True Franchise Confessions
What's it REALLY like to buy a franchise? Seven entrepreneurs share their experiences as franchisees.
Walk a mile in a franchisee's shoes, and you'll find that it could be a walk in the park--or over crushed glass. We figured the best way to know exactly what the franchisee experience is like is to hear it straight from the source. So we asked seven franchisees, ranging from happy to disgruntled, to anonymously share their unadulterated thoughts, opinions and advice.
And just in case you're not convinced by the franchisees, we also got two experts to speak out: Michael Seid, founder of franchise advisory firm MSA Worldwide and co-author of Franchising for Dummies, and Robert Zarco, founding senior partner of Zarco Einhorn & Salkowski P.A. in Miami, a law firm that represents unhappy franchisees and has been involved with over 350 franchise systems worldwide. (Seid's and Zarco's advice appears in italics; all franchisees names, which are in bold, have been changed.)
One aspect that David liked about the moving-service franchise he purchased in Alpharetta, Georgia, was its size: "If it's not a big franchise, it's easier to feel you're not just a number in the system, and the market's not saturated."
Seid: Smaller franchisors can't afford to let the first couple of franchisees fail, so they tend to get very personalized and over-serviced. That's good and bad--more good for the franchisee. A [smaller] franchisor may be struggling with critical-mass issues and be unable to [offer] TV advertising or proper brand advertising, so it really depends.
In his first year, David set the national record for first-year revenue--largely due to the time he invested. "I worked my tail off that first year or two--seven days a week, 12 hours a day," recalls David. As a new franchisee, don't expect easy hours.
Seid: We say in the Dummies book that if your family does not buy in, you're going to fail. The pressure of not seeing the family during the early days is deadly. We strongly recommend people self-assess before buying.
Phillip is a particularly happy inkjet and laser-toner cartridge recycling franchisee in Santa Rosa, California, because his franchise "gives [him] an opportunity to give back to the community and planet." Before buying, Phillip had to know that the franchisor's key employees were committed to these ideals. While researching a franchise, he says, you should ask who's on the board of directors, running the day-to-day operations and providing support.
Seid: You have to look at whether management is entrepreneurial enough to stay ahead of the curve, especially when dealing with a technology-related product.
Sometimes a franchisor allows franchisees to purchase supplies only from approved vendors. The franchisor then receives a percentage of those sales. Phillip's franchise doesn't require this; instead, it suggests several vendors and even negotiates discounted prices. "The only way the franchisor makes money is if we make money," reasons Phillip. "Find out if there's an approved vendor list, and how expansive it is. Ask the franchisor, 'Is this a discount?' and, 'Do you negotiate?'" Franchisors do have to let you know if they restrict you to approved vendors--it's in Item 8 of the Uniform Franchise Offering Circular.
Seid: If I, as the franchisee, am buying something for $1 and the franchisor can buy it for 50 cents and sell it to me for 75 cents, I'm thrilled--as long as they're not losing the ability to get me the lowest price by having fewer vendors.
A former entrepreneur, Sean is now a happy ramp-rental and sales franchisee in North Olmsted, Ohio, but he warns others not to equate being a franchisee with entrepreneurship: "A true entrepreneur wants to build from the ground up, but the franchise has already been built by the franchisor. You have to work within their system, even though you do, in a sense, run your own business."
Seid: Franchisees are not entrepreneurs. They're entrepreneurlites at best. An entrepreneur wants to chart his own course. Franchisees have to follow a set of rules, and they cannot violate a franchisor's brand. If you have to have things your way or think the franchisor's product needs to be improved or changed, you should start your own business.
While Sean's franchise was marketed as homebased, the franchisor made the logistical considerations clear, and Sean ended up renting storage space for the ramps. Make sure you find out exactly what a homebased franchise entails.
Seid: Ask, "Are there any zoning requirements? Do I need a van? What kinds of deliveries are coming in? Are customers coming to my house?"
Bradley spoke to franchisees the franchisor suggested and found all were doing very well. However, when he randomly stopped by another of the sandwich franchise's locations, he heard two hours' worth of horror stories. Bradley figured this location was the exception to the rule but now realizes he should've investigated further. "Don't just talk to the people the franchisor [provides]," advises Bradley. "Stop in at other stores and talk to the owners."
Seid: There's an anonymity over the telephone. Call and be very respectful. Say, "Hi, I'm looking to buy a franchise. Is now a good time to talk?" Call those who have left the system in the past year. Most of them are unhappy--you'll find out why.
One major contention Bradley has with his franchise is unrestrained growth. With no protected area, he found three stores placed less than a mile away from his Worcester, Massachusetts, location.
Zarco: The franchisor reserves the right to place a competing unit in a location regardless of the impact that will have on existing franchisees' sales, profits and incomes. When you join a franchise, you should have an expectation of reasonable impact. Factor into your business plan how your business will be affected by a first and then a second location near you, typically taking 10 percent and 5 percent of your sales, respectively.
Leo thought the business-coaching franchise he purchased in Ohio would allow him to help others run successful businesses, but he quickly became unhappy with his own. Leo felt the education provided by the franchisor "became stagnant." "They weren't creating new tools, providing new information or research to help my business," says Leo.
Before sinking your money into a franchise, Leo suggests some questions to ask franchisors: "How have you changed in the last five years? What are you doing today that is different from last month, especially with technology? What's the copyright date and publication date of your procedural manuals? If it's more than a year old, it's old."
Seid: [Also ask], "When was the last time you did consumer research? Who did it? What were the results? What have you done to improve your product?"
While Leo was well-qualified to offer business coaching, he was dismayed to discover unqualified fellow franchisees. Make sure the franchisor isn't accepting sub-par franchisees just because they have the money, says Leo. "If you have to jump through a lot of hoops and go through multiple interviews, then that franchisor has ethics about who joins the team."
Seid: Check for psychological and personality testing, serious questions about background and qualifications. And talk to other franchisees--if they're not up to your standards, get into a system where they are.
Samuel purchased an area development agreement for a Mexican food franchise in Kansas City, Kansas, after the franchise's CEO enticed him with stellar average unit volume numbers, which he later found to be inflated. "We had significant [verbal] misrepresentations," says Samuel, who claims the numbers the CEO gave him differed from those in the UFOC. Samuel also alleges the franchisor used aggressive sales tactics, even ignoring the company's own financial requirements so Samuel could qualify. A red flag? You bet.
Seid: Franchise salespeople are gifted. They play into your ego, drive, future and beliefs. You need an advisor. I send people to lawyers [I trust], because they'll dispassionately look at a franchise and say, "This is crap."
Zarco: When a franchisor is looking to go public and increase the value of its company, it [sometimes] engages in aggressive sales tactics by mispresenting the average unit sales volumes in order to seduce new franchisees. . . . [Sometimes, a franchisor] will bend the rules when it finds someone ready to put money down to open new units, even though that person may not be financially qualified.
When Samuel asked about marketing strategy, he was told it consisted of giving away free food at events. The franchisor did not heavily advertise; instead, marketing funds were used for the CEO to attend awards shows and to provide free salsa bars for celebrities.
Seid: Ask the franchisor what results they're seeing in their advertising. If they're not measuring results, get up and run--they're amateurs. Ask them how much of the advertising dollars are spent on nonmarketing functions. Most franchise agreements allow the franchisor to spend [advertising] money on administrative costs, which can include the salary of the marketing person up to 18 percent. It can also pay for overhead.
Gregorio is both a happy and an unhappy franchisee. He's not indecisive--he just has two franchises in the same Evansville, Indiana, mall, providing two very different experiences. One glaring dissimilarity: communication. Calls to his coffee franchise president and marketing director are returned promptly, while the franchisor of his custom embroidery hat business rarely, if ever, returns his calls. Since Gregorio only spoke to one hat franchisee before buying, he made sure not to repeat that mistake when researching the coffee franchise. "I asked the franchisees, 'Do you get the support that they claim?'"
Seid: Find out if the field staff visits you and what they do when they visit. What's the field-staff turnover rate, and can they make decisions? Also, does the franchisor set up a regional meeting of franchisees in the area? If they do, you've got a great franchise.
The hat franchise offered a week-long training course that taught Gregorio how to run the machines and computer, but not how to restock and order. Before buying the coffee franchise, he worked at a store for one day, then had additional classroom training; after buying, he and a store manager received two weeks of training and were offered an additional week. "You and your managers must be comfortable learning how to run your store," says Gregorio.
Seid: Length of training does matter. But for some franchises, quite frankly, three days is too long. It depends how complex the franchise is. It's not so much a matter of time; it's a matter of the curriculum. How much classroom time are you getting? Do you have role playing? How do you train your staff later? And do they have tools for you to do that?
When Gregorio became involved with the hat franchise, it was a relatively new operation. Based on his experience with them vs. his experience with the coffee franchise, which has been franchising since the 1980s, he definitely recommends choosing an established franchise. "When you buy into a new franchise, you're paying for a name nobody's ever heard. They've still got kinks to work out."
Seid: [Newer operations] don't have the same resources or experience. Gregorio's not wrong, but that [new] franchisor is probably going to work harder than the older guy does because of those issues.
The Big Picture
If you take one thing away from all these experiences, let it be this: There are great franchisors and, inevitably, bad ones. Zarco recommends having an experienced franchise counselor review the franchise agreement and the UFOC, and getting "a complete and precise understanding of the respective rights and obligations of the parties." While too many prospective franchisees don't bother with legal counsel, Zarco estimates 70 percent of his clients could have avoided lawsuits had they sought counsel from the beginning. "Don't be pennywise and dollar-foolish," says Zarco. Apply that adage to the time and money you invest before buying a franchise, and happy days are sure to come.