Over the past 5 years I’ve had the opportunity to buy, operate, and sell five franchised restaurants. The restaurant businesses, and specifically franchised restaurants, have provided significant additional cash flow for my family (on top of my earnings as a financial advisor 2002-2006, and now private equity fund manager 2007-present).

I think the key is to realize that 9 out of 10 new business ventures fail in the first 12-18 months. Conversely, a franchised business (franchised from an established, proven company) generally has a 90% chance of surviving that first year, and a 75% chance of surviving and/or thriving for up to 5 years.

The second key point is to understand the difference between (1) franchises that require the owner to operate them day in and day out, and (2) franchises that are designed to be operated by a manager and not requiring 8 hours of “on site” time from the owner. I’ve confused these two in the past and it has cost me dearly.

If you desire additional cash flow, you need to find a franchise concept that is designed to allow the owner to maintain their current career, but to “support and assist” a manager at their franchised business.

This is important, because if you purchase a franchise that is designed to have the owner live there, you have simply bought yourself an expensive job. It will own you, you will not own it! The key point of understanding a franchise as an investment is to employ the concept of return on equity.

Let’s say you purchase a hair care franchise for $100,000. With good credit you generally will need to come up with $20,000 of your own cash (you, family, friends, etc.) … and a bank will usually give you the other $80,000, spread out over a 5-year repayment term. If you hire a great manager your store may be profitable that first year. To illustrate, let’s assume your store did $200,000 in haircut sales that first year. You paid your manager, your employees, your rent, your supplies, utilities, franchise fees (royalties), taxes, interest on your loan, etc. Then your accountant tells you that you have $20,000 left over at the end of the year… your profit! You may look at this and say, “Wow, I made a 20% return, because this hair care place cost a total of $100,000…Great!” But from the standpoint of Return on Equity, you have actually made a 100% return on your invested dollars! The actual equity that you have into your business is only the $20,000 that you had to come up with to secure your $80,000 bank loan. $20,000 invested, $20,000 profit, 100% annual return. (If things go well…and there is a lot that can go wrong! This is not for the faint of heart, no matter how much you like a franchise.)≡

This post was written by The Almost Millionaire. If you have follow-up questions or would like to know more about any aspect of starting or buying your own franchise for cashflow, you can contact him on his blog at http://thealmostmillionaire.blogspot.com, where he posts regular updates about his businesses.

This should be interesting.  I’m glad I won’t be a BCE holder much longer.  Today’s story in the Financial Post (Toronto) - Google Slams Bell for Throttling Internet - shows that Bell Canada is still being held to task for its bandwidth control practices.  I checked up on the share prices, but there isn’t much change:

BCE: TSX - is on somewhat of a downtrend at 39.08 (CAD), and
GOOG: NASDAQ - is inching upward at 546.02 (USD).

Can someone please tell me why you might want to own GOOG at $546? They don’t pay a dividend.  I imagine you’re expecting a stock split pretty soon.  If so, why hasn’t GOOG split yet? It’s a genuine question.  I’m ignorant in this area, so I’d love to learn.  Maybe they haven’t split because there’s been no decline in momentum going upwards.

As for BCE, remember, everyone, that the Ontario Teachers’ Pension Plan is buying them out and it looks like it’s all finally going to close this summer.  I’m glad my BCE have moved upwards a bit, back to their normal range - for a while it was looking like I was going to lose some good cash.

Lately I’ve found a new source of distraction in this sporadically intriguing book by David Rothkopf:

The book is ostensibly about the world’s power elite and the nature of their power, wealth and influence. Sounds like predictable, run-of-the-mill summer reading? It’s not. It’s actually quite a nuanced approach to the subject. Rothkopf has impressed me a few times with some of his references, and of course, his own in-depth research and personal interviews with some of these people.

Contents

I always find a quick skim down the chapters heads is a great way to get a sense of what the book has to offer.

Intro: The Power Elite on the Promenade
(1) Each One is One in a Million: Meet the Superclass
(2) Ceteris Non Paribus: Inequality, Backlash and the New Order
(3) Lessons of History: The Rise and Fall of Elites
(4) The Multinational Moment: When Finance and Business Became the Center of It All
(5) Globalists vs. Nationalists: Political Fault Line for a New Century
(6) The Age of Asymmetry: Decline of the Titans and the Rise of Shadow Warriors
(7) The Information Superclass: The Power of Ideas
(8) How to Become a Member of the Superclass: Myth, Reality and the Psychopathology of Success
(9) The Future of the Superclass - And What it May Mean for the Rest of Us

323 pages and loads of notes and references. What is Rothkopf’s position on all of this? In a nutshell, he’s: pro-globalization; pro-social-equality; anti-conspiracy theory. Rothkopf is on the side of greater social equality, but his presentation is not one-sided, but very thorough, considered many sides of each issue.

The World’s Most (Obvious) Power Elite

OK, so who are in the superclass? Rothkopf identifies precisely 6,000 of them. Obviously there are the usual lists of world’s wealthiest that get bandied around infotainment sites like MSN on a regular basis. But Rothkopf and his research firm have a specific measure that they use on certain kinds of indicators in order to measure global influence. They came up with some unique and some surprising findings, in addition to everyone who you might assume would be a member of this superclass, like Bill Gates. One interesting tidbit is that the membership of this elite isn’t fixed: Tony Blair was once a member but is no longer, for example. So here’s a compilation of some of the categories and people Rothkopf considers. And he does limit his list to about 6,000: because this number is still small enough to be measurable, analysable, and meaningful.

• heads of state, presidents, prime ministers of the world’s wealthier countries
  -Rothkopf measures the President of the U.S. as the most powerful individual in the world (there are actually objective indicators that decide this; it’s not based upon cultural perceptions; one of them is that the U.S. economy represents about 30% of the world total)
• top entertainers, artists and creative professionals (who influence with their ideas)
  -Bono
  -Angelina Jolie (who apparently now has membership in the Council on Foreign Relations)
  -Mark Zuckerberg (of Facebook fame)
• heads of the biggest world religions (e.g., the Pope)
• heads of terrorist regimes (whether famous or unknown)
  -includes the shadow weapons markets and private military firms like Blackwater
• CEOs of transnational companies (these comprise the largest group)
• Managers of hedge funds (these have really taken off since 1999)
• Any individuals with net worths in the billions and higher (actually, Rothkopf shows how the Billion is no longer much of a measure of fiscal power: that power is now measured with the Trillion, and the rise is not just due to inflation)

How to Become a Member of the Superclass

Pragmatism sells. I’d try to convey some of Rothkopf’s “How-to” for you, but there isn’t much in the way of that in this portion of his book. Mostly it is a thorough review of past and present members, conspiracy theories and other elite corporate classes such as the Bilderberg group and others at Davos every year. He effectively deflates (through good personal and second-hand anecdotes and conversations) the notion that Bilderberg still has any real power in the sense he’s talking about. They’re more of a symbol of the superclass power of several decades ago.

But I can cull a few tips from offhand remarks he makes throughout the book. One way to make it to the superclass is to be born into it. It makes it that much easier that you’ll also follow a career path that keeps you in the superclass. Another way is to attend the top business schools and network with others there. Rothkopf demonstrates well the extent to which powerful boards of directors across the world’s largest companies often significantly overlap, and many of these overlapping figures attended the same business schools, were in the same or contiguous graduating class, etc. Rothkopf focuses more on the business and political groups within the superclass. It would be interesting to hear more about fringe superclass groups such as certain celebrities and the type of influence they wield.

Sometimes A Bit Pedantic

There’s enough new information in this book to change (even if only slightly) your perspective on the world. But for the most part, I found myself skimming through longer sections that I found basically repeated some information that I was already familiar with: such as how great Chile’s economy has been doing recently and why. Or the world history of elites: Rothkopf actually includes the obligatory return to Ancient Greece in order to round out his analyis of current elite structures. There are a couple other similar sections that I think weigh the book down too much, such as his Brief History of Conspiracy Theories (with special sections on the Freemasons and the Skull and Bones, of course). The author is at his best when he’s telling stories about situations he was in personally, or overheard personally, and about the people and actions that are relevant to the present moment. You’ll especially enjoy his vivid account, in the Introduction, about his many meetings at Davos, Switzerland, each January. Or his description of “Washington’s many black-tie-galas, events that typically serve up little more than gossip and rubbery chicken.”

Something to Think About

Nevertheless, this book gives much to think about. One interesting angle on all of this that the author brings up is the view that this superclass or power elite function much like the proverbial canary in the coal mine. Where they are today might be a good indicator of where the world will be in the future. Or more specifically, the possibilities open to this superclass today is a good indicator of the possibilities that might be open to the majority at some point in the (near?) future. This has its positive and negative ramifications, as you can imagine. But I like this image. Think of Richard Branson, owner of Virgin, and the types of projects he’s involved in.

Reading this book is also saddening for many reasons. It truly puts one’s wealth into perspective. When one considers the inequality that exists just between a middle-class, single-income earner in North America and someone living below the dire poverty line (pick your favourite impoverished location here), it’s all the more amazing that an equivalent amount of inequality exists between the middle-class earner and the super-elite. Continua of inequality are scale-invariant. They have a scale-invariant fractal structure. It’s the “top one percent of each top one percent” phenomenon.

All in all, I recommend the book insofar as it is well researched, a thorough treatment of its subject, and the prose is quite entertaining in parts. But overall, it’s also a lot of what I’ve already read about in other places. If you’re looking for an “insider’s look” like John Perkin’s Confessions of an Economic Hit Man, or some similar read, this is not that book. But if you’d like to learn more about what goes on at Davos every year, this is a really good near-anthropological study of it (I say near only because Rothkopf is not a professional anthropologist, but this book is basically a good ethnography of the circles he frequents).