“Franchising is a model for doing business, a recipe for success,” said Stephen Maeker, who has held director level positions at franchises such as Mr. Gatti’s, Mobile Oil and Jack-in-the Box. He and his wife own a franchise, and he is an independent franchise consultant.
If you research the 3,000 franchises in the U.S., you will find that not all franchisors are created equal, Maeker told attendees at a SBDC forum. He equated the science used by matchmaking site eHarmony (where he met his wife of 10 years) with the science and matchmaking required to find the right franchise for you. Approximately 99 different industries are covered in franchising with choices ranging from retail concepts such as food, fitness, hair care, medical and automotive to service franchises for home improvement, cleaning, home inspection, education and non-medical home health care.
The advantages of going with a franchise include their proven system which provides the potential for fewer mistakes; name brand recognition and marketing; training and support from the franchisor; tax deferrals and resale assistance. One study found that 90% of franchisees are still in business after five years, compared to 10% of non-franchise start-ups. Disadvantages include adhering to strict standards and procedures and paying franchise fees and royalties.
Entrepreneurs who like to have things their way are not well suited for a franchise, Maeker said.
“You must follow the rules. Ex-military personnel often make great franchisees, because they know the importance of following rules to a T. If you cannot play nicely with others in the sandbox, a franchise might not be for you.”
The Franchise Disclosure Document is the most important element in investigating a franchise, Maeker said. Each FDD, which he called the bible of a franchise business, covers the same 23 items, but the relationships, responsibilities, and obligations set forth in those items vary widely, depending on the franchisor. Key items covered are the Estimated Initial Investment, Franchisor’s Assistance, Territory and Financial Performance Representation, which may or may not include revenue and profit projections. The items delineate the fees and initial investment costs, site location, territory size, restrictions on what a franchisee may sell and where they buy their products, the revenue and profit models of existing franchises, and much more.
One of the first things to look at in the FDD is how much litigation the franchisor has faced, Maeker said. “None is best.” That means the franchisees are happy with the relationship with the franchisor. Another important focus is the Initial Fees. “You often see incentives to buy multiple units.”
To read more of this story by Eileen Mattei, read the March 2015 edition of VBR under the “Current & Past Issues” tab on this website, or pick up a copy on news stands.