Franchise opportunities bring many entrepreneurs into the world of small business. Many people hunger for the success of many franchise owners – and overlook the failure of many who try.
By definition, a franchise is “a business system in which private entrepreneurs purchase the rights to open and run a location of a larger company.” McDonald’s, Burger King, Jack ‘n the Box, right? Yes, but the franchise world is bigger than fast food restaurants. It includes convenience stores like 7-Eleven, hotels like Hampton Inn, hair stylists like Cost Cutters, and plumbers like Roto Rooter.
Depending on the franchisor’s requirements, the franchisee boards the brand name ‘success train’ in exchange for upfront money and a percentage of revenues thereafter. The business owner (franchisee) receives training, supplies, product, advertising, and a range of support systems – just about everything to make the franchise work. Yet, there are downsides. Among them, the franchisee surrenders independence. The franchisor has invested big bucks in development and is not about to let a first time entrepreneur run it into the ground. Again, depending on the franchisor, the franchisee can expect a complicated, multi-faceted contractual relationship.
Interestingly, there are a number of franchises available for start-up at reasonably accessible costs. For example, Entrepreneur lists 50 “low-cost” franchise opportunities. Among the 50 companies listed, there is a wide range of franchise fees, royalty fees, length of agreement, and so on. Additionally, there is a variety of expectations, cash on hand demands, and net worth demands. You would be well advised to work with an attorney specializing in this arena and to examine the nature of support and training in meticulous detail.
One thing I should bring to your attention to is the nature of the franchises on the list. Almost all of the 50 are service franchises, some of which can be run from home. Almost all of them address lifestyle issues: home/office cleaning services, tax preparers, exercise classes, training lessons, carpet cleaners, travel agencies, landscape maintenance, and pet care. In fact, seven of the top 10 are commercial or residential cleaners. These choices reflect an economy that assumes a future where consumers will be employed. These future consumers will look to keep up their homes and businesses. These are conservative spenders who are less likely to eat out or sleep over at a franchise, but who are more likely to spend on home improvement and self-development.
Such opportunities are loaded with concerns that are subtle and not apparently part of the upfront costs. For example, your research has to determine the reputation for support from the home office; such support is part of your purchase, and if it isn’t there, you have been scammed. Upfront costs and royalties are intangible until you run the numbers, so get a fix on how this rolls out. Franchise contracts are usually unilateral and favor the franchiser; make sure you can live with those implications. Also, make sure you can meet and exceed the high productivity requirements. Finally, only you can figure out how long you are willing to owe your royalties and loyalties – to “the company store” – without resentment. If you don’t like the arrangement now, your sentiment is unlikely to change in the future.
By Steven Schlagel