4 Advantages to Buying a Big-Name Franchise
With borrowing leverage, purchasing power and marketing prowess already in place, big franchises handle much of the legwork.
Hardy Grewal may not be as internationally known as Steve Jobs, Bill Gates and Howard Schultz, but his business is as much of a household name as Apple, Microsoft and Starbucks. Grewal went from corporate accountant to business mogul in one simple step: buying a Subway franchise.
That giant leap plugged Grewal into the power of a big franchise, yes, but, more importantly, into the bigger powerhouse that is franchising itself. Franchising added $880 billion, more than 140,000 new businesses and 1.2 million jobs to the nation's economy from 2001 to 2005, according to the International Franchise Association. IFA president and CEO Matthew Shay predicts growth will continue, even during the current economic downturn.
Grewal took full advantage of that power potential. Though he looked into other franchises, including smaller chains, he ultimately decided to buy a Subway location in 1989. Grewal figured a large franchise offered more sustainability in the long run and made expansion possible for an everyman like himself.
Two years after buying his first franchise, he says his "accountant brain started working," and he realized that by acquiring units, he could multiply his earnings by five, 10, 20 times. That's when he gradually started buying more units--at first, one to two a year, then two to three, then five more, then 10 more, until by 2004, he owned 25 stores.
Today, having sold all but three of his locations, Grewal serves as Subway's development agent for Los Angeles County and Orange County, a territory that earns the most sales in the entire system. In other words, he now helps others start their own franchise empires.
Grewal notes four big advantages to buying into a big system:
- Capital. This is simultaneously the greatest asset and the greatest obstacle to starting a business in this economy.
"If the brand is established and you can show net profits, the banks will lend money, even in this environment," Grewal says. "Even now, people are getting funds and buying and opening new stores."
- Purchasing Power. Forget stocking up at Costco. Subway purchases food, forks, knives, etc., for its more than 29,000 stores.
"That quantity gives you the advantage over someone who owns, say, five stores," Grewal says. "And those savings are passed on to franchisees."
That's particularly crucial in a food-related business, as food inflation puts more restaurants on the edge.
"We have purchasing co-ops run by franchisees, with locked contracts," Grewal says. "Prices have gone up, but not as much as they have with other [restaurants]."
- Competition. "In downturns, the brands with the strongest financial positions and reputations are more in demand," Grewal says, pointing out that even being the No. 2 brand in a category may not be enough to survive in a tough economy.
- Marketing. Subway dominated this year with its well-timed "$5 footlong" promotion. Grewal says it was an idea some entrepreneurial-minded franchisees started in their local market--the corporate advertising board got wind of it and took it system wide, and now "the numbers are mind-boggling."
Those numbers balloon in a big, corporate system that can afford national primetime marketing on all networks. "The parent company develops new products, does all the studies and focus groups to make it a stronger franchise company," says Grewal. "And the franchisees pool [advertising] money and can buy more."
See next month's column to find out whether it's possible for you to buy a big-name franchise
Entrepreneur.com readers: How did you finance your franchise? In this tight credit market,franchisees have to be more creative than ever in financing their franchise. What is the most creative approach you took to find franchise funding, or what is the most creative financing story you've heard from another franchisee?
E-mail your stories to email@example.com. Then check back to this column; in an upcoming month, we'll reveal the most creative financing stories of the bunch.
Janean Chun is articles editor at Entrepreneur, where she has been covering the franchising beat for more than 15 years. She can be reached at firstname.lastname@example.org.