A Perfect Match
Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
When Cindy Miller started searching for the perfect franchise in 1993, she had just one stipulation: "Anything but fast food." After two years spent considering a variety of businesses, she and her husband, Jim, opened a Blimpie Subs & Salads shop in November 1995.
Even though she initially thought fast food wasn't right for her, Miller, who now owns two shops in Terre Haute, Indiana, found that it was the best business for her. "It has been going really well," says Miller. "I'm enjoying the work and we've been very successful. Our first store has done well since the day it opened."
During her long search for the perfect franchise, Miller learned a number of important lessons, including the necessity of keeping an open mind.
"We looked at several businesses, but found that a Blimpie franchise fit our needs the best," she says of the 33-year-old company, which is the second largest submarine-sandwich franchisor in the world. "The market wasn't oversaturated, and the company is established, but positioned for growth."
Miller also discovered that no two franchises are the same, just as no two potential owners are alike. The perfect franchise for one person might be a poor choice for another.
"Choosing the perfect franchise is no simple task," says Mark Siebert, president of Francorp, a franchise-development and consulting firm in Chicago. "The decision should be made carefully, because it's one you have to live with."
While many potential franchisees start out looking for the perfect franchise by examining various businesses, they're looking in the wrong direction, says Siebert. "You don't make a decision by examining businesses first," he says. "You start out by examining yourself."
The Life of a Franchisee
Your first step is to make certain being a franchisee is right for you. Although as a franchisee you are essentially your own boss, you may not be as unfettered as an independent entrepreneur.
"The advantage of being a franchisee is that someone else has taken a lot of the risks in the business and has perfected and refined a system," Siebert points out. "To be successful, you must follow a prescribed set of rules."
"An independent entrepreneur makes all the decisions, whereas a franchisee listens and follows a game plan," adds John Campbell, CEO of Franchise Masters, a franchise-development and consulting company in Minneapolis.
One thing remains the same for entrepreneurs and franchisees, though: Both are responsible for their own success. "Don't think that because you become a franchisee you'll automatically become successful," says Campbell. "The franchisor is only providing the tools; the rest is up to you."
What Do You Want from a Business?
If you decide you are able to follow a game plan, your next step is to do some soul-searching to discover the type of business that best suits you. This inner examination includes considering your goals and objectives, personality, likes and dislikes, strengths and weaknesses and personal circumstances, including finances.
Answering the following questions will help you get an indication of what type of franchise would be right for you:
- Are you comfortable in a sales role? If selling isn't your thing, don't buy a business that will involve heavy sales activity.
- Do you work well with the public? A restaurant isn't a good choice if you don't like greeting customers, unless you have a partner and can stay behind the scenes in the kitchen.
- Do you work well with employees? This is an important consideration if you will need to staff your business.
- Do you want to sell a product or a service? Do you like to perform services, such as housecleaning or car repair, or do you prefer to offer a tangible product, such as bagels?
- Do you mind getting dirty? If getting grubby turns you off, don't buy a business like a quick-lube franchise, a janitorial service or a landscaping business.
- Why are you buying a franchise in the first place? Do you want to amass retirement savings and create a business to pass on to your children? Or do you simply want a steady job? To accumulate a large amount of money, you will probably have to invest in a newer franchise that has the potential for high earnings, as opposed to a more predictable, established franchise that pays you a moderate salary.
- What working hours do you prefer? If you are averse to working long hours seven days a week until the business is established, stay away from retail and restaurant ventures. Likewise, if you want your weekends free, don't go into real estate, which requires working Saturdays and Sundays. If you prefer working days, stay away from a janitorial-service business. Most cleaning occurs between the hours of 6 p.m. and midnight.
- What are your personal interests and hobbies? We tend to do best with what we love. A hobby franchise involves a hobby or pastime which you enjoy, such as a baseball-card shop, a kite store, a Jazzercise studio or a craft- and-gift boutique. Do you have a hobby that you can pair up with a franchise? If so, look at possible related franchises, but do so with a level head.
"Although there are many hobby businesses, such as aerobic franchises, they tend to be financially limited," Siebert says. "If you just want to get paid for what you like to do, then such a business may be fine, but if you want to make a great deal of money, you're better off getting a different franchise that meets your financial needs."
- Can you start a business that will enable you to use previous contacts? If you've been in the corporate world for years and have built an impressive roster of contacts in the human-resources field, it would be a shame to not put that contact list to good use.
- Do you have children and need a kid-friendly atmosphere? If you would like your children to learn from the business, a bookstore, a restaurant or an accounting business might be an appropriate choice.
New or Established Franchise?
An important consideration is whether the franchise is new or well-established. Each has its benefits and its drawbacks.
Established franchises have a number of advantages in their favor, including name recognition, a tested business-operation plan and many other successful franchises for the new franchisee to look to for encouragement, direction and inspiration.
Some of the negatives of such a business include a possibly oversaturated market and a lack of prime locations, which make it more difficult for the new franchisee to be profitable. While an established franchise may have diminished profitability because of increased competition, the potential for growth and the capturing of market share for a new franchise is high.
If you sign on with a franchise in its early years, you'll tend to get the prime locations, and if the business is successful, your return is likely to be higher than if you'd chosen an established franchise. There is the risk that a new franchise won't survive, however, leaving you without financial support. There is also a risk that the concept of a new franchise won't survive, and your business will fail. Because the franchise is new, there are fewer proven guidelines for you to follow and, as a result, you can be less sure of what works. An established franchise comes with a "road map" of instructions and guidelines that have been proven to work.
Whether you choose a new franchise or an established one will depend on your personality. "Individuals who choose newer franchises tend to have a higher risk tolerance," says Siebert. "Because the concept is untried, they are making a much more risky investment. They may also need a high return on their investment, which only a new franchise can generally provide."
When Doug Bauguss chose to buy an Impressions On Hold International franchise, he did so partly because it is a new business that has a high potential for growth.
"You hear people talking about ground-floor opportunities, and that's what this is," says Bauguss, who started his customized, on-hold phone-advertising business when he bought the territorial rights to the entire Phoenix area in February 1995. "The market is unlimited and the potential for growth is phenomenal."
Steve Dunkle also got in on the ground floor of The Connoisseur, a gift-service franchise based in Redondo Beach, California, that operates through retail stores. The Connoisseur features premium wines and champagnes with personalized messages printed on each label. This February, he and his wife, Diane, opened their The Connoisseur franchise (the franchisor's sixth store) in Portsmouth, New Hampshire, which happens to be the first to open east of Colorado.
"I chose a new franchise because, at heart, I'm an entrepreneur, and the higher the risk, the higher the potential for reward," Dunkle says. "I wanted a franchise that could be grown--one with no limitations--so that I could create a retirement fund. With the business still in its infancy, it can be lucrative for myself and others involved in the start-up."
Elements of a Promising Franchise
Regardless of whether a franchise is new or established, it's important portant that it has made its mark with a niche in its industry and that it is still open for growth.
After deciding to buy a fast-food franchise, the Millers narrowed their choice down to Blimpie because the company hadn't already oversaturated the market in their town.
"There was a burger joint on every corner, but the sub-and-salad market was still really open," says Miller. "From our research, we could tell that Blimpie was set for growth. So far our predictions have come true. We've just opened a second store."
Another important consideration is the relationship between the franchisor and its franchisees. "A golden rule is that the franchisor should treat the franchisee as a working partner, and never like someone they look down on," says Campbell. "The franchisor has to understand the equation of franchising, and that the franchisee is the most important part of that equation."
A big part of Bauguss' evaluation of Impressions On Hold involved taking a close look at the relationship between the franchisees and the franchisor.
"I really liked the fact that they are dependent on their franchisees," Bauguss says. "They couldn't exist without us, and we couldn't exist without them. The relationship is win-win."
To find out what the relationship is like between franchisees and franchisors in a particular system, talk to existing franchise owners and visit the corporate headquarters to meet with company officials.
"Don't talk to salespeople, who you'll probably never see again," says Siebert. "Meet the people you will be working with. Make sure that you have confidence in their ability and product, and that you can get along with them, because this will be a long-term relationship."
When he was deciding whether or not to purchase a Connoisseur franchise, Dunkle and his wife flew to Southern California to meet with the company's president, Sandy French.
"After meeting with Sandy, we knew the business was right for us," says Dunkle. "Sandy allows creativity within certain guidelines, which really appealed to us. I could tell that the opportunity was very much a win-win, team-oriented one."
When calling existing franchisees, don't ask them easy questions such as, Do you like the franchise? "Ask quantifiable questions, such as: `How much support do you get from the franchisor?'" suggests Siebert. "How frequently does a company representative visit? What services do they provide to you? How much money are you making? How long did it take you to break even?"
Miller called 30 franchisees before deciding to buy a Blimpie sandwich shop. "I asked them a lot of questions, such as if they were happy with what they were doing, what their sales and expense numbers were and what kind of support they got," she says.
How to Investigate a UFOC
An important part of deciding whether or not a franchise is right for you is investigating the Uniform Franchise Offering Circular (UFOC). Required by the Federal Trade Commission, this document discloses extensive information about the franchise, covering 23 subjects.
The UFOC should be reviewed carefully, because it provides information on some important points, such as your anticipated earnings. Franchisors aren't allowed to make earnings claims, so you must scrutinize the UFOC to get a good understanding of what kind of earnings you can expect.
Also look at the company's audited financial statements, because they can give you a big clue as to the average revenue of a unit.
"If a franchisor reports $1 million in annual royalty revenues and they charge a 10 percent royalty, then the total network volume is going to be $1 million divided by 10 percent, or $10 million," Siebert explains. "Divide that by the number of franchises in the system and that will give you the average reported revenue per franchisee."
Siebert cautions that the above formula is less reliable when the business is a new, fast-growing franchise, but it can give you a point of reference to consider.
Another thing to look for in the UFOC is current or past litigation against the franchisor. What is the nature of the litigation? Although allegations don't necessarily mean the lawsuit is founded, litigation is a red flag. Also make sure the franchisor hasn't been involved in a bankruptcy.
You can also find in the UFOC an indication of the financial strength of the franchisor to withstand a downturn in the market, as well as the franchisor's profitability and significant net worth.
The UFOC includes a list of all the franchisees currently in the system. Experts suggest contacting as many franchisees as you possibly can and asking them about their earnings and profitability.
Another critical item to examine is the franchisee-turnover rate. The UFOC lists how many franchisees have left the system in the last three years. If only one percent or two percent have bowed out, the franchise is probably a low-risk venture.
"If the amount of franchisees who have left is significantly higher," says Siebert, "then you need to start looking at the business from the standpoint of how much risk you are really taking on."
Finally, before signing, have a lawyer experienced in franchise law review the UFOC and related contracts to make sure you are getting a fair deal.
Whats Hot In Franchising?
Looking for a franchise opportunity that is popular now and likely to remain in demand? Consider the following franchise opportunities suggested by franchise consultants John Campbell and Mark Siebert.
- Amateur sports, including equipment and tournaments
- Baby boomer services
- Children's services
- Computer-related businesses
- Employee training
- Internet-related businesses
- Medical services
- Natural products, including foods and vitamins
- Niche food services, such as bagels, pretzels or rotisserie chicken
- Pet stores
- Senior services
Blimpie Subs & Salads, 2501 Ohio Blvd., Terre Haute, IN 47803, (812) 238-7827.
The Connoisseur, 712 Islington St., Plaza 800, Portsmouth, NH 03801, (603) 431-3100.
Franchise Masters, 1000 Shelard Pkwy., #320, Minneapolis, MN 55426, (800) 328-4158.
Francorp, 20200 Governors Dr., Olympia Fields, IL 60461, (800) 372-6244.
Impressions On Hold International, 5717 N. Seventh St., #300, Phoenix, AZ 85014,