Business-Format Franchising

Franchising can be viewed as an alternative growth strategy because the original founders of a company avoid dilution of their ownership and are no longer directly responsible for the financial investment needed to fuel growth and expansion. Instead, this financial responsibility is shifted to third-party franchisees and area developers who pay the franchisor for the right to use its trademarks and systems in exchange for initial franchise fees and royalties. Over time, this income stream can be a very valuable and lucrative asset around which an estate plan can be built.
Over the past three decades, franchising has emerged as a popular expansion strategy for a variety of product and service companies. Retail sales from franchised outlets make up about half of all retail sales in the United States (estimated at more than $1.5 trillion) and employ nearly 16 million people. (See sidebar.) You don’t have to have the ambition to become a national or multinational corporation to consider franchising, which can be an especially effective option for smaller businesses that cannot afford to finance internal growth. But franchising as a method of marketing and distributing products and services is appropriate only for certain kinds
of companies. A host of legal and business prerequisites must be satisfied before any company can seriously consider franchising as a method for rapid expansion.
Many companies prematurely choose franchising as a growth alternative or exit strategy, then haphazardly assemble and launch the franchising program. Other companies are urged to franchise by unqualified consultants or advisers who may be more interested in professional fees than in the long-term success of the franchising program. This has caused financial distress and failure for both the growing company and the franchisee, usually resulting in litigation.
Current and future members of the franchising community must be urged to take a responsible view toward the creation and development of their franchising programs.

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Values and the Concept of a Preferred Life Vision

One way to conceptualize a system of values is through the concept of a preferred life vision. Levi-Strauss points out that people are sensitive to contrasts in the human condition.5 Examples are seeking excitement versus being bored, being rich versus being poor, or being healthy versus being ill, and so on. People seek the life that captures the more preferred polar extreme. But, as all aspects of the good life cannot be pursued with equal vigor, the consumer’s value system reflects the particular weightings he or she attaches to various components of the preferred life vision. These weightings have some stability but can change with circumstances and cultural drift. Indiference to any contrast is equivalent to giving equal weighting to the polar extremes: a possibility that can be dismissed for all practical purposes. Rokeach spoke of both terminal and instrumental values, though this distinction has not caught on, presumably because values, as the concept is being used here, are usually viewed as terminal by definition. If we were to tie values to consumer buying, they might look like the following for many people:

• Preference for a less-pressured over a fast-paced lifestyle
• Preference for an environment less threatening to health over a more technologically driven way of life
• Preference for a more meaningful, simpler life over a more materialistic one
• Preference for more solidarity, face-to-face communication, and sense of sharing with others over mere luxurious isolation (bowling alone is not pleasurable)
• Preference for more to be preserved from the past than overthrown in the name of progress
• Preference for staying young-looking rather than old-looking

There is no complete homogeneity of values, consumer or otherwise, within a culture—simply a family resemblance. Consumers attach diferent weights to various values; hence psychographic segmentation, which is based on diferent values and lifestyles. Values difer among social classes and difer among people of diferent generations within the same class, depending how refined our categories of values are. Sharp diferences in values between generations have led to “generational marketing” and “cohort marketing” in segmentation. 6 While diferent generations are separated by about 25 years, cohorts are formed by common defining experiences in their history. As a consequence, cohort groups are assumed to be “value-bonded” by similar preferences. Thus the “postwar cohort” came of age between 1946 and 1963, experiencing a time of family togetherness, economic growth, and social tranquility. In spite of the Korean conflict, it was an experience of security and stability. Marketing campaigns to cohort members exploit nostalgia with symbols of the experiences behind the bonding. Such symbols can incite a good deal of nostalgic emotion.
Accepting that early emotional experiences are most involved in molding the consumer’s system of values, the question becomes: How influential are common cohort experiences in shaping values? Are they suficient to direct preferences? Values can be poor predictors of buying until or unless beliefs are taken into account. Consumers can have the same set of values but show diferent buying patterns because they have diferent sets of beliefs about the appropriate means for promoting their values. Values operate like goals for the individual, but the paths to goal attainment are many. Thus a consumer may place a high value on buying the “best tennis racquet money can buy,” but this depends on beliefs about the criteria that reflect “bestness,” while other beliefs about personal finances and buying opportunity will also play a role in what tennis racquet is bought.

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Convertible Options in Term Insurance

If you purchase a convertible policy, you are allowed to convert to a different type of policy — one that builds a cash value, such as whole life or universal life, sampling is the medical insurance, without having to pass another medical exam. Again, because your health is more likely to deteriorate as you age, this feature may be important if you think that you may want to keep buying life insurance later in life.

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Most people don’t continue to insure themselves after theyreach retirement age, usually because they no longer have anyone dependent upon them, but there are exceptions. For example, take a look at a family of four in which the father is 56, the mother is 43, and the two children are both under 10. The younger child won’t start college for another 15 years, and the parents want to make sure the children have sufficient money even if the father dies. These parents may want to keep insuring the father after he reaches the age of 70, the age at which his policy specifies that he can no longer renew his term insurance policy. To them, therefore, convertibility is an important option.

Another reason you may want to be able to convert your term insurance is if your family has a history of heart disease, cancer, or other serious illness. If your family history makes you more likely to become sick later in life, you may want to ensure that you don’t have to pass a medical exam later, even after term insurance is not available. Because buying life insurance is, basically, eliminating as much risk as possible, many people think that this provision is an important one.
A third reason to keep the convertible option has to do with the price of term policies versus cash-value policies. Term policies generally cost considerably less than other types of life insurance because the others also build value while paying for the insurance. Convertibility may be important to you if you’re on a limited budget but want a cash-value policy. You know that you can convert later, when you have greater financial strength.

Keeping the option to convert means that your policy will likely cost you more.

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The Economics of Your Life : Your uninsured medical costs

Uninsured medical costs are one of the biggest potential drains on a family budget. Including uninsured medical costs in your family budget is crucial because health insurance terms, benefits, and regulations change so quickly.
Moreover, because life insurance protection is related to your health, by definition you want to be certain that your survivors can pay for your medical costs should you die. So after completing the budget worksheet, add a flat amount at the bottom to pay for these unexpected and uninsured medical costs.
How much to add? Good question. The figure you decide on will vary depending on what kind of health insurance you have now. If you belong to an HMO, most of your medical expenses are covered. On the other hand, if you have a private plan in which you pay 20 percent of the costs, your portion is likely to be far greater. Only you can really estimate this amount. However, most experts say that you should always maintain approximately three months worth of living expenses available, so try adding that amount to the bottom of the worksheet as your emergency fund to cover these uninsured medical costs.

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The Economics of Your Life : Your cost of living

The economic value of your life is not only how much you will be earning but also the cost of living that is, how much you actually need to live on. More importantly, the cost of living you and your family have set up is really the amount of life insurance income protection you need to purchase especially because most people tend to spend a bit more than they bring in.
In addition, part of your living costs are more than likely going into some sort of savings — to pay college expenses when your children are old enough, to go toward your retirement, to cover a big vacation, and so on. You still want your survivors to be able to save for some of these items (college expenses, for example). But clearly, saving for your retirement isn’t something you have to be concerned about if you die.
The budget worksheet that follows can help you determine your cost of living. Note that most of your expenses increase over the years due to inflation, if nothing else. On the other hand, some expenses may decrease or be eliminated because they are no longer necessary. One of these, of course, is the life insurance premium. But some other examples of unnecessary costs are clothing, food, and other expenses for children who will eventually be out on their own and paying their own expenses.
Note also that this budget doesn’t include unusual expenses, either planned (such as college expenses or weddings, unless your budget includes saving for them) or unexpected (such as medical emergencies or funerals).
And note, finally, that the budget worksheet doesn’t include paying off any large debts which you’re currently paying over time. If you want your life insurance to pay off some or all of these debts, make sure that you increase the death benefit to cover these amounts so that your survivors no longer have to include the debt payments in their budgets.

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Organize Based on What’s Left After Taxes

Once you have filed important documents in your home so that they can be easily located, it is important to go one step further by organizing all your financial assets into a system based on the following four criteria:
1. Organizing an investment based on its risks.
2. Organizing based on the liquidity of the asset, that is, how easily can I sell this investment?
3. Organizing based on timing, i.e., when will it be wise to sell this investment?
4. Organizing based on valuation, or in other words, based on a dollar value.
In addition to these criteria, we have found the most successful way to get organized is based on a fifth and most critical criteria:

5. Organize based on the taxation of investments.

While each individual’s situation may vary according to risk, liquidity, timing, and so on, everyone’s situation is universal when it comes to taxation. All people are subject to tax. Unlike the other criteria, taxation does not vary greatly depending on your individual situation. Taxation is definable and absolute.
The taxes we pay are demanded of us before we do anything else. That’s why we teach our clients to organize their finances around what they get to keep after paying taxes. By doing so, it becomes easier to understand what you need to do to plan because you know what’s absolutely going to be left over. If you organize based on risk, for instance, you may never be quite sure what you have to work with because that risk will always vary. But taxes are sure. By organizing based on taxation, you can know either how to keep taxes to a minimum, thus keeping more of your wealth, or know how much money you will have left after paying taxes so you can feel free to work with the balance in order to create additional wealth.
Important documents should be organized in what we call “Tax Drawers.” Because there are only five ways you can be taxed, financial affairs should be organized based on the following five
dimensions of taxation:

• Drawer #1: Taxed—savings accounts, checking accounts, reserve funds, and so on.

• Drawer #2: Tax Free—municipal bonds, Roth IRAs, and so on.

• Drawer #3: Tax Deferred—401(k)s, IRAs, and so on.

• Drawer #4: Life Insurance—life insurance can be taxed in a variety of ways, and most often is not taxed until the benefit is received in cash while you are living. If you die, then the income is tax-free. How you receive the money determines whether it will be taxed or not.
• Drawer #5: Capital Gains—real estate, mutual funds, or stocks that appreciate in value. There will be a loss or gain depending on tax rules at the time.
  

Organizing your financial assets into these five “Tax Drawers” will help you find a lot of extra money you didn’t know you had. How is this possible?
1. It makes it easier for you to visualize your assets and in terms of what you get to keep for retirement.
2. It provides a basis for calculating and projecting the accumulation of your wealth.
3. It helps you understand the impact taxes have on your longterm savings.
The following example illustrates the importance of organizing into “Tax Drawers.”
Suppose you put all your money in a 401(k) program for retirement.
This money will grow because you will be able to defer paying taxes on it all those years you are working. However, when you begin withdrawing this money, 100 percent of it will be subject to income tax. If you organize your assets into five “Tax Drawers” and use a forecasting tool such as the Master Plan software you will be able to play “what if” scenarios with your money. “What if” you put this money into a tax-free municipal bond rather than a 401(k) or capital gains account? “What if” you took your money and put it into a Roth IRA, or “what if” you put it elsewhere? Of all the tools available to get and keep oneself organized financially, being able to project your debt, income, and assets over time is among the most valuable. Staying organized is a function of being able to sweep all financial elements (spending, borrowing, and saving) out to a future date and look at the results. By doing this, it is easy to play “what if” so that you can test how a financial decision made today will impact your future. Using organizational tools such as the Master Plan software can help you determine the best way to accumulate money so that you can maximize your assets. And because there are no future decisions, only decisions made today that affect the future, this knowledge allows you to make much better choices. You can make the necessary changes today and not get down the road and have to look back and say, “Oh, I wish I had known!”

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