Three words explain why many former corporate executives prefer to buy a franchise rather than starting a business from scratch: safety, security and support. But behind every successful franchise, there is a supportive team of people who make the model work.
When you buy a franchise, you are buying a model that has been proven successful in dozens, sometimes hundreds, of other places. Also, you get extensive training and 24/7 support. As a result, franchised businesses tend to fail much less often than their standalone counterparts. For middle-aged executives (people aged 50 to 60), franchises are especially attractive because the typical franchise term is 10 to 15 years, thus creating a “bridge to retirement.” The executive can build the business and then either sell it or hand it off to the next generation when it comes up for renewal.
The advantages to a “turnkey” business, especially for someone who really didn’t start out wanting to have a business of their own, can be summed up in two words: “less risk.” Unlike a startup business, an existing business has a location (and you often can assume the seller’s existing lease without negotiating an entirely new one), employees (and you may want to keep some of them), equipment (most of which doesn’t need replacement), and customers (many of whom will likely continue with the business after it changes ownership).
Also, because the business has a history, you can review financial statements, tax returns and other data to help you determine how much you will be able to take out of the business each month as compensation (called “owner’s discretionary income” or “ODI”), how long it will take you to recoup your investment in the business and so forth.
It goes without saying that you should do your due diligence before signing a franchise contract. Where should you begin? First, you should speak to as many franchisees as possible. Don’t be afraid to talk to every franchisee in your area, even if you have to ask the same questions over and over again. Don’t just listen to their words; listen to the “music” as well. Do they seem happy? Are they satisfied with the support the franchise is giving them? Are they still as excited about the franchise as they were when they first bought into it? Sometimes the 19th franchisee you talk to will tell you something the first 18 didn’t, and that will be the information that helps you decide whether you really want to buy the franchise or not.
Second, don’t rely on the franchise’s estimates of the cost of starting up the franchised business. Get “real world” quotes in your area and do a spreadsheet showing how and when you will be profitable. Many franchises start in low-cost areas of the country, where real estate and employees are plentiful and inexpensive, only to have their franchise models break down when they expand to the East and West Coasts, where everything’s more expensive. You have to sell an awful lot of doughnuts each month to pay rent that’s $60 a square foot or more.
Third, always, always have an attorney review your franchise contract before you sign it — even though most franchises don’t negotiate or change their franchise contracts, a good attorney can help educate you on the risks of buying that particular business. Also, most franchises will, if pressed, give you a “clarification letter” explaining provisions in their contract that might be ambiguous — that could be a useful document to have if you have to sue them down the road.
By far, the biggest mistakes people make when buying a franchise are assuming that the franchise will do all of the work of marketing and promoting the business. When you buy a franchise, you are halfway between working for yourself and working for someone else — you are executing someone else’s business model (the franchise’s), but you are just as responsible for growing your franchise outlet and generating sales as a startup entrepreneur would be. Franchisees who sit behind the cash register waiting for customers to show up, relying on the franchise name and reputation to generate business, rarely succeed. The people who succeed at franchise ownership take it upon themselves to get out there, hustle, get involved in their communities, and make sure the phones are ringing and the customers are showing up at the door.
Buy only franchises that have proven their concept and that have at least 30 to 40 existing locations in different markets. Look for franchises with business models that are likely to last for a long time and are keeping pace with new technologies — Blockbuster Video was one of the hottest franchises of the 1980s, but I’m not sure how their model will stand up in the age of Netflix and Redbox.
Finally, look at the people — after all, you are relying on them to be there for you when the going gets rough. Do they have the experience to run the franchise and keep the model up to date? Do they know the industry? Do you trust them? Is the franchise overly dependent on a “key” individual who could get run over by a truck at any time? At the end of the day, if you don’t “buy” the people, don’t buy the franchise.
The International Franchise Association Targets Athletes
With research showing that eight out of 10 National Football League athletes fall into financial straits just two years after they retire, the International Franchise Association and Allied Athlete Group are collaborating to expose professional athletes to business opportunities in franchising.
Their first venture, the Allied Athlete Group/IFA Franchise Summit ’10, was scheduled for July 12-14, 2010, in Atlanta, with major franchise brands offering information about franchising and about what needs to be considered before purchasing a business. “This summit is primed to become a landmark event by exposing professional athletes to the opportunity and long-term stability that franchising can provide,” said Miriam Brewer, IFA director of education and diversity.
Poor business decisions and a lack of proper guidance are the main factors contributing to the inability of professional athletes to create and maintain generational wealth, Brewer said. By acquiring a franchise, they would be buying into an established brand and system that will provide training and support, she said. Industry executives acknowledge, however, that access to capital often is a deterrent for prospective franchisees.
Lenders have become even more tightfisted in the current recession. An IFA study shows that banks are expected to lend $6.7 billion to franchises this year, $3.4 billion less than the amount the association estimates would be needed to meet 100 percent of demand. “The shortfall can be attributed to banks’ conservative approach to a weak economic outlook and uncertainty in the commercial real estate market,” the IFA said in a statement.
To improve access to capital for members and prospective franchisees, the IFA in June formed the Credit Access Working Group, charged with developing “a plan of action to create educational sessions and information to help make the case to lenders and others at the grassroots level about the ability of franchise businesses to contribute significantly to local economies,” said Ken Walker, IFA chairman and CEO of Driven Brands.
The IFA says the $3.4 billion shortfall in lending from 2009 to 2010 would result in 134,000 jobs not created or maintained and $13.9 billion of lost annual economic output. At 100 percent lending, franchise businesses could create or maintain 305,000 jobs and $32 billion of annual economic output in 2010.
The working group will develop templates and guidance on what information lenders are now requesting as they consider loan applications, identify ways in which franchisors can improve the process and show how the IFA can collaborate with banking associations and organizations to share knowledge.