So you’re thinking of buying a franchise?
Chances are, if you’ve thought of striking out on your own and starting a business, somebody has suggested that you buy one. Odds are also good that someone you also know has urged you not to buy a franchise.
For those who aren’t familiar with the concept, here’s a quick recap: McDonald’s is a franchise, and so is Subway, Jiffy Lube, Supercuts—the list runs into the thousands. Almost any time you go into a store that you can find anywhere else in the country, you’re in a franchise (although there are exceptions, like Starbucks and Barnes & Noble, both of which only have company-operated outlets).
An individual can buy into the franchise, often spending hundreds of thousands of dollars to run a UPS Store, a Domino’s Pizza, a Gymboree, and so on. The franchisee then pays an ongoing franchise royalty fee out of its sales to the corporation, such as the Wendy’s International headquarters, or the Ace Hardware Corporation. Whatever’s left over, and hopefully it’s a lot, the franchisee keeps.
That sums up franchising in its most basic sense, and your friends and colleagues are all right. There are good reasons to buy a franchise—and good reasons not to. Here are the positives:
1. You want to work for yourself. As Joel Libava, a franchise consultant who runs TheFranchiseKing.com, says, “Becoming a franchise owner is a great way to avoid ever having to deal with a tough job market ever again.”
But it isn’t utopia in the franchise world. You’ll have the franchisor’s corporate headquarters to deal with—the mothership, if you will. This isn’t a relationship that will likely work for someone who is completely headstrong and independent. For instance, if you own a McDonald’s, while you can do things like hire and fire employees, you can’t paint the golden arches purple. But that’s a good thing. You don’t buy a franchise because you want to change it. You buy it because it’s a tried-and-tested business model.
2. You’re excited about hard work. Many people buy a franchise expecting a “business in a box.” The misconception is that you open the doors, customers will come, and it’ll run itself. There’s no guarantee that will happen, though, especially if the brand name isn’t one that everyone is intimately familiar with.
“You need to be motivated and willing to put time and energy into your franchised business, to make your investment pay off, and you must follow the franchisor’s system down to the letter,” says Cheryl Babcock, director of the International Institute for Franchise Education at Nova Southeastern University in Fort Lauderdale, Fla.
Many people get an adrenaline rush from running a business, and if that’s how you roll, consider buying a franchise.
3. You don’t want to take too much of a risk. The advantages of going into franchising, says Babcock, are that you have the “experience of the franchisor and the system’s established franchisees who can guide and support you.”
She says a good franchisor will offer ongoing training and support; nobody’s going to hand you the keys and expect you to magically understand how a Jiffy Lube is run.
Another plus, she says, is the “buying power and efficiencies of scale in the franchise system. The franchisor can negotiate lower prices for the products and services you need to run your business.”
Buying a franchise also comes with some negatives that anyone looking to jump in would be foolish not to consider:
1. It is expensive. You might have some great experience in managing a business, but unless you have deep pockets or stellar credit and can get business loans (or perhaps a wealthy partner who can pony up the cash while you do the rest of the work), buying a franchise is next to impossible.
In 2004, Robert Saunders and with wife, Tinamarie, now 56 and 47, bought a UPS Store in Long Beach, Calif., while they were both still employed at Southern California Edison, where they continued to work while their staff kept their business humming; during the weekends, evenings, and vacation time, they worked on their UPS business. Because they didn’t have the money outright to buy the UPS Store, they took out a $150,000 Small Business Administration (SBA) loan to buy into the franchise. That still wasn’t quite enough: They also had to borrow $50,000 from their house and 401(k).
Their experience is typical. Franchises can cost as low as tens of thousands of dollars to a little north of a million, which is what anyone buying a McDonald’s can expect to pay, or even more (a Denny’s will cost you $2 million). Why are these businesses so expensive? You’re paying for everything from leasing commercial property to buying inventory and equipment to paying the one-time franchise fee, which gives you permission to use the franchisor’s signage and logo. For comparison’s sake, Subway’s franchise fee is $15,000. Mr. Rooter, the plumbing service, has a $29,500 franchise fee. You’ll also pay the corporate office an ongoing royalty fee every year, which is essentially a percentage of your business’s sales, and you may have to contribute to a marketing fund.
2. It may be less risky than starting your own business, but it is still a risk. The UPS Store is a strong brand, but the recent recession was strong, too, and when the economy cracked several years ago, the Saunders’ store couldn’t withstand it.
“Customers who had been doing next-day air packages, which had a better profit margin, began saying, ‘Well, it doesn’t need to get there tomorrow. It can get there in three or four days,'” recalls Robert Saunders, adding that small businesses that rented mailboxes from them began shutting down as well. “That was our bread and butter,” he says.
In 2009, they closed their business, five years in the middle of a 10-year contract. After UPS adhered to its formula for franchisees breaking contracts, the couple wound up paying a fee of $23,000 to their franchisor.
But it’s not all gloom and doom. Robert Saunders, who retired from Edison in 2011, still speaks well of the UPS Store, and being a franchisee gave him an idea for the business he and his wife started in 2010: College Storage & Student Services, which stores belongings for college students who can’t take their furniture and belongings with them back home and can’t leave them in the dorm or their apartment over the summer.
“We saw a lot of college students coming into the UPS Store, needing to ship things and being stressed out,” he says.
So owning a franchise helped them, and it hurt them. The Saunderses, in fact, won’t forget their experiences any time soon. Four years after closing their UPS Store and nine years after opening it, they are still paying off their SBA loan.