5 Myths About Owning a Franchise

1. You Can’t Afford It

After a corporate career in human resources, sales, and marketing at companies such as John Deere and Stanley Tools North America, Ron Norsworthy wanted to buy a franchise with minimum startup investment. Home Helpers, which provides in-home caregiving services, caught his attention. Impressed by the business model and the ability to buy the rights to the Sugar Land, Texas, territory for $13,500 (now about $49,000), Norsworthy used his own savings to open for business in 2003. But it also impressed him that the franchisor offered financing.

“I believe a franchisor that has the financial wherewithal to let you pay as you go is a testament to the financial viability of the enterprise,” the 68-year-old says.

Because the franchise was initially home-based, Norsworthy kept his startup costs low. Not having to pay rent meant he could focus on other areas of the business, such as marketing, hiring, customer relations, and accounting. In three years, the business outgrew his home and he opened a commercial storefront.

While it’s true that it costs between $1 million and $2 million to open a local McDonald’s, some franchises cost only $10,000, says Miriam L. Brewer, director of education and diversity at the International Franchise Association. For example, you could spend as little as $10,500, depending on the population in your zip code, to open a Candy Bouquet franchise.

Indeed, you can manage some franchises and still collect a paycheck—for instance, a travel or janitorial franchise in which you could hire workers and run it effectively while keeping a regular 9-to-5. While most franchisors will require you to put up some of the money with your own funds, business loans can provide much-needed capital. Approximately 10% of loans (by revenue) under the Small Business Administration’s 7(a) loan program and 7% of the number of loans have gone to franchise businesses. Once your initial investment is paid off, you can leverage your profits to expand your franchise and own multiple units.

2. Running a Franchise is Easier Than Running Other Startups

In 2008, when Dr. Tasha Wallace lost 20 pounds in six weeks through Medi-Weightloss Clinics, the family practice physician invested about $150,000 in opening a franchise of her own. She’d already managed a private medical practice, so Wallace figured that starting the new business would be a breeze since franchises come with a blueprint and support system already in place. She quickly learned that that assumption was false. It wasn’t easier to run a franchise business—it was just different.

“With a private medical practice, the patients come to you,” the 38-year-old says. “With a weight-loss clinic, we have to get our name out there and market the brand.”

To do so, Wallace and her staff used several strategies including community health fair appearances, cable television commercials, and “walking down the street with pamphlets” that explained how her weight-loss clinic differed from other such programs. Her hard work paid off. The Lehigh Acres, Florida, franchise has generated more than $1 million in revenues since its doors opened in September 2009. Through it all, Wallace has maintained her medical practice.

3. Franchises Are a Safe Investment

Many people believe that a franchise isn’t risky because you’re buying a proven brand and business model. But there’s risk involved with starting any business, says the AAFD’s Purvin. And when it comes to franchises, not all concepts are successful. You can increase your odds of picking a winner by looking at performance data, Purvin says. A franchise’s failure rate can also provide a clue. For example, statistics compiled by the National Association of Government Guaranteed Lenders show that the loan failure rate of Amazon Café was 52% between 2000 and 2008, while Dunkin Donuts’s was 5% during the same period. Other considerations include the length of time the franchisor has been in business and whether brand recognition will help to attract customers.

4. You Are the Boss

Franchise ownership doesn’t mean you call all the shots. As an entrepreneur you naturally have the desire to experiment or tinker with the brand. However, franchisors are adamant about conformity. You won’t see a McDonald’s selling sweet potato pie.

Susan P. Kezios, founder of the American Franchisee Association, says, “The reality is you’re operating a business according to somebody else’s standards and policies, and they may change from time to time at the discretion of the franchise corporation.”

For example, you might identify a promising new revenue stream, but you likely won’t be able to implement a new product line or discontinue a service that isn’t working for your particular franchise without direction or prior approval from the franchise company.

That’s not to say you have no power, since you’ll likely be the one determining, for example, where to advertise. You might even be able to negotiate some aspects of the franchise contract, such as the territory your business covers or even the franchise fee.

5. Exiting a Franchise is Easy

If you were to compare business ownership to owning your own home, “Buying a franchise is more akin to renting an apartment,” says Kezios. The franchisor often owns your customer list and equipment—both of which have tremendous monetary value. If you’re looking to sell, a franchise corporation may limit the sale of your franchise to someone within the franchise system, which could lower the amount you’re able to get for your business.

Furthermore, when you exit the system, a franchisor may enforce the terms of a non-compete clause, which prevents you from working in that same industry within a geographic area for years.

“They’re protecting the marketplace for the franchise corporation,” says Kezios. “When you decide not to renew, it’s difficult to leave with any equity.”

Before buying a franchise, contact current and former franchisees and ask them if they’re satisfied with their franchisor’s support. Purvin suggests looking for franchises with an independent owners association.

“So, as issues come up there is a cohesive voice of franchise owners who can address them on a level playing field.” 

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  • http://www.skyemediagroup.com/ Skye Media Media Group

    Very insightful. Thanks for the info.