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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POSTED IN: ISOLD IT, xBuyer Beware
18 opinions for Franchise Cautionary Tale of iSold It Reaches BusinessWeek
Don Sniegowski
Aug 31, 2007 at 5:11 pm
Congratulations to all. It is heartening to see AmITheOnlyOne.org’s story getting out there. Sean Kelly has been watching the wires for eBay drop it store news and have worked closely with Karen McGinn and Gene Bowen to get their news out.
Doug
Aug 31, 2007 at 5:12 pm
Congratulations, Sean! This is a huge accomplishment and very well done. :)
Joel Libava
Aug 31, 2007 at 7:34 pm
Sean,
It is now an honor and a privilege to have links on your blog.{About time BusinessWeek picked you up…}
Joel Libava
Armando Guerroro
Aug 31, 2007 at 10:00 pm
This article may open up the floodgates. Wonder how ISI will spin this for franchiees? Ken has been saying how Karen and Gene are disgruntled ex-franchisees, But when Business Week uses them in a story, then the credibility is there.
At one time iSoldit promoted that they had over 800 Franchises sold. The most stores they ever had opened was 185. If you go to the web site now, you will see that they have about 154 domestic stores in business. Of the first 100 stores only 36 are still open. I believe an ex-employee posted in these pages, that management told them to disregard the complaints about software, when in fact they knew isoldit’s internal back end couldn’t handle more than 10 stores. They smelt blood and went for the throat. Someone made a lot of money off franchisees. The fact that the Pasadena store was open less than 3 months before they started selling franchises, suggests that this whole franchise sales concept was premeditated, knowing full well they were rolling the dice. One of the biggest losers has been eBay, because their name was used to sell people on the concept. I don’t think they are too happy about the outcome at this point. I wouldn’t know because I closed my two stores, and moved on. Good Riddance!
I wonder if Rick and Elise can sleep well, even though they haven’t been mentioned lately.
sean
Sep 1, 2007 at 8:15 am
Don Sniegowski Thanks, Don. I’m glad Blue Mau Mau got a well-deserved plug and link. FYI I understand Don was pressing ISI for an interview with Ken Sully, and was told all was great with the chain, only one store had closed. A few days later Sully’s bombshell letter was posted here, stating over 60 stores had closed and they were on the verge of insolvency. Ken Sully reportedly agreed to an interview, then declined when he got Don’s questions (which were mild).
Doug Thanks for your help and the help of the b5media network, which links us to 200 cooperative blogs. Doug runs a great customer service site called Service Untitled. Check it out.
Joel blogs at Franchise King. He is actually a franchise sales pro who believes in helping franchise prospects look BEFORE they leap. As a result, he can’t afford $1500 paintball bills for his kids like ISI’s salesperson can, but he does sleep at night.
Armando Excellent points. As far as eBay goes, I’ve thought from the beginning that total dependence on eBay was the concept’s biggest flaw. What if eBay decides the negative press outweighs the benefits of affiliation with these franchisors? What if eBay decides to put on a major drive to build its Trading Assistant program, or launch a better support and software program for full-timers? Could it not shut off access for the franchisors and then offer the franchisees the opportunity to work directly with eBay? Even if an agreement’s in place, the FRs would be no match for eBay’s legal muscle. And eBay has an obligation to protect its trademark, which is being dragged through the mud. The fact that these companies didn’t have ultimate control over their own businesses indicates they may have seen this as a quick opportunity to cash in on a fad while it was hot, with no expectation that this would last long-term. I could be wrong.
Paul Patterson
Sep 1, 2007 at 10:55 am
This is a cautionary tale of how unproven business models have extremely high risks…
…and how difficult it is to dig out the truth.
Franchise attorney Mr. Michael Webster points out, “”ISold It had no business experience,” he says, so it was never in a position to make earnings estimates like the one McGinn and Bowen say they were given during a meeting for potential franchisees in January, 2005.”
Ken Sullly seems to understand the legal seriousness of making false earnings estimates like those professed above. iSold It’s CEO is quick to respond, “We told everybody that this is sort of like the wild, wild West. It’s a brand-new concept and nobody knew for sure where it was going.”
But if that were the case then why did his attorney just recently add so prominently in their disclosure document that the concept was unproven?
Answers iSold It’s CEO, “because of the number of stores that weren’t understanding the complexity of the business.”
Huh???
Attorneys and insiders who are watching this have seen this dance of avoiding liability before.
Salvatore Binnachi Jr.
Sep 1, 2007 at 12:25 pm
Franchisees should ask Ken Sully, why he didn’t settle with Karen and Gene when he had the chance. A Note to Franchisees: DON’T BELIEVE WHAT HE SAYS
Miki Saxon
Sep 2, 2007 at 5:08 pm
Great post, Sean, and triple congratulations on your interview in Business Week from someone who’s been reading BW for over 25 years!
However, I’m confused, Granted, I don’t follow this business segment, but I do remember talking to a similar business four or five years ago when I lived in San Mateo, CA. I don’t think that it was called ISold It, but still, the concept doesn’t seem exactly new.
The thing that really strikes me isn’t the “it’s not our fault” smoke being blown by the ISold It management, that’s SOP, but rather that people still don’t get that, “If [insert appropriate word/phrase] seems to good to be true then it probably is!” It’s sad; it seems that people always hear stuff like this with a “but me” at the end.
sean
Sep 3, 2007 at 12:00 pm
Thanks for your comment, Miki. For those of you who don’t know, Miki is one of b5media’s newest blogger, having just taken over at Leadership Turn. Check it out.
You’re referring to what I call the “hot new franchise” phenomenon. The premise of franchising for an individual to pay a premium (franchise fees, royalties, loss of total autonomy) in order for the right to duplicate of a proven, successful business model. The assumption is that the benefits of not having to go through trial-and-error will provide benefits outweighing the fees, etc.
Yet many people want the supposed “security” of buying a franchise, but are looking for the hot new concept (the antithesis of a proven, successful model). So they assume both the risks of an entrepreneurial start-up AND the costs and restrictions associated with franchising. It’s a double whammy in a competitive market where a single whammy is more than enough.
The lesson is, if someone is stupid enough to buy an all-cereal restaurant franchise, someone will come forward to sell it to them.
Joel Libava
Sep 3, 2007 at 1:40 pm
Sean,
When my wife told me she heard about a “cereal only” franchise concept, the first thing I said was:
That, my darling, is a failure waiting to happen!”
Some think I am a Negative Norman. Some think I never think a new franchise concept is going to do well. When I was a member of a large franchise brokerage network {Sorry, Jack and Steve..you DON’T get a link to your network’s website. You don’t deserve it..} a few young unproven concepts were brought on board. I was not comfortable showing them to my candidates. I am very comfortable in my role. I am a skeptical guy, until you prove me otherwise.{When it comes to business that is}.
Cereal Schmerial.
Joel Libava, The Franchise King Blog
sean
Sep 3, 2007 at 2:49 pm
Joel:
I am actually a fan of many new franchise concepts, and have helped launch many dozens of them over the years. I’ve put more focus in the past year on helping some of the start-up concepts, as I did early in my career, because I like their energy, passion and idealism.
However, I think there’s a big difference between a new franchise concept that’s a refinement or variation of a proven model, and one that has an untested, unproven model to begin with. For example, a new pizza franchise or sandwich franchise might be new, but we’ve got an established market, a good understanding of the economics, food costs, etc. We know people will continue to order pizzas in good & bad times, that they’ll order out for lunch, etc. We DON’T know that people will pay a 35% commission to have someone sell their stuff on eBay or that people will pay pajama-clad Cerealogist $4 to eat Fruit Loops from a Chinese Takeout container.
I guess there’s risk associated with a new franchise, but ridiculous risk when the new franchise is of an unproven concept.
Joel Libava
Sep 3, 2007 at 5:17 pm
Sean,
You have made some valid points..as usual.
Well I am certainly not anti-new franchisor, for me, anyway, the concept has to really “sing” for me to be able to find that warm and fuzzy feeling that I get a few times a year.
{Related to new franchise concepts, guys hahaha}.
Sean, since you are in the marketing side of franchising, I respect your take on new roll outs of franchise concepts.
There is actually a neat concept out of Akron, Ohio that will be rolling out soon, that I liked right away.
More to be revealed!
Joel Libava
Miranda
Sep 6, 2007 at 7:41 am
I finally blogged this on my WorkShak blog!
http://www.workshak.com/2007/09/carefully-consi.html
Great job, and good information. It’s amazing how many dubious “opportunities” are out there for those of us who just want to work from home or be our own boss.
R.
Sep 10, 2007 at 8:42 am
Sean - FYI, Business Week pulled down all the reader comments. Wonder why?
sean
Sep 10, 2007 at 10:30 am
Sean - FYI, Business Week pulled down all the reader comments. Wonder why?
R.: I was just able to access it. 17 comments. Maybe it was down temporarily.
Sean
kate
Dec 11, 2007 at 6:00 pm
I went to isold it store and found them very nice, i got the idea to buy or look on ebay for a video magnifier for elderly friend…but they rejected some of my things and one of them went for $168 this past week, so i’m guessing they dont have research down…?…one thing they could do maybe is showcase items for sale, esp big ones…locals are likely to bid because they can come pick the stuff up! I think the store is a great idea, although how many years did it take me to go there, at least one…and only then because I have been ill (i went to ebay classes last year).
ARE NOBLE ROMAN’S FRANCHISE OWNERS FAILIERS?
Mar 22, 2008 at 4:27 pm
[…] have I heard that, lately? Was it Mark Golob of Butterfly Life? Or Ken Sully of iSold It? Or was it Cold Stone Creamery’s CEO Doug Ducey, right after the brilliant acquisition […]
sean
Mar 27, 2008 at 8:21 am
After 3 years, Brian and Gail Eischeid are throwing in the towel. A story in USA Today had drawn them in:
iSold It eBay Dropoff Franchise to Close in Savannah
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