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9.23.98  
Why Paul Orfalea Didn't Franchise Kinko's
The company founder talks about how he restructured his copying powerhouse

One of the perennial debates in business is whether franchising is a good or a lousy deal for the entrepreneur who runs a store under someone else's brand name.

Paul Orfalea, founder of Kinko's Inc. -- the hugely successful copy-shop chain -- faced the franchising issue from the other side: Was franchising the right structure for his company's expansion? And if not, what was?

Orfalea knows the choices facing small-business owners, both as an entrepreneur himself and as a business owner serving small businesses. Kinko's, which remains closely held, has increased from one store in Santa Barbara, Calif., in 1970 to more than 900 in the U.S. and 43 other countries today, with annual revenue of close to $1 billion. Its stores now serve as ad hoc high-tech offices -- renting computer time and offering E-mail, faxing, and other services of that nature -- for those who need only periodic access to such equipment or can't afford to buy it.

Orfalea confronted restructuring last year. Over the years, Kinko's had mushroomed into 128 joint ventures, small companies, and partnerships. In 1997, New York investment firm Clayton, Dubillier & Rice bought one-third of Kinko's for $214 million through a private equity fund and helped reshape the company into a single corporate structure, with Orfalea and the previous owners of Kinko's other structures holding most of the remaining equity.

Now, the company may go public within the next year.

Orfalea talked with Business Week Online's Jeremy Quittner about his past choices and the outlook for Kinko's. Here are edited excerpts.

Q: What is your attitude toward franchising? Kinko's never became a franchise.
A:We decided not to franchise because we like the idea of making money with someone on the bottom line rather than on the top line. We thought that was a better way of doing business, sharing the profits. The franchisor takes money from the top, he takes a percentage of sales. I just like the idea of working with people. [Franchising] just seems like it would set up an adversarial relationship.

Q: Do you think that is always the case with franchises, that there is an adversarial relationship?
A: I think all organizations have difficulties with this. The franchisee has an expectation that the franchisor is going to make [it] successful. We wanted to have a good relationship with the field.

Q: You started out as a small business with one shop. What advice would you give to a small-business owner who might be considering franchising? What are some of the other options?
A: Company owned. Do it yourself or maybe go in as a partner with someone, 50-50 partner or 60-40 would be better. Rather than being a franchise, I had partners.

Q: And what is valuable about the partner relationship vs. the franchise relationship?
A: Imagine yourself if you were in business with someone, and you sold $100 worth of stuff, and they took $6 off the top. Or if you made $6 in profit, and you split...with the other guy. What would you rather be, splitting the profit or having it taken from off the top? I'd rather have it on the bottom line where you split the profits. It is a little more equitable, and the other guy listens to you. It's different strokes for different folks. In certain instances, it is a good deal, but generally I have drifted away from the traditional franchise.

Q: Where is Kinko's today, and where is it going?
A: I think we are blessed with one of the only recognized trademarks in a $100 billion-a-year business called printing, and all of that printing world is coming our direction.

Q: How is it coming in your direction?
A: It is all going digital, and we are perfectly positioned in the digital world. Our chief executive officer, Joe Hardin, a very farsighted guy, put in T1s [data-transmission lines] in all of our stores, put in all of the digital copiers, and just digitized the business. We have put the Internet in all the stores. People get their E-mail and all that stuff.

Q: Who are your major competitors now?
A: Usually a competitor is not someone you see, it is someone who comes out of left field. The one you see, you can always get your troops rallied over. I worry about the guys you don't see. I think technology and the laser printer [are] our biggest competitive threat. If we are not shrewd and always on top of our business, this technology could wipe us out. It has affected our business negatively. But by the same token, there are more originals out there that need to be copied, and people are more creative in general and they are writing more stuff.

Q: Do you have plans to go public?
A: We were in New York to think about doing that right now.

Q: Have swings in the market affected you at all?
A: It's great to be private right now. It's better for us to be private right now. Your stock goes down, and it affects your workers' morale.

Q: Any other plans for the next few years?
A: We are going to open in the next two years about 200 locations. We are expanding aggressively in Japan and Australia and England. We are putting more bandwidth in all of our locations and have a lot more services to offer our customers.

Q: How important is the small-business owner to Kinko's?
A: How important? They are everything. I think when you realize 45 million folks out of 110 million employees in this country work out of their homes, that is small business right there.

Q: Any other advice you could offer small-business owners?
A: Keep your nose in the window long enough, and they are going to let you in.

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