True Franchise Confessions
What's it REALLY like to buy a franchise? Seven entrepreneurs share their experiences as franchisees.
Opinions expressed by Entrepreneur contributors are their own.
Walk a mile in a franchisee's shoes, and you'll findthat it could be a walk in the park--or over crushed glass. Wefigured the best way to know exactly what the franchisee experienceis like is to hear it straight from the source. So we asked sevenfranchisees, ranging from happy to disgruntled, to anonymouslyshare their unadulterated thoughts, opinions and advice.
And just in case you're not convinced by the franchisees, wealso got two experts to speak out: Michael Seid, founder offranchise advisory firm MSA Worldwide and co-author of Franchisingfor Dummies, and Robert Zarco, founding senior partner of ZarcoEinhorn & Salkowski P.A. in Miami, a law firm that representsunhappy franchisees and has been involved with over 350 franchisesystems worldwide. (Seid's and Zarco's advice appears initalics; all franchisees names, which are in bold, have beenchanged.)
One aspect that David liked about the moving-servicefranchise he purchased in Alpharetta, Georgia, was its size:"If it's not a big franchise, it's easier to feelyou're not just a number in the system, and the market'snot saturated."
Seid: Smaller franchisors can't afford to let the firstcouple of franchisees fail, so they tend to get very personalizedand over-serviced. That's good and bad--more good for thefranchisee. A [smaller] franchisor may be struggling withcritical-mass issues and be unable to [offer] TV advertising orproper brand advertising, so it really depends.
In his first year, David set the national record for first-yearrevenue--largely due to the time he invested. "I worked mytail off that first year or two--seven days a week, 12 hours aday," recalls David. As a new franchisee, don't expecteasy hours.
Seid: We say in the Dummies book that if your family does notbuy in, you're going to fail. The pressure of not seeing thefamily during the early days is deadly. We strongly recommendpeople self-assess before buying.
Phillip is a particularly happy inkjet and laser-tonercartridge recycling franchisee in Santa Rosa, California, becausehis franchise "gives [him] an opportunity to give back to thecommunity and planet." Before buying, Phillip had to know thatthe franchisor's key employees were committed to these ideals.While researching a franchise, he says, you should ask who's onthe board of directors, running the day-to-day operations andproviding support.
Seid: You have to look at whether management isentrepreneurial enough to stay ahead of the curve, especially whendealing with a technology-related product.
Sometimes a franchisor allows franchisees to purchase suppliesonly from approved vendors. The franchisor then receives apercentage of those sales. Phillip's franchise doesn'trequire this; instead, it suggests several vendors and evennegotiates discounted prices. "The only way the franchisormakes money is if we make money," reasons Phillip. "Findout if there's an approved vendor list, and how expansive itis. Ask the franchisor, 'Is this a discount?' and, 'Doyou negotiate?'" Franchisors do have to let you know ifthey restrict you to approved vendors--it's in Item 8 of theUniform Franchise Offering Circular.
Seid: If I, as the franchisee, am buying something for $1 andthe franchisor can buy it for 50 cents and sell it to me for 75cents, I'm thrilled--as long as they're not losing theability to get me the lowest price by having fewer vendors.
A former entrepreneur, Sean is now a happy ramp-rentaland sales franchisee in North Olmsted, Ohio, but he warns othersnot to equate being a franchisee with entrepreneurship: "Atrue entrepreneur wants to build from the ground up, but thefranchise has already been built by the franchisor. You have towork within their system, even though you do, in a sense, run yourown business."
Seid: Franchisees are not entrepreneurs. They'reentrepreneurlites at best. An entrepreneur wants to chart his owncourse. Franchisees have to follow a set of rules, and they cannotviolate a franchisor's brand. If you have to have things yourway or think the franchisor's product needs to be improved orchanged, you should start your own business.
While Sean's franchise was marketed as homebased, thefranchisor made the logistical considerations clear, and Sean endedup renting storage space for the ramps. Make sure you find outexactly what a homebased franchise entails.
Seid: Ask, "Are there any zoning requirements? Do I needa van? What kinds of deliveries are coming in? Are customers comingto my house?"
Bradley spoke to franchisees the franchisor suggested andfound all were doing very well. However, when he randomly stoppedby another of the sandwich franchise's locations, he heard twohours' worth of horror stories. Bradley figured this locationwas the exception to the rule but now realizes he should'veinvestigated further. "Don't just talk to the people thefranchisor [provides]," advises Bradley. "Stop in atother stores and talk to the owners."
Seid: There's an anonymity over the telephone. Call andbe very respectful. Say, "Hi, I'm looking to buy afranchise. Is now a good time to talk?" Call those who haveleft the system in the past year. Most of them areunhappy--you'll find out why.
One major contention Bradley has with his franchise isunrestrained growth. With no protected area, he found three storesplaced less than a mile away from his Worcester, Massachusetts,location.
Zarco: The franchisor reserves the right to place a competingunit in a location regardless of the impact that will have onexisting franchisees' sales, profits and incomes. When you joina franchise, you should have an expectation of reasonable impact.Factor into your business plan how your business will be affectedby a first and then a second location near you, typically taking 10percent and 5 percent of your sales, respectively.
Leo thought the business-coaching franchise he purchasedin Ohio would allow him to help others run successful businesses,but he quickly became unhappy with his own. Leo felt the educationprovided by the franchisor "became stagnant." "Theyweren't creating new tools, providing new information orresearch to help my business," says Leo.
Before sinking your money into a franchise, Leo suggests somequestions to ask franchisors: "How have you changed in thelast five years? What are you doing today that is different fromlast month, especially with technology? What's the copyrightdate and publication date of your procedural manuals? If it'smore than a year old, it's old."
Seid: [Also ask], "When was the last time you didconsumer research? Who did it? What were the results? What have youdone to improve your product?"
While Leo was well-qualified to offer business coaching, he wasdismayed to discover unqualified fellow franchisees. Make sure thefranchisor isn't accepting sub-par franchisees just becausethey have the money, says Leo. "If you have to jump through alot of hoops and go through multiple interviews, then thatfranchisor has ethics about who joins the team."
Seid: Check for psychological and personality testing,serious questions about background and qualifications. And talk toother franchisees--if they're not up to your standards, getinto a system where they are.
Samuel purchased an area development agreement for aMexican food franchise in Kansas City, Kansas, after thefranchise's CEO enticed him with stellar average unit volumenumbers, which he later found to be inflated. "We hadsignificant [verbal] misrepresentations," says Samuel, whoclaims the numbers the CEO gave him differed from those in theUFOC. Samuel also alleges the franchisor used aggressive salestactics, even ignoring the company's own financial requirementsso Samuel could qualify. A red flag? You bet.
Seid: Franchise salespeople are gifted. They play into yourego, drive, future and beliefs. You need an advisor. I send peopleto lawyers [I trust], because they'll dispassionately look at afranchise and say, "This is crap."
Zarco: When a franchisor is looking to go public and increasethe value of its company, it [sometimes] engages in aggressivesales tactics by mispresenting the average unit sales volumes inorder to seduce new franchisees. . . . [Sometimes, a franchisor]will bend the rules when it finds someone ready to put money downto open new units, even though that person may not be financiallyqualified.
When Samuel asked about marketing strategy, he was told itconsisted of giving away free food at events. The franchisor didnot heavily advertise; instead, marketing funds were used for theCEO to attend awards shows and to provide free salsa bars forcelebrities.
Seid: Ask the franchisor what results they're seeing intheir advertising. If they're not measuring results, get up andrun--they're amateurs. Ask them how much of the advertisingdollars are spent on nonmarketing functions. Most franchiseagreements allow the franchisor to spend [advertising] money onadministrative costs, which can include the salary of the marketingperson 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 sameEvansville, Indiana, mall, providing two very differentexperiences. One glaring dissimilarity: communication. Calls to hiscoffee franchise president and marketing director are returnedpromptly, while the franchisor of his custom embroidery hatbusiness rarely, if ever, returns his calls. Since Gregorio onlyspoke to one hat franchisee before buying, he made sure not torepeat that mistake when researching the coffee franchise. "Iasked the franchisees, 'Do you get the support that theyclaim?'"
Seid: Find out if the field staff visits you and what they dowhen they visit. What's the field-staff turnover rate, and canthey make decisions? Also, does the franchisor set up a regionalmeeting of franchisees in the area? If they do, you've got agreat franchise.
The hat franchise offered a week-long training course thattaught Gregorio how to run the machines and computer, but not howto restock and order. Before buying the coffee franchise, he workedat a store for one day, then had additional classroom training;after buying, he and a store manager received two weeks of trainingand were offered an additional week. "You and your managersmust be comfortable learning how to run your store," saysGregorio.
Seid: Length of training does matter. But for somefranchises, quite frankly, three days is too long. It depends howcomplex the franchise is. It's not so much a matter of time;it's a matter of the curriculum. How much classroom time areyou getting? Do you have role playing? How do you train your stafflater? And do they have tools for you to do that?
When Gregorio became involved with the hat franchise, it was arelatively new operation. Based on his experience with them vs. hisexperience with the coffee franchise, which has been franchisingsince the 1980s, he definitely recommends choosing an establishedfranchise. "When you buy into a new franchise, you'repaying for a name nobody's ever heard. They've still gotkinks to work out."
Seid: [Newer operations] don't have the same resources orexperience. Gregorio's not wrong, but that [new] franchisor isprobably going to work harder than the older guy does because ofthose issues.
The Big Picture
If you take one thing away from all these experiences, let it bethis: There are great franchisors and, inevitably, bad ones. Zarcorecommends having an experienced franchise counselor review thefranchise agreement and the UFOC, and getting "a complete andprecise understanding of the respective rights and obligations ofthe parties." While too many prospective franchisees don'tbother with legal counsel, Zarco estimates 70 percent of hisclients could have avoided lawsuits had they sought counsel fromthe beginning. "Don't be pennywise anddollar-foolish," says Zarco. Apply that adage to the time andmoney you invest before buying a franchise, and happy days are sureto come.