Your Burning Franchise Questions
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Franchises play an integral role in our lives and American society in general. Most likely, you're a frequent customer at the local Subway franchise. Or you know people who have found success through franchising. Perhaps you've even considered purchasing a franchise yourself. If so, you probably have some burning questions you haven't quite been able to find the answers for.
We know the current economy and society have brought new concerns to the surface, so we dug a little deeper to find answers to the issues affecting you. We took six burning questions people are asking today and presented them to Michael H. Seid, managing director of Michael H. Seid & Associates, a West Hartford, Connecticut-based management consulting firm specializing in the franchise industry. Here's what he had to say.
Should I own my own business before buying a franchise?
It can't hurt, but it's not essential. Keep in mind, some franchisors would prefer that you didn't. The reason is, if you were in the same industry, you may have habits that they'd have to spend time breaking. You'd have [management] styles that may not be compatible with theirs, and the normal and natural thing would be for you to always slip back into your comfort zone.
On the other hand, having experience working in any business gives you discipline. You understand how to work with customers, meet deadlines and take on responsibility as opposed to relying on your co-workers and your secretary in a big company. All in all, sure, I would rather have someone who spent years in business, but it's a personal preference among franchisors.
Either way, a lot of franchisors realize that people who come out of training remember about 20 percent of it, and then they struggle for a while until they grasp the rest of it through practical experience in the [franchise] setting.
Over the past few years, I have built up significant equity in my home. Would it be wise to cash out some of that equity to invest in a franchise?
Given today's interest rates on home loans, yes. They're modestly priced. I would certainly be careful, as with any investment. There's no difference between investing in a franchise, quite frankly, and investing in a stock. If you invest in a very stable, secure [franchise] with a great history and good performance, there's not a lot of risk. If you get involved with a franchise that's a fad or that you don't know a lot about and haven't done your research on, no, I wouldn't invest a dime. But that's just an investment decision. Most people [use the equity in their homes] because it's their major asset and they can borrow against it, but you should make sure that what you're investing in is a rational investment. Don't jump into something just because the salesman is good.
I am 20 years old and interested in buying a franchise instead of going down the usual post-college career path. What are the obstacles in franchising for a young person?
Probably fewer than you imagine. There are going to be some franchise salespeople who will talk down to you, and you need to under-stand that you have to set them right and tell them you're a serious investor. If you're 20 years old, you have more enthusiasm than you have experience. You haven't seen a lot--you think you've seen a lot, but you haven't. You need an experienced advisor. You need one at any age, but at 20, you really do, and dad and mom aren't it, unless they happen to be franchise sophisticates. You should definitely find yourself an advisor [and] a good lawyer. Go to the International Franchise Association's website and learn about franchising, or buy a book on franchising to get an understanding [of how it works]. But at 20, some franchisors are going to speak to you with less respect.
Let's be honest about it--franchisors are in the business of selling franchises. They're in the business of expanding their systems, and if you come to the table with enthusiasm and knowledge, you've done your research, have the money, can show the franchisor you're serious and have a good track record, they'll treat you seriously. But understand that you need to do more than just believe everything the franchisor says. Twenty-year-olds are more gullible than 50-year-olds--most of the time.
In the industry today, we put a lot of emphasis on veterans--kids in their 20s coming home from military [service]. My firm puts out a scholarship every year to put a veteran in college, for example. [Some] franchisors have VetFran [the International Franchise Association's Veterans Transition Franchise Initiative], which offers a discount for veterans. On one level, we're doing it out of respect for the soldiers, regardless of their age. And from the franchisors' point of view, they're doing it because they want to sell franchises.
Making the Transition From Corporate Life
I am currently working a corporate job and am planning to buy a franchise, but I'm not sure how to time the transition. Should I sign the franchise agreement and purchase the franchise before quitting my full-time job?
Yes, absolutely. More important than that, you've got to realize that the franchise is not going to immediately [produce] the cash you used to get as a paycheck. It's going to lose some money. It's kind of nice to have health benefits, make home payments and buy groceries. So if you're in a relationship, both of you shouldn't quit your jobs. Somebody should keep their job until the business can produce enough income to support the family. That may be a year, that may be 10 years, but at least that income is coming in. You can always hire someone [to help with the franchise], but you don't want to give up your health benefits.
While you keep your full-time job, you can go to franchisor training for two weeks using your vacation time. A lot of people do that. You can work weekends to find locations. You can do a lot of [preparation] and not give up your job and your paycheck. I recommend to people that if they have unlimited wealth and they can leave their job, sure--it's much better to have a clean mind and focus on the business. But in the real world, Johnny and Janie want to have breakfast, and you want to be able to make decisions without having the pressure on you. As long as you have a paycheck coming in, you can pass up that site that looks pretty good and wait for the site that looks really good. If you don't have a job and need a paycheck really quickly, you may take that B site instead of waiting for the A site.
I have some personal savings, but have not yet started saving for my retirement. Would you suggest investing the savings I do have in a franchise, and using the franchise as an investment I can live off of in retirement, rather than investing in a 401(k) or an IRA?
It depends on how old you are and how close you are to retirement, and on whether you are a risk-taker or not. And again, it comes down to how secure [the investment is]. If you're in your 30s, it's a different answer than if you're in your 50s. In your 30s, you're entitled to make mistakes. If you don't make mistakes in your 20s or 30s, you'll have a miserable retirement, because you would've taken no risks in your life. So if I'm in my 20s or 30s, the answer is, "Absolutely I'm going into it, because if I screw up, I can get a job and I'll rebuild." If I'm in my 50s, living with my children in my 70s if I foul up is not going to make me feel good, and that's what I'm facing.
Overall, the answer is yes [but if you're in your 50s, be extra careful]. A business is something you can sell when you're ready to retire, and when you sell a business that has a great cash flow and is under a great brand, that is a heck of a retirement. That's better than any 401(k) I know of. Would I be doing it with an Average Joe franchise? No. Would I do it with a solid brand? Yes.
I have started to research a franchise I'm interested in, and most of the franchisees I've talked to are happy with their investment. However, there's a small group of disgruntled franchisees who are very bitter and vocal against the franchisor. How much weight should I give these franchisees' opinions in my overall decision?
A lot, but in every franchise system, [some] people are unhappy. There are unhappy McDonald's franchisees and unhappy Wendy's franchisees. But you have to listen to why people are unhappy. You should always call the people who have left the system. I tell people they should call every franchisee. If that's unreasonable, they should at least call a few of the franchisees in the system and find out what is going on, [and then] call as many of the people as possible who have left the system to find out why they left. Understand that those people are going to have a negative viewpoint. But it's important to know why. They're not all irrational, but you have to listen to the specific [reasons] why they're unhappy. If they're unhappy because the franchisor wouldn't let them do things their own way, that's a good franchisor. [It's] protecting the brand. They're just bad franchisees. If, on the other hand, the franchisor didn't provide them with field service, [it] didn't provide them with the contracts that were promised, if every time they spoke to the franchisor, the franchisor threatened to sue them, I'd listen to that, too. I certainly would not ignore the people who aren't happy.