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How About Starting a Franchise?

[NOTE: This post is part of a series on Entrepreneurship 101 to give a kick-start to those who are thinking about starting their own business. Our regular Job-Seeking and Career-Improvement programming will continue soon!]

One of the first franchises. Is this one for you?Okay, so you’ve gotten this far and decided you don’t want to start a business from scratch. It’s too much work and too risky. So, you’d like to start a business with instruction someone who has developed a good system already. As the franchisers always say, “You want to be in business for yourself, not by yourself.”

And if you listen to franchisers for very long, you don’t understand how any franchisee that follows “the system” (there are always horror stories about those poor saps who didn’t follow “the system”) could ever fail.

On the other hand, you’ve even seen a McDonald’s (one of the most recognized names in their space) close down here and there, so you know it’s possible.

So, what’s the catch? Can you be successful in a franchise? What should you look out for?




THE BASICS OF FRANCHISING

Let’s start with some of the plusses and minuses of franchising.

THE POSITIVES

  • Mistakes have been made and the resolutions to those most common mistakes are listed in the manual that the franchisor provides for you.

  • A Helping Hand - Most franchisors will help you do site selection, train you completely on their system, and be on hand for any questions that come up while you’re starting up.

  • Name Recognition - The good franchises already have good name recognition, so you don’t have to worry about spending a ton on marketing just to tell people what you do.

  • A Network of Help - You can always turn to other franchisees (outside your local geography) for someone in your exact situation to help you fix whatever problem you find yourself in.

  • Steady Returns - While you might not make a whole ton, if you follow the system and you’ve selected your site well, you’ll pretty much make a steady amount of money, month in and month out.

  • Real Wealth - Though the money will come slowly, you’ll be building up an investment that will increase in value every year. Both the land that you’re built on (if you bought it) and the stores themselves can be re-sold to someone else. And businesses that are already successful sell at a premium.
THE NEGATIVES

  • You’ll Need More Bags, Sir - You need a lot of money to start a franchise. And the better-known the franchise is, the more it costs. For example, a Hampton Inn will run you anywhere between $3 mil and $7 mil to open. You’ll need about $1 million to start a McDonald’s today. A Subway can cost about $250,000. A Maid Brigade starts at around $100,000. While some lesser-known franchises can go for a few hundred or a few thousand.

  • A Piece of the Action - A percentage of your sales usually goes back to the franchisor

  • Limitations - There are always limitations placed on things you can do (marketing, store design, etc.) so that the franchisor can present a consistent brand to the public.

  • Unwanted Assistance - Just ask the Taco Bell franchisees what they thought about the “Yo quiero Taco Bell” ads. They were forced to carry the (no profit) stuffed dogs, which sold like hot cakes (and clogged the lines with non-food-buyers). And their food sales numbers actually went down for the period that they used the ads. Nonetheless, all the franchisees were forced to pay the millions for those ads.

  • Limited Returns - Because of the way that franchises are set up, it is unlikely that you’ll make a profit much different than any other of that type of franchise. And, as an example, the average owner of a fast food franchise makes around $40K a year.

  • You’ll Need More Money - In order to become truly “successful”, you’ll need to open several of your franchise in your geography. Did I mention that you’ll need a lot of money? And that’s if your franchisor allows that sort of thing. Some franchises, like 7-11, require you to be an “owner/operator”, which means you’ve got to be on-site most of the time.

You’ll need to know yourself well to know how you’d do in this sort of environment. If the positives seem to outweigh the negatives in your case, then you’re ready to do the hard part: picking a franchise to start.


SCREENING THE FRANCHISES

From the first second that you’re looking at franchises, you need to understand something. The people selling you a business make most of their money by selling those businesses. And they make good money!

So, as shocking as it may seem, they might not give you the exact, 100%, unadulterated truth about running one of their franchises. However, they are required to reveal honestly anything that you ask.

So, here are the things to ask about:

  • What Is Required To Start? - Many franchisors are requiring a specific amount of net worth plus a specific amount of liquid cash (after their franchise fee, of course) in order to own a franchise.
  • How Many Franchises Are Currently Being Operated? - Don’t be among the first 1 or 10 or, probably even 50 franchisees unless you’ve done this before. Brand new franchises offer all of the risk of starting from scratch with all of the restrictions of a franchise. Not a good combination.
  • Who else is running one of these franchises and what is their phone number? - You need to talk to a bunch of existing owners to get a good perspective on what you’re really in for. If they won’t give you phone numbers (and that’s a big red flag!), go look ‘em up in the phone book and cold call ‘em.
  • What training and ongoing support is offered? - You want to know exactly what they’re going to do. Will someone be with you in your store for a week after you open? Can you go back to “Burger U” anytime you want for free? AND get it all in writing.
  • What are your restrictions? - What are your boundaries with this franchise? Can you only do corporate-approved advertising? MUST you run specific amounts of advertising? Can you hire anyone you want? Can you use any supplier you want? These are the things you want to know before you get the legal department sending you letters.
  • What are your protections? - Do you have an exclusive geography? Is there a competitive analysis for all competition in that geography? Do they do expert site selection for you? If they’re selling franchises like water and letting the franchisees battle it out (as often happens in franchises without exclusive territories), that’s a bad franchise.
  • When can you spend a day with another local franchisee? - Go visit franchisees in other geographies. If he’ll let you, spend a day with the owner. Is this how you envisioned your business?
  • What are your mandatory contributions? - How much money do you have to send to the franchisor every month? Is that in addition to a percentage of sales? What is that percentage?
  • What do you get for your contributions? - Sales Leads? Area marketing? A grand opening celebration planned by the franchisor? Anything?

As you ask these questions to a bunch of franchisors, in addition to a lot of nervous smiles, you’ll get a complete look at what you’re in for.

SIDE NOTE: Most of the answers to the above questions, you’ll eventually need in writing. When a franchisor says something like, “Yeah - I think so…” or “I’m pretty sure…”, that is franchisor-speak for “No”. You want an unadulterated, unequivocal answer to your questions. Any other kind of answer you might as well figure is the opposite of the answer you were looking for.

And as you find that out, you’ll find that most franchises aren’t what you’re looking for. Finding the right franchise requires long days, weeks, and months of research. Don’t short-change the process or you’ll be killing your business.

Next In The Entrepreneurship 101 Series: Being Successful In Network Marketing


Enjoy the Search!

-Dan


Photo by: theotherway

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This entry was posted on Wednesday, January 31st, 2007 at 9:44 am and is filed under Entrepreneurship 101. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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