arbitration or any thoughts on the aspect of that?
MICHAEL: Fortunately, no.
NASIR: That’s good.
MICHAEL: Generally, if you’re in arbitration, you’ve got problems and the simple model that I used is I brought everyone in initially from probationary perspective as 1099 contractors, consultants.
NASIR: Okay, yeah.
MICHAEL. And then, from there, depending on people willing to their W2 or frankly for the (00:13:48 unclear) contract employees, I mean, I think that 1099 structure both parties a lot of flexibility.
NASIR: Yeah, by its nature.
MICHAEL: And then, what I’ve looked to do beyond that to really differentiate my brand is look to offer supplemental insurance through one of those carriers to have a benefit so beyond whatever I’m doing from an hourly rate or whatever I have for bonus based on the success of the franchise also have some supplemental insurance which most folks aren’t giving to hourly employees to really differentiate that.
NASIR: Yeah, I think that’s a good way to do that. Obviously, there’s always going to be a danger between classification between independent contractors and employees but, if you’re able to do it right, putting them in an independent contractor status – or 1099 status, if you will – is a good way to test out that employee – or that potential employee, I should say – and then, when you’ve had that relationship with them, then you’ll feel comfortable bringing them on that employee status which, of course, has a little bit more risk that allows you to have more control over those personnel.
Michael, before we let you go, I don’t know if you want to end us on a good note with some contact information for people to contact you if they have questions or learn a little bit more about Cartridge World? I’ll let you end with that and we’ll also post links accordingly on our show notes.
MICHAEL: Sure, I’d love to.
My store name is Cartridge World Camp Creek. We’re located in Atlanta, Georgia – cwatlinkrefill.com. my email is firstname.lastname@example.org. Our Facebook handle is ATL Ink Refill as is our YouTube channel and things of that nature but, if anyone wants to contact me in terms of looking to make that franchise decision or really anything from a small business entrepreneurial perspective – and I’ve done several startups – more than happy to make myself available. If you want to call by phone, the number at the store is 404-629-5200.
The other thing I’ll tell you really quick because I’ve got 20 seconds, what I’ve learned about the economy right now, people want to do business with small business. They also want to do business with small business that really makes an impact with the community. If you can value add to what you do or you can do more than one thing for them well, they’d rather make one stop. So, I’ve expanded my store beyond printer cartridges to things from lettering to copy to fax or repair work so they can come to me with one-stop shopping and I also connect small businesses together because I’m a community business and I invest in the non-profits. I think that’s what makes your brand important and that’s why people will come back.
Thank you for that. That’s very generous of you to give your contact information. We won’t post your email out there; otherwise, you’ll probably be spammed to death on the show notes but we will definitely post a link to your website and thank you so much for joining the program. I appreciate your insight on the franchise world as I call it.
MICHAEL: Thank you for the opportunity!
NASIR: All right, that’s our show. Thank you for joining us!
MATT: Keep it sound and keep it smart.