Tears running freely, my head fell into my hands. The steel gray February day was fitting for the moment as Kathy (my partner, investor and significant other) and I, after three weeks of spirited lament and seven months of struggle, agreed to swing the axe across the neck of Auto Exam, our franchised business.
The doors were closing for good. My pride and ego were suffering, and my desire to continue the struggle was strong, but Quickbooks told me a sad story: For the next year, things were only going to get worse. Just before dusk, I called Ricky, our only employee, and gave him the proverbial apologetic handshake-effective two weeks later.
Publicizing this manifesto of personal failure is a bit of an embarrassment, but the years since have healed my wounds. I've decided it's time to help you avoid making the same mistakes.
Todd D. Maddocks is a franchise attorney and small-business consultant who is presently the CEO of The Worldlink Group, as well as Entrepreneur's "Franchise Focus" columnist. You can reach him at TMaddocks@aol.com.
In Search For The Right Franchise
The financial leap you take toward freedom depends mainly on your desires and experience. With my tenure as a franchise attorney, I knew franchising could be a wonderful way to get started down the path to entrepreneurship. I first realized this when I began meeting franchisees of the Pearle Vision Center chain as an attorney for the company. As an insider, I was entitled to review the financial performance of the chain. When I saw how much money the better franchisees were making, I was flabbergasted.
What is lurking in the franchise world? Check out the Franchise Opportunities section and read up on some excellent franchises.
Company founder Stanley Pearle was a pioneer in applying retail attributes to what was a pretty mundane medical practice, and customers flocked to Pearle Vision Centers with profitable results. For example, while a customer paid about $20 for scratch-resistant coating for a pair of glasses, the incremental cost to the franchisee was about 40 cents.
If you wear glasses, you really don't want to know what the margins are on those $200 frames, but suffice it to say, Stanley Pearle helped create a lot of millionaires. I witnessed a great many married couples living and succeeding together, both partners engaged in their mutual success and enjoying the freedom that being self-employed with extra money can bring. These franchisees were living the dream; they had their freedom, which was exactly what I wanted.
The search for a franchise we could afford took about six months, until we found a little company called Auto Exam that had just started franchising in our hometown of Dallas. Kathy and I loved the Auto Exam concept because it was homebased, we could afford the risk, and the business concept used intelligence, diligence and technology to help people distinguish the great used cars from the lemons. We knew customers would appreciate witnessing our ASE certified mechanic perform a 120-point check and use a handheld diagnostic computer to provide them with a written status report.
Hearing Existing Franchises' Experiences
We had done our homework, and the concept gave us a good feeling. In researching, we called existing franchisees and were encouraged by their responses, but we failed to ask them one key question: "Are you making any money?"
When you call franchisees in a system, they're often struggling with validating their decisions. I've discovered they'll usually inform you that it's going great, sales are growing, they'd definitely buy another franchise and they're satisfied with the results. These are the answers you want to hear when you've already become excited about a franchise opportunity. The tendency is to press no further. However, when you ask whether they're making money, the facade drops.
If you really want to increase your odds of success, press them to tell you exactly how much they made during each year they've been in business. You may find it took them two years to make a dime. In our case, had we asked, we would have learned our future fellow Auto Exam franchisees were barely surviving, and we were the reinforcements.
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Notwithstanding popular perception, buying a franchise is still a somewhat risky proposition. Of course, that's true for just about everything worth working for, but the level of risk in a franchised business is very uncertain.
Plenty of statistics floating around indicate a high percentage of franchisees are successful. For a number of reasons, however, you should discount those platitudes. Consider, for instance, how success is measured in the franchise industry. In some franchise surveys, the success of franchising is measured by comparing the total number of franchises that are open to the number of franchises that have closed during a given period. Unfortunately, owning a franchise that's "open" is quite distinct from making money while you're open.
According to Bob Purvin, a franchise attorney and the founder of the American Association of Franchises and Dealers (AAFD), AAFD's definition of a successful franchise is one that pays all its bills, as well as a wage to the franchisee if he or she works on the premises in a managerial capacity, plus at least $1 profit at the end of the year. That's certainly a more accurate baseline for the definition of success, but these results sound about as exciting as kissing your aunt. My theory is, if you're risking your own capital for a venture, you're successful when you start earning as much as you could have made in the "real" job you're forsaking.
Bring out your measuring cups-read Now You're Cooking to see what truly gauges franchise success.
Sunday, 7 a.m. The ringing phone opens my business day. It's a customer who needs a car inspected. Most of the day will be spent working on tax returns, corporate motions, employee issues and banking.
We worked ourselves silly promoting our business; and with limited funds, we engaged in guerrilla marketing with a passion. We set up a booth at the local fair, created a newsletter, advertised in coupon books, sent the kids into mall parking lots armed with windshield announcements, called on auto dealers and advertised in the paper. We did what the franchisor told us to do, and our sales were climbing, but most of our business came from the Yellow Pages ad placed by the franchisor. Although we had become the sales leader for this young chain, we were still subsidizing our business when we realized things were worse than we'd thought: A fellow franchisee shut down because he could no longer exist on his income.
Failure has a bad reputation for hanging around and dragging down those surrounded by it. If you have ever been on a high school team that sadly never won, you can understand the interpersonal dynamic that occurs when blame is assigned. Accordingly, the strength of being engaged in a franchised business with other franchisees that pool their resources for adver-tising, assistance and national exposure can become your downfall when these synergies don't happen. I've seen this arise in mature franchise chains as older franchisees become comfortable with their success and quit caring about reinvesting their talent and finances into the company. Instead, they ride their cash cow to the detriment of others. When the franchisee down the street starts poisoning his customers, you'll feel the effect. That's why you want a franchisor that has fair rules and enforces them.
For a young franchisor, the domino effect of failing locations can be the fatal blow. Auto Exam couldn't get any further financing, and a rift soon developed between the CEO and the president. Soon, the management team parted ways, and the company was left to its founder, a well-intentioned auto mechanic inexperienced in fund-raising, management and the slew of responsibilities facing the typical CEO. Then, sensing the imminent death of the company, another new franchisee began withholding royalties. The resulting angst, confusion and miscommunication had devastating consequences: Our franchisor missed the Yellow Pages cutoff deadline.
It's a little hard to operate a business without anyone knowing you exist and, as the phone calls began to slow with the issuance of a new phone book, the impending reality of suffering for another year brought our business to a close. Fortunately, the closure of our franchise didn't destroy us financially. Yes, we learned an expensive lesson that was reflected in our credit card statements and foregone vacations for years to follow, but in making our investment, we'd stuck to the principle that we would not risk more than we could afford to lose. We covered our losses by pawning the equipment, and I had to drive a cargo van until our lease expired.
Your Story Starts Here
There are many franchise opportunities out there, and almost every franchise brochure claims a "proven concept." But what works in New York may not play too well in Wichita Falls (have you seen any bagel shops close over the past few years?).
Look for depth in the management team and remember that running a single successful restaurant or chrome-plating business uses different skills than running a national-caliber franchise company. Really look at the financial statements of your franchisor and be assured it has the capital to do what it promises. Also make sure your family members agree to work with you on the venture and that you have their unbridled support. The last thing you need is someone saying "I told you so."
Finally, don't forget to measure the opportunity cost of taking on obligations, as you'll have little time for anything else when you own a business. This is especially true when things don't go as planned.
By golly, we've got it! Check out the Franchise 500 for the best franchises in the business.
- American Association of Franchisees and Dealers, (800) 733-9858, ext. 100, www.aafd.org