Opening a Franchise Cuts Risk in Recession
The Great Recession has made some would-be entrepreneurs skittish about starting a business from scratch.
For them, it may make sense to buy a business franchise. While franchises have taken a hit, PricewaterhouseCoopers (PWC) forecasts that the number of franchises will expand 2% from 883,292 last year to 901,093 in 2010.
“Franchising lets people get into business for themselves, but not by themselves,” says Alisa Harrison, vice president of communications and marketing at the International Franchise Association in Washington. Here are a few things to keep in mind when considering becoming a franchisee.
Advantages over entrepreneurship: Unlike a typical startup, a franchise comes with automatic brand recognition, meaning the franchisee doesn’t have to invest in getting the word out. Franchisees also receive operational assistance and management support from headquarters.
“Becoming a franchisee is a natural for someone willing to let other people make mistakes on their behalf in advance,” says Jason Earle, founder of 1-800-GOT-MOLD, a mold-detection company best known for the mold-sniffing Labrador retrievers it employs. Founded in 2003, the company recently secured its first franchisee and is looking for more. (Earle, incidentally, holds a Guinness record for acquiring his stockbroker’s license at age 17.)
“We’ve really built something that’s turn-key,” Earle says. “You walk through the door, and you get a four-legged partner who becomes your calling card.” Disadvantages compared with entrepreneurship: The difference between starting a business and buying a franchise is analogous to the difference between building a house and buying a condo. Much as condo owners must adhere to the rules of the condo board, franchisees are required to operate their franchises according to a franchisor’s preexisting restrictions and procedures. Thus, the franchise model doesn’t leave much room for creativity, which may rankle entrepreneurs who are used to making and breaking their own rules. In the franchise model, they are required to play by the rules of the brand.
“You don’t buy a McDonald’s and decide you want to sell hot dogs,” says Alisa Harrison, vice president of communications and marketing at the International Franchise Association in Washington. “You have to follow the system that has been laid out. Veterans make awesome franchisees because they’re very disciplined and are used to following a system.”
Investment requirements: The initial investment that franchisors require depends on overhead and the complexity of running the business. The commercial cleaning company Jani-King, which boasts more than 12,000 franchise owners worldwide, offers investment opportunities for as little as $3,000. McDonald’s, on the other hand, requires a minimum of $500,000 in non-borrowed assets before it will consider a potential restaurant franchisee.
What to look for before you leap: All franchisors are legally required to provide a disclosure statement, also known as the Franchise Disclosure Document (FDD) at least 10 days before the signing of a franchise agreement. Potential franchisees should read through the document for basic information such as additional fees, designated sales territories and available training programs. But they should also look for red flags such as litigation and bankruptcy histories. It makes sense to scour the Web for chat group discussions about any given franchises. “If a group of franchisees isn’t happy, they’re going to talk about it,” Harrison says.
Best bets: The fastest-growing franchise fields include quick-service restaurants, real estate and retail food, according to PricewaterhouseCoopers. Franchisors in these fields include Great American Cookies, which requires an investment between $170,000 and $300,000; the home-staging company Showhomes, which requires an investment of $43,800 to $74,000; and the drive-through coffee franchise Mountain Mudd Espresso, which requires an investment of $105,000 to $1.9 million.
For more information, visit www.showhomesfranchise.com
Tags: Franchise Advice