Franchise 101 Buyers learn to beware at franchise boot camp

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Eyeing a franchise purchase but don't know a UFOC from a UFO? Then it might be wise to take a seminar on the basics. Here's a look at where you can turn for help.

Louis Dominguez, a 53-year-old retired account executive with Verizon, was recently on a conference call with a representative from Alphagraphics, a print-and-copy-shop franchise based in Salt Lake City, and a group of potential franchisees like himself. One of the other hopefuls asked how many Alphagraphics stores had gone out of business in recent years, and the rep responded that he didn't know offhand and would have to get back to them, Mr. Dominguez recalls. That's when he jumped into the conversation.

"Let me ask the question a different way: Can you tell me how many franchisees have gone under in the last few years?" he remembers asking. "The guy gave me a figure, but said he'd have to really check."

Mr. Dominguez knew the question needed to be asked in that specific way and that franchise sales reps might try to evade it because he'd recently been to what can only be described as "franchising boot camp." "They showed us how a franchisee can go under, but the store will keep going [with] a new franchisee. Then the company might try to tell you it's a great business because no stores have closed."

The seminar that Mr. Dominguez attended in New York -- one of a series that Women in Franchising (WIF) and the United States Hispanic Chamber of Commerce (USHCC) recently hosted in five other cities as well -- was specifically aimed at "making people critical consumers of franchises," according to Susan Kezios, who founded WIF and ran the seminar. It's one of several workshops popping up around the country, usually sponsored by small-business organizations or business schools. These courses are designed to meet a rising interest in franchising -- often among people who have been laid-off or offered retirement packages before they were ready, like Mr. Dominguez.

Consider the demographics from the New York workshop: Thirty percent of the attendees described themselves as middle- or upper-level managers, and another 21% said they worked for themselves. But only about 35% were working full time, and less than 5% were working part time.

"The timing for these workshops is perfect," notes Randell Ramat, strategic-alliances specialist as the USHCC in Washington, D.C. "People are really interested in learning about franchising right now, and the economy probably has a lot to do with that."

Asking the Right Questions

Running a franchise is a unique business endeavor. After all, franchisees aren't quite entrepreneurs -- they have to run their businesses according to their parent company's rules -- and aren't employees, either, because they've invested their own money in the store or service they're running. Additionally, the five-year survival rate for individual franchise units is lower than for other kinds of start-ups, according to research by Timothy Bates, a professor at Wayne State University in Detroit.

So, regardless of your business experience or financial acumen, if you've ever toyed with the idea of running your own Dunkin' Donuts or Jiffy Lube shop, it's worth attending a workshop that lays out the basics of selecting, buying and running a franchise.

Most cover much of the same ground -- how to read the Uniform Franchise Offering Circular (UFOC) that tells you about the company and its operations; what questions to ask before signing the contract; why you should get an attorney who specializes in franchise law; and how to get financing, for example. But the workshops can vary in the tone they take and what they charge.

Avoiding Traps

The USHCC's workshop -- seven weeknights over four weeks -- was free, and Ms. Kezios, its chief organizer, has long been known as a vocal advocate for franchisee rights. She plainly states that fewer people want to buy a franchise after taking her seminar and doesn't think that's a bad thing.

"I want people to be aware of the challenges and pitfalls and know that this isn't a piece of cake," she says. "Whether they come away deciding they want to start a franchise, or an independent business, or go back to their nine-to-five job, that's OK." She says the USHCC and WIF are planning to run another series in four or five new cities starting this fall.

At the other end of the spectrum is a weekend-long seminar run by the University of Texas, El Paso, which costs $900 and is part of a continuing-education program run by the International Franchise Association, an industry group that represents franchise companies.

At prices in between, there are programs sponsored by business schools with small-business centers, or by local chapters of organizations like SCORE, which puts beginner entrepreneurs in touch with retired executives who can mentor them. The H. Wayne Huizenga School of Business and Entrepreneurship at Nova Southeastern University in Fort Lauderdale, Fla., offers a course called Catch the Franchise Feverseveral times a year for $59. And the Zicklin School of Business at Baruch College in New York offers a four-session workshopapproximately once a semester. A good place to start looking for workshops in your area is the U.S. Small Business Administration's events calendar.

Seasoned Advice

Look for seminars that will put you in touch with franchisees, as the one at the Huizenga School does, according to Cheryl Babcock, the professor who runs the course.

One of the most eye-opening parts of the seminar Mr. Dominguez attended was hearing the franchiser's point of view on one night while a franchisee offered his perspective on the next.

"The franchiser was telling us things are great and growing, and there's a national advertising campaign hitting the airwaves," he recalls. "The next night a franchisee was there telling how he found out after he got in that he had to pay for his own advertising, and it was costing him a fortune."

Mr. Dominguez was sufficiently interested in franchising to do about 60 hours of his own research into franchises before coming to the seminar, contacting about 25 companies and reading through five offering circulars. But from what he learned from Ms. Kezios and the other speakers -- who also included two franchise attorneys and a banker who loans money to franchisees - plus his own research, he's leaning toward opening a business from scratch or even returning to a corporate job.

"[With a franchise], you lay out a lot of money and have no guarantee of success -- they might open a store right next to yours," he says. "If I invest my money in my own business, I can always hire people with expertise I don't have, like marketing, and I don't have to pay royalties."

Lessons Learned

Others left the seminar feeling more optimistic, but more cautious, too. One of the major lessons: Big established franchises offer strong brand names, but they can also be less flexible negotiators and more restrictive parents than smaller, younger franchise systems.

"I came into the seminar thinking I was interested in a Subway or another big name," says Fred Soleto, who took the course in Los Angeles and co-owns VivaHollywood, an entertainment-news Web site for Hispanics. He was interested in a franchise as a second business, most likely as an investment that someone else would run. "Now, as an entrepreneur, I think I'd be more interested in a franchise where the ball is rolling, but it's still small enough that I can invest money, maybe buy a territory and maybe help to shape how it evolves. Or where at least there would be more flexibility in negotiating the contract."

The contract takes center stage at most workshops. Attendees spend much of their time dissecting it and learning what can go wrong if they don't pay enough attention to it. Leo Hicks walked into a USHCC workshop in Dallas believing he wanted to own a

Wing Zone chicken franchise and walked out still convinced, but with a long list of questions he wanted to ask about his contract.

"I wanted to know if I'd be able to protect my territory from other restaurants (in the franchise), how many lawsuits had been filed against the company, circumstances where the franchise could be taken away, my obligation to participate in promotions, and what my termination rights are," he says.

Listening to a woman talk about her lawsuit against her former franchiser and to a man who started and sold a competing chicken-wing chain persuaded him that "franchises are a good business," says Mr. Hicks, but they're just that: a business. "It's not a family. It's hard-nosed business. The franchiser is going to look out for his best interest and I have to look out for mine."

But after going to franchise boot camp, he's confident he knows how.

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