Franchise Buying Guide

The Choice Is Yours

Franchises
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

Trien looks at franchising as the other side of the coin. He describes franchising as a two-way opportunity: Franchisors get the opportunity to grow without the massive capital expenditure required to form a chain, while franchisees get a proven way of doing business.

"A franchise is relatively safe, but not every franchise is safe," Trien cautions. "In many cases, franchisees simply bought themselves a job. The guy who is a successful corporate soldier, who was willing to become subject to a `totalitarian regime' because it promised him protection, wants to be part of a strong franchise organization where they're going to tell him how to march.

"People do get a lot of information and a lot of help from legitimate franchises," Trien continues. "The danger is that there are franchisors out there that don't have the capacity to fulfill their own plan, and there are a bunch that are themselves undercapitalized. You could be part of a franchise that dies; that is part of the entrepreneurial risk. It's not a risk-free decision."

John Reynolds, executive vice president of the International Franchise Association, a nonprofit organization in Washington, DC, disagrees, saying that franchises are much more likely to succeed than independent start-ups because of the evaluation process an entrepreneur must go through before buying into a franchise opportunity, and because of the business structure and support franchises provide to new franchisees.

"The reason that most franchised businesses tend to have a lower failure rate is that most franchise companies do a better job of financially qualifying the franchisee before they start the business," Reynolds says. "The reason that most independent businesses fail is due to inadequate capitalization--which means that people don't have enough money to live on while they're getting their businesses off the ground."

Reynolds questions statistics recently published by the Small Business Administration (SBA) which state that franchises have a success rate of roughly 62 percent over a four-year period, while independent start-ups succeed at a rate of 68 percent. He cites studies that place franchise success at a rate of 90 percent or higher annually, and at around 85 percent during a franchise's first five years.

"The SBA study tended to be out of line with a lot of other studies by the Department of Commerce or the Big Six Accounting Firms," Reynolds says. "The failure rate of franchises in those studies was a very low percentage, in the five-to-10 percent range annually. It's really hard to get data about franchised businesses that compares them to independent small businesses so you can make an apples-to-apples comparison."

Reynolds explains that franchises are also substantially different from business opportunities, in both the dynamics of operation and the support received from the parent company after investment.

"The shorthand, oversimplified difference, in most cases, is that with a business opportunity, all you get is a stack of business cards and the opportunity to go into business by yourself selling whatever it is the business opportunity is selling," Reynolds says. "With a franchise, you get a business system and the opportunity to go into business, not only for yourself but with the franchise system behind you. So you're going into business for yourself, but you're not by yourself."

Franchises generally require a substantial investment, which, Reynolds says, begins in the $25,000-to-$50,000 area and runs into the $500,000-to-$700,000 neighborhood, with the average start-up costing between $150,000 and $200,000. Reynolds says that with more than 65 types of business being franchised, the cost of investment is largely dependent upon the specific type of business.

Franchises that provide more overhead services, such as accounting, payroll and marketing services, or those with more intensive equipment requirements, are generally more expensive, according to Reynolds. He points to personnel services as an example of why franchises tend to have higher fees and royalties--because of the level of overhead services typically provided by the franchisor.

"You can select a franchise concept that is a mature system--one that's been in the business a long time, has a lot of franchises, a big market share, and some staying power in the marketplace--and you're going to have a more secure investment," says Reynolds. "Or you can choose a business that's a relatively new concept--one where they've been in business less than five years and have a smaller number of franchises. Your investment may not be as secure, but who knows--that may be tomorrow's big franchise success. So you've got that ground-floor opportunity. It depends on a person's financial goals."

DeeAnne Clowes became a franchise success story after relocating from Boise, Idaho to Atlanta. While contemplating a new career, she heard about Budget Blinds, a franchise operation that's been in the window-covering business for a little more than a decade. She looked at a few business opportunities, but a friend's success with a Budget Blinds franchise inspired her to buy one, too.

"I have a business and accounting background, and I was attracted to the way it was set up--that it had a structure to it, that there was a game plan, and that it all came in a package with company support instead of you being out there on your own trying to figure it out," says Clowes. Those factors and a start-up cost of around $12,000 made the endeavor attractive to Clowes, so she took the plunge.

Since the financial rewards are now going straight to her rather than to a boss or company shareholders, Clowes finds the hard work satisfying. Clowes' business has produced cash from the start, and has steadily grown to the point where she is realizing monthly sales of between $35,000 and $45,000 after just a year and a half.

"The experience has been wonderful. I thrive on it," Clowes says. "I don't think there are any drawbacks to a franchise. I know franchise owners who complain about paying royalties every month, but I don't mind. There is no way I could have done it without Budget Blinds' support. I used their office, their support and other franchisees (for information relating to the business) constantly when I started out."

The Franchise Pros:


  • Statistically, there is a low failure rate in the first five years of operation.


  • National and local advertising programs are provided for you, with costs covered by your franchise fees.


  • There is strong, continuous corporate support after the purchase.


  • Proven operational systems remove the guesswork from starting a business.

Cons:


  • A substantial initial investment is required, generally more than $10,000.


  • Ongoing fees or royalties must be paid to the parent company.


  • Rigid operating guidelines, as set by the franchisor, must be followed.

Resources:


  • International Franchise Association

1350 New York Ave. N.W., #900

Washington, DC 20005

(202) 628-8000.


  • Individual franchise sellers

(Federal disclosure regulations force franchises to make a wealth of information available to potential investors.)

Like this article? Get this issue right now on iPad, Nook or Kindle Fire.

This article was originally published in the May 1997 print edition of Entrepreneur with the headline: The Choice Is Yours.

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