Five Franchising Strategies Owning and operating isn't the only way to build a franchise biz. Here are five other strategies to get you in the game.

You'll find many routes to owning a small business andseveral intriguing paths to participating in a franchise business.It's not "one size fits all"--not even close. If youthink of franchising in one dimension, you'll limit youropportunities. There are so many ways to get into franchisingbeyond building and operating a new pizza restaurant. Keep yourears open for opportunity, and prepare to be flexible. With theright approach to franchising, you'll quickly find yourself onthe road to career satisfaction and financial success.

Here are the five most common ways you can participate in afranchise program:

Go the Classic Route. This is how most people think offranchise opportunities: You buy a new franchise, find the locationand build it out yourself. It's all new, and it's allyours. You roll up your sleeves and plunge into your new businessas an owner/operator.

This is the classic route because it is precisely how so manythousands of franchisees built their multiunit empires, and itdescribes how much of the franchise world still operates. Newer(and hotter) franchise offerings usually provide the classic routeto business ownership.

"We're a young franchise program, and we're openingnew markets all over the country. Most of our owners have noexperience in publishing a fashion magazine," says TylerAllen, CEO and franchisor of a new publishing venture,Industry magazine, based in Orlando, Florida. "Openinga new market and starting from scratch is currently the only waysomeone can own an Industry magazine franchise."

Among the advantages of this approach is the full new term ofthe franchise agreement, allowing you the maximum time you needover the term of the agreement to recoup your investment. You alsohave the opportunity to build your business from scratch. When youopen the location, it's brand-new and ready for business; anymistakes made in the establishment of the business will be yourown. You don't inherit anyone else's problems or hiringmistakes. You hire your entire team, and your direct involvementwill make you the owner, manager, boss and unquestioned captain ofthe ship.

The best upside: The new concept could take off and become asmash success--and you got on the elevator at the lobby level.

There is always a downside, of course (business imitatinglife?). With the classic route, the biggest possible downside isthe untried location. It can make or break a retail business, andyou may have a substantial sum of money riding on that outcome.Second, your team is untried, so the training and opening supporthad better be solid. The startup phase of the franchise at a newlocation will drain your cash until the operation's growingrevenue begins to carry the payroll, inventory and other expenses;so plan carefully, and never go into a startup franchiseundercapitalized.

Buy an Existing Franchise

The strongest advantage of buying an existing franchise businessis that you have a chance to examine its performance numbers. Youknow what the sales and expenses were in the past year--and evenearlier, assuming the records are accurate (ask the franchisor toprovide a royalty payment record so that you can cross-check thekey sales numbers). You have an opportunity to discuss the businesswith the owner, interview key employees and observe the operation.You can research the industry and gain an understanding ofobjective valuations in that business sector. In an importantsense, you also lower your investment's uncertainty . . . andyour own risk.

Where will you make your money? Maybe you can identify astruggling franchise that needs a new shot of leadership andenthusiasm for the business. If you're successful, you'llbuild a strong business out of a weak one, and reap the financialbenefits.

Buying an existing franchise business means that you'resubject to the transfer provisions of the existing franchiseagreement, which can be very restrictive. Many franchisors reservethe right of first refusal on all proposed transfers, so it'spossible that you can end up putting a big effort into a formalpurchase offer only to have the franchisor match it and take youout of the picture.

The franchise agreement might also impose a hefty transfer fee,often expressed as a percentage (5 to 15 percent) of the purchaseprice. This will, of course, fall on your shoulders, so include itin your calculations and your price negotiations. You might alsonegotiate with the franchisor on the transfer fee, especially ifyou're buying a troubled franchise. A new, enthusiastic ownermay be the answer to the franchisor's prayers; the company maybe more than willing to lower or eliminate the transfer feealtogether just to help you take over the ailing franchise.

Your major risk: hidden problems of the previous owner'smaking. No one likes surprises in a new venture, and these hiddenproblems will cost you money you didn't plan on spending. Theyrange from unhappy supply vendors to dishonest employees todefective equipment--and they simply come with the territory. Addan "unexpected problems" line to your opening budget, andplan for the unexpected.

Some may call the act of selling a house in California,purchasing another in Florida, and buying a franchise--all within atwo-month period--a midlife crisis; but for Sonja and Mike de Lugo,it was an opportunity they couldn't pass up. They had beenlooking for an existing franchise to purchase when a FastSignsfranchise went on sale in Gainesville, Florida--an ideal location,since it was close to Mike's family.

Taking over a franchise that had been in business for sevenyears granted the de Lugos, both 41, a comprehensive database ofexisting customers who were already familiar with the FastSignsfranchise--which specializes in signs and graphic solutions.However, they were also left with a negative reputation to correct,due to what Mike calls "lack of managerial enthusiasm."They immediately purchased new equipment to increase theirproduction rate and informed the community of the change inownership.

Though nervous about buying a failing franchise, the couple wasconfident in the system since two of their family members werealready FastSigns franchisees and could testify to thefranchisor's willingness to help. Also, Mike used his previous20 years of experience as a general manager at hotels in the Hiltonchain to his advantage. He knew the business, knew how to talk topeople and had contacts, so the couple targeted the hospitalityindustry as primary customers.

Within eight months, the de Lugos had managed to triple therevenue from the year before; they ended 2004 with estimated salesof $800,000. The de Lugos' success has solidified theiropinions about existing franchises. "There may be locationswhere there's not much competition and it would make sense toput in a new one," says Mike. "But it's just my ownpersonal opinion that I would stick with the resale."

Buy Master Franchise Rights

If you're looking for a more aggressive role in thefranchise system, you could check into becoming a masterfranchisee. The details of the master franchisee concept differfrom one system to the next, but the basics are the same: A masterfranchisee is appointed to serve as a local or regionalrepresentative of the franchisor, providing training and fieldsupport, and is compensated for those services, often by receivinga percentage of the royalty revenue generated in the assignedterritory. The master franchisee may also have recruitingresponsibilities, generating commissions on franchise sales madefrom his or her efforts.

The appointment as a master franchisee is usually extended toexisting franchise owners who prove successful in their operationsand are interested in expanding their involvement in the system. Ifyou enjoy teaching and want to super-size the return on yourfranchise investment, inquire about master franchise programs.

It's the involvement in franchise sales that draws manyinvestors to master franchise programs, and it is there that thelaw imposes the most restrictions. As a third party participatingin a franchise sale, the master franchisee will be considered a"franchise broker" and, as such, must be included in thecompany's Uniform Franchise Offering Circular, disclosingbusiness experience and litigation history. The franchisor mustsubmit a "salesman disclosure" form to most registrationstates. In a few states, a broker must independently register withstate authorities.

A master franchise is often confused with a subfranchisingprogram, but there's one important distinction: A subfranchisoroffers and sells franchises directly, for its own account; and, ofcourse, a master franchisee does not sell franchises directly. Amaster franchisee typically generates leads, meets with andqualifies prospective franchisees, and sends them on to thefranchisor for closing.

A master franchisee is the utility infielder of franchising.Success is measured by the ability to manage, teach and recruit,while continuing to operate your own franchise businesssuccessfully.

When Rich Giannini became involved with Action International, ahands-on business coaching franchise, not only did he lack anyprevious franchise experience--he barely understood the franchisingconcept. Nevertheless, in 1999, he confidently assumed the role ofmaster franchisee of the Nevada territory and took on theresponsibilities of marketing the business, finding entrepreneursto purchase franchises, and providing success coaching tofranchisees. "As a master franchisee, you have two fundamentalroles," says Giannini, 34. "The first is to find suitablefranchisees; the second is to help them becomesuccessful."

Giannini enjoys the freedom that being a master franchiseegrants him. Because he is free to set his own schedule, he canjuggle working at Action's head office--helping other masterfranchisees--with running additional businesses on the side,including a real estate and investment business. "There'sa fairly quick educational process," says Giannini."What's important is that you've got thatentrepreneurial attitude--that you'll go out there and get itdone, whatever it takes." He points out that his royalty fromthe sale of each franchise is fixed. In contrast, a regularfranchisee chooses the monthly rate to charge clients and is,therefore, more in control of his or her income.

Giannini advises potential master franchisees to look ahead 10years, examine their vision, then speak with different franchisees.Giannini says of becoming a master franchisee, "I [believed] Icould help people more by being able to sell multiple franchisesand have a lot of people helping business owners rather than justme. My vision better suited the master franchisee side than theindividual franchisee side."

Absentee Ownership & Conversion Franchises

Be an Absentee Investor. For the right kind of business,with the right employees running that business, it is entirelypossible--though rare--to own a franchise business and not bedirectly involved in its management. Rare, I think, because it ishard enough to own and operate a successful small business evenwhen you're on the floor every day.

What type of business lends itself to absentee ownership? First,it must be a business that doesn't have valuable inventory. Ionce had a senior executive of a muffler franchisor tell me hisshops couldn't be run by employee managers because too much ofthe inventory would leave at the end of the workday. Only an owneron the premises is sufficiently motivated to prevent that fromhappening.

Second, the business must have sufficient margins to beprofitable after the expense of having a reliable manager. So manyfranchise businesses have razor-thin margins that allow for theowner to take out not much more than a modest salary. So the keyquestion then becomes: What drops to the bottom line for theowner?

Service businesses with training programs that can support anemployee manager may meet these qualifications. It would be amistake to assume that any franchise can prosper with an uninvolvedowner, but with the right program and a handpicked management team,it can work.

Buy Into a Conversion Franchise. A conversion franchiseallows an existing independent business to affiliate with anational brand. The classic conversion program is Century 21 RealEstate Corp., which converts independent real estate brokers andallows them the benefits of a strong brand affiliation whileallowing them to continue using their individual identification.Affiliation programs have been launched by a variety ofprofessional service providers, such as handymen, home-repairprograms and hotel chains.

Conversion franchise programs offer an attractive balance ofbrand identification and buying power. If you're operating anindependent business and long for the competitive advantages ofbeing tied in to a national reservations system or receiving localleads generated by a national or regional advertising campaign, youmay want to consider joining a franchise affiliation program inyour business category.

Can you use your current business name, or do you have tocompletely identify with the franchisor's brand? That dependsentirely on the system. The real estate affiliation programs oftensplit the identification between the national brand and the name ofthe broker/franchisee. This is the approach taken by one of thenewest real estate franchise systems in the market, Envirian LLC,in Reston, Virginia. Lee Konowe, founder of Envirian, doesn'tinsist on rigid uniformity with the solitary display of theEnvirian name. "We are flexible on how the Envirian name iscombined with the broker's name or the town name, orboth," says Konowe. "We want our brokers to capture thevalue they've built in their names, so they can maximize theirmarketing power as members of the Envirian system."

Often, the fees paid for an affiliation program are considerablylower than those of traditional franchise systems, reflecting thefact that the franchisee is an experienced business owner and needsless training and less support than someone new to thebusiness.

Franchising doesn't exist in a single investing dimension;it has developed in ways that allow virtually any level of investorin any business situation to participate. The lesson is clear: Keeplooking until you find an investment that's well-structured foryour interests and needs, and you'll probably find it in thefranchise arena.

Andrew A. Caffey is a practicing franchise attorney in theWashington, DC, area; an internationally recognized specialist infranchise and business opportunity law; and former general counselof the International Franchise Association.