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Franchising 101

Is Franchising the Right Business for You?

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Blair Taylor always knew he would own a business someday. To prepare, he spent 10 years in corporate America gaining experience and perfecting his skills. When the time came to make the transition to business ownership, he decided to buy a franchise instead of starting from scratch. He believes franchising offers the structure and support needed to guide his entrepreneurial spirit.

"This is a great field for entrepreneurs," he says. "But you must find a franchise system that will give you the right amount of freedom and the ability to put your own stamp on the business."

Today, as CEO of Consolidated Operations International Corp., a Marina del Rey, Calif., holding company, he owns and operates four Athlete's Foot stores, one Mail Boxes Etc. and one Fanamania store in Southern California, plus another Athlete's Foot store in the Caribbean. He expects to open an Athlete's Foot store this month and two more Mail Boxes Etc. this fall in Southern California.

For Mr. Taylor, spending time in the corporate world before moving to franchising was essential. As a senior executive at PepsiCo. Inc., he learned business know-how and built a strong professional network. Now he's comfortable making business decisions under fire. "Expanding your network is critical because you'll need these people for support during the dry season," he says.

Industry contacts are essential for potential franchise owners, but they aren't enough to make a venture work. A passion for the business is vital. "If you need to ask if you should open a franchise, you probably shouldn't," says Mr. Taylor.

The Nuts and Bolts

Franchising is booming. According to the International Franchise Association, a trade group based in Washington, D.C., the industry has grown by at least 10% in each of the past three years. Today, there are between 2,000 and 2,500 operating franchise systems and more than a half million franchise outlets nationwide.

When buying a franchise, you not only gain a service or retail outlet, but you receive detailed instruction on how it should be run. In return for national advertising and support from the parent company, franchisees pay a monthly fee. Depending on the franchise company and industry, monthly royalty fees will range between 3% and 8% of monthly sales, reports the IFA.

While corporate executives who buy franchises may not earn as much as they once did, they can make a good living, according to the IFA. A survey of 1,000 franchise owners shows they grossed (after expenses but before taxes) an average of $91,630 annually.

Owners of multiple stores often have higher gross incomes than those with just one, and the longer the business is open, the higher the average annual gross income, reports the IFA. Yet, only one out of four franchise owners (24%) grossed more than $100,000 during 1997, while 64% earned less than $100,000.

Ideal Candidates

Executives are drawn to franchising as an alternative to the corporate world, and many make good prospects, say industry professionals. Corporate executives usually are systems-oriented and willing to follow the rules of the franchise organization, which makes them "ideal candidates," says Jerry Thissen, president of National Franchise Sales, a franchise brokerage firm based in Buena Park, Calif. And typically, senior-level executives have the cash--an average of $143,260, including franchise fees and additional expenses--to purchase a franchise business.

In fact, many franchisees come from executive positions, says Paula Turner, senior executive of franchising for Express Personnel Services in Oklahoma City. Nearly half (45%) of respondents held a professional or managerial position before becoming a franchisee, according to the IFA.

While leaving a top post to start a franchise may seem an unlikely move, it often satisfies executives' career goals. Consider that during Mr. Taylor's 10 years with PepsiCo, he had been the brand marketing manager in its world beverage headquarters in Somers, N.Y., national sales and marketing director in PepsiCo's western divisional headquarters and director of operations for PepsiCo in Las Vegas. He also had five years of information systems experience with International Business Machines Corp.

Franchising offers mid- to senior-level executives the ownership they can't get in most organizations. "At the top levels, you don't work hands-on," says Ms. Turner. "But as a franchisee, you're involved on a daily basis. You're the owner on the premises and you're responsible for all operations." Indeed, 83% of franchise owners say they're actively involved with their store operations, the IFA says.

A Different Kind of Support

Running a franchise isn't like having a traditional job where you're in charge of one function. At first, franchisees must do everything--from ordering business cards to buying fax paper. This adjustment can be difficult for executives used to the perks of a large corporation. "You'll have fewer resources and less support staff," says Mr. Taylor.

But you won't be alone. The franchiser serves as a business partner. "They're your family," says Ms. Turner. "You have a safety net." Franchiser assistance can help executives operating businesses for the first time solve tricky dilemmas. "You're in business for yourself but not by yourself," she says, "You're a semi-entrepreneur." Of owners surveyed by the IFA, 64% say they would be less successful if they had tried to open the same type of business without the support of a franchise system.

Buying a franchise helps establish your business in the community. Name recognition is the most important advantage to owning a franchise for 22% of franchise owners, followed by company support (21%), product knowledge and expertise (8%) and advertising (6%), the IFA survey shows. Further, half of respondents say they would recommend purchasing a franchise rather than opening a non-franchise business.

Make an Educated Decision

The decision to leave a corporate position to start a franchise shouldn't be made on a whim. Mr. Taylor spent nearly 18 months researching 100 different concepts to find a business he liked and a franchiser who could build a strong relationship. He had three primary criteria: The franchise company had to be flexible and have a strong reputation and well-developed operating systems. He opened his first Athlete's Foot store in Brea, Calif., in 1996 and is now the area developer for Athlete's Foot in California.

As a former athlete, he particularly liked the products sold at Athlete's Foot. "If you don't like what you're selling, you'll be miserable," says Mr. Taylor.

His methodical approach to choosing a franchise may be unusual for franchisees. Many executives who take early retirement or are laid off with severance opt to become franchisees when they can't land new positions. "It's difficult to find a job at the age of 56," says Jay Mitchell, national director for franchise sales for U-Save Auto Rental based in Hanover, Md. "These professionals now have the money to buy themselves a job."

At age 43, Joe Zdybel was the human resources director for Zenith Electronics in Chicago. He was offered and accepted a position as the HR director for the data systems division of Zenith in Benton Harbor, Mich. A few years after he and his family had bought a new home and moved, the company was sold. Out of a job and anxious to move back to Chicago, he began to research franchising.

Mr. Zdybel now owns Express Personnel Services offices in Schaumberg and Elmhurst, Ill. He hopes to open another office in Des Plaines, Ill., later this year.

To be a good franchisee, you must be a self-starter, he says, and not every executive fits that description. "Many executives in the corporate world aren't as independent as they like to think they are," he says.

The Real World

The good news is age is seldom a factor in franchising. Many successful owners have reached their maximum earnings or promotion potential in the business world, or believe their positions were in jeopardy, says Ms. Turner. "Age doesn't determine success," she says.

Still, franchising isn't the right move for every executive. "Owning a franchise isn't a retirement venture," says Mr. Thissen. In fact, 58% of franchise owners say they work more hours as a franchise owner than in their previous positions, according to the IFA survey.

Before buying a unit, be prepared for dramatic changes in your work style. Some executives think running a franchise will be easier than their corporate jobs. But the sense of risk and reward is greater because you're in business for yourself, says Mr. Mitchell. The buck stops with you.

The Downsides

Franchise owners say the most significant drawbacks to being with a franchise system are paying royalties (39%), followed by lack of support (15%) and freedom (11%), reports the IFA.

Some franchise systems are known for providing low levels of support. However, any franchise system that's worth its weight will provide training and support, says Kara LaGrassa, media relations manager for the IFA. "Franchisees must be successful for the parent company to be successful," she says.

Determining franchise turnover is difficult. An IFA study found that system growth and industry category affects franchise turnover. Systems with more than 50% growth annually tend to have higher turnover. By category, baked goods, children's products and general services have higher turnover than others. Restaurants and fast-food and retail-food outlets change hands often, but much of that simply is transferring ownership from one franchisee to another, according to the IFA.

Tips From an Owner

To make it as a franchisee, Mr. Taylor advises gaining direct sales experience with customers before leaving the corporate world. Sales is the most important skill to acquire because success depends on your selling abilities, he says. "You'll either be selling yourself to investors or selling your product."

Franchise organizations screen executives for their ability to be hands-on managers. If you operate a retail outlet, you'll be managing younger people. Some fast-track types may have a hard time managing 18-year-olds, who lack their employers' commitment, says Ms. Turner.

As boss, you must set an example, says Don Lowman, who left pharmaceutical sales in 1997 to become owner and operator of an Express Personnel Services office in Hickory, N.C. "You can't jump on them for being late to work if you're never on time," he says. And respect comes because you earn it, not because you hold a top corporate job, says Ms. Turner.

Still, nearly two-thirds of respondents say they would purchase or invest in the same franchise business again, if given the opportunity. Of respondents who wouldn't buy the same franchise again, those earning $150,000 or more annually were more likely to consider purchasing a different franchise.

Getting Started

Leaving a secure corporate post to open a franchise is a major decision. These tips will help you determine if it's the right move for you:

  • Do thorough research.
  • Talk to other franchisees, including past and present owners.
  • Hire an attorney to review all documents.
  • Consider how much cash you can afford to invest in a new business.
  • Reflect on the type of business you can feel passionate about.

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