Is Franchising Right For You?

Losing your job when you have a family to support can make you feel down, dejected, and downright depressed. But for 45-year-old Maurice Geyen, the setback was the motivation he needed to muster his courage to try franchising. “I knew I still wanted to be in business,” recalls Geyen, who was a business manager before he was laid off in 2008. “But I wasn’t prepared to start all over in corporate America.”

Today, after setting up a corporation with some of his retirement account and investing nearly $200,000 of those funds in a franchise endeavor, Geyen and his wife, Kiesha, 39, are entering their third year as owners of a BrightStar franchise (one of black enterprise’s 40 Best Franchises for African Americans). Their Inglewood, California-based homecare, childcare, and medical staffing services franchise generated about $500,000 in revenues in 2010, and the couple expects revenues to double in 2011.

Now may be a good time to venture into franchising. According to a report PricewaterhouseCoopers prepared for the International Franchise Association, the industry expects growth in 2011 of 2.5%, or about 19,000 new establishments. This is compared to only 0.3% growth seen between 2009 and 2010. Business lines such as lodging, automotive, retail products and services, as well as personal services, which include healthcare, appear to be the sources of the growth, the report notes. Also, the Minority Business Development Agency reports minority firms are more likely to operate franchises than non-minority business enterprises.

While the Geyens are doing well in the franchise business, success is never guaranteed. Money is at stake and risks are involved, but careful calculation, research, and preparedness can help ensure a positive outcome. Here are a few things you want to keep in mind before making a commitment to a franchisor.

Entrepreneurs need not apply?
If you’re going into franchising because you want to be an entrepreneur, you might want to think again. “Some true entrepreneurs make lousy franchisees,” says Burton D. Cohen, founder of Delray Beach, Florida-based franchise consulting firm Burton D. Cohen and Associates L.L.C., and professor of strategic franchising at Northwestern University’s Kellogg School of Management. The concept of franchising is based on consistency, notes Cohen, and franchises

can become a source of frustration for some entrepreneurs because of restrictions inherent to the industry. “These types of entrepreneurs want to have total control over every aspect of the business,” he adds. “A franchised pizza parlor in one city, for example, will have the same ingredients, menu and even identical building designs as another location in a different place. This can be vexing for an entrepreneur who wants to add his or her own personal touch, or improve the business model in some way.”

Robert L. Purvin Jr., chairman and CEO of the American Association of Franchisees & Dealers, a San Diego-based nonprofit trade association dedicated to the interests of franchisees, agrees. “There should be a sign out in front of every franchise that says, ‘Entrepreneurs need not apply,’” he asserts. Geyen notes: “Entrepreneurs want to do their own thing, and franchises want good lieutenants who can follow their model,” which is what attracts many to the industry because you’re provided a turn-key operation. “A franchise is about being part of a team,” Geyen adds.

Due diligence is a must.
The worst thing prospective franchisees can do is slack on their homework. “This is something you cannot enter into casually,” says Cohen, who for nearly 20 years was senior vice president and chief franchising officer of McDonald’s Corp. (one of be’s 40 Best Franchises for African Americans). “Typically, people are putting, if not their entire life savings, a substantial portion of their life savings into a franchise, possibly going into debt and signing a lengthy contract–and those are things you don’t do without a lot of investigating.”

And sometimes that investigating starts with a deep self-evaluation. Nancy Dillard and her husband, Terrell, both 41, became franchisees of a JAN-PRO commercial cleaning company in 2003. But beforehand, Nancy says they “looked in the mirror” to see if they were really ready. The answer was a resounding yes, says Nancy, whose franchise is in Cleveland. “While I believe I’m a creative person, it’s nice to know with franchising you’re not reinventing the wheel,” she adds.

The Dillards’ self-reflection led them to a broker who assisted them with the process of choosing a franchise. They also hired a lawyer to help them sort through convoluted contracts. After deciding on JAN-PRO, they opted to take their ownership a step further and became master franchisees, which means instead of simply operating a single franchise they also sell unit franchises to others. The $100,000 investment it took to get the Dillards’ franchise off the ground has paid off tremendously. To date, they have sold more than 150 unit franchises. In 2010, the Dillards and their eight-person staff raked in more than $2.5 million in revenues, and the couple expects that to increase 10% to 20% in 2011.

Decision time.
Great places to start include the International Franchise Association’s An Introduction to Franchising manual (http://bit.ly/introtofranchising) and Black Enterprise‘s “The 40 Best Franchises for African Americans” (September 2010). Prospective franchisees should

also scour FRANdata, an Arlington, Virginia-based company that offers objective information about franchising, some for a fee. You might be able to circumnavigate fees by going directly to franchisors’ websites or reading trade magazines. A franchise expo could also help you make a decision. Once you’ve settled on a compatible industry, you can start researching and comparing franchises.

Documentation required.
The Franchise Disclosure Document, or FDD, contains critical information you need to know about a company before investing. All FDDs contain 23 items, including actual contracts franchisees will have to sign, as well as all of the company’s financial statements, information on staff, and the responsibilities of the franchisor and franchisee. “You cannot make a decision about going into franchising without thoroughly reviewing the FDD,” says Miriam Brewer, director of education and diversity for the International Franchise Association. “Everything you need to know about the franchisor is in that document.” You should also know about royalty fees, market saturation, territory restrictions (if any), and terms for renewing or selling the franchise, which are all included in the FDD.

While some private companies offer Franchise Disclosure Documents for a fee, Brewer says there’s no need for a potential franchisee to pay for an FDD. Franchisors are required by law to give prospective franchisees a free copy of the FDD before anyone signs a contract or pays any franchise fees.

Cohen says once you obtain the report, you should get a lawyer and financial adviser to help you sort through the documents because they can be dense. He suggests the International Franchise Association for expert legal advice, but you can also consult resources such as the American Association of Franchisees & Dealers’ LegaLine to help you find a lawyer with franchising expertise. When going through contracts, you should ask your lawyer if the contract treats you fairly, says Purvin. “Unfortunately most businessmen are only focused on the business terms and forget about the contract boilerplate that could seriously impact their rights.” Kiesha Geyen adds that when you’re comparing franchises and reviewing agreements, you should “pay close attention to any mandatory performance requirements, and understand whether the agreement provides flexibility related to economic conditions.”

When in doubt, check it out.
Cohen says franchisors typically have “discovery days” where prospective franchisees visit headquarters and learn more about the business to determine whether the franchisor is a good fit. At this point, you should be spending some hands-on time in the business to get a feel for what it’s like. The Geyens and the Dillards say they devoted about three months to researching and preparing themselves to get into their respective lines of business. You’ll also want to talk to franchisees. Ask current and former franchise owners about their

experience running their operations, as well as working with the franchisor and being part of the system.
Book Resource: The Franchise Fraud: How to Protect Yourself Before and After You Invest (BookSurge; $18.99) by Robert L. Purvin Jr.

Make yourself attractive.
If you think convincing a franchisor to choose you as a franchisee is as

easy as filling out some paperwork and plunking down cash, you’re wrong. Agreements and financial investments are important, but franchisors weigh other factors to help them decide whether they want to work with you.

Franchisors will want to know that you have a proven track record of success in your previous endeavors, says Cohen, but those endeavors are not limited to business. They may also want to see that you’ve had some profit-and-loss responsibility as well as fine-tuned people skills, especially if you are entering a service-oriented industry. And of course, you will want to make sure that your personal and business credit are excellent (read “Do You Know Your Business Credit Score?” Enterprise, July 2010). Larger franchisors have the luxury of being more selective, so polishing up your business skills is paramount.

Figure out the financing.
One myth about franchising is that it makes capital more available to you. Almost no franchisors provide capital, and Purvin says the opposite is more often true–many franchisors come to franchising as a way to get capital, not give it away. But if you choose your franchise well, you can find increased favor with lenders. For the most part, Purvin says, lenders are “looking for businesses that have a lot of equipment and a lot of real estate that they can provide as security.  The more equipment or assets you have that can be used as collateral, the easier it is to find money. It’s not easy to get traditional capital for a soft business.

Prospective franchisees should think long and hard about how they plan to finance the business, whether it’s through personal savings, an SBA loan, or through a bank that provides franchise financing.

Fiscal matters are certainly an essential part of one’s ability to successfully navigate the franchising landscape. However, finances are one card in a deck of many that you must be sure about if you plan to take the gamble on franchising in hopes of winning big.