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Front Page » August 29, 2013 » Focus » To franchise, or not to franchise?
Published 767 days ago

To franchise, or not to franchise?

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When people talk about the American dream they often include in that dream having a great job they love, owning a home, having a family and owning their own business.

That last one, owning their own business, comes in many forms. Some people inherit businesses either from family or from associates. Some start from scratch and create their own path.

And still, many more buy a franchise.

Franchises are a way of getting into business that requires one to evaluate what another has done and see if it fits their idea of what a business should be. Putting money and time into a franchise however, can be just as risky as putting those same investments into one's own invention.

Kerry and Frankie Jensen started looking into business opportunities about 12 years ago when Kerry ended up out of work as a coal miner.

"No one was hiring, and the only way I could have found work with someone else was to move and I didn't want to do that," said Mr. Jensen. "I looked around and saw a need and did some research. In February of 2001 we bought the ServiceMaster Franchise for this area."

What a franchise offers

Imagine yourself in a wilderness where few people have gone before. You roam around trying to find all the staples you will need to sustain life. You need shelter, food and water. You have little idea of where these things are, other than through your experience in the world you come from. Some things you know will fit your circumstances; like water is usually in rivers or streams that flow in low places. Other things, like trying to build a weatherproof structure out of the materials available or trying to eat berries and nuts, without knowing which are poisonous and which are not would certainly complicate survival. In this situation during the summer months many of the things you would need would be easy to find. In the winter, not so much.

And you would realize that if you don't figure it all out, at least in some order, you will probably perish during the cold weather.

Then imagine you find someone else living in the wilderness. He has a good shelter, has learned where the good berries are, where the best fishing spots are and most of all, he knows what you have to do to get through the frigid times. He offers you all this knowledge, but with one catch. He wants you to donate part of what ever you create, grow, scavenge or hunt down to him in trade for his knowledge.

What do you do?

Buying a franchise in a business is much like this, particularly if you are entering into a business field you know nothing about. In a sense you are out in a wilderness, the wilderness of business. Even with the knowledge you have, you may not have the answers you need to do everything it takes to make a business successful. If you buy a franchise, the right kind of franchise, in the right kind of business, you just may be successful. No one can guarantee anything.

But that's the point. Some people who buy franchises are totally successful and make a lot of money for both themselves and for those that own the franchise. In a sense the franchisee is the customer of the franchise owners; yet there is a bond that must exist there that can get them through what sometimes get to be complex problems.

What a good franchise offers over starting up a business cold are the following things.

Experience. If a franchise owner has long term franchisees who have been successful, this experience is a plus.

A plan. Good franchises come with a plan for everything. The owners of a franchise company should know the drawbacks and how to avoid them. They should be able to express to you the costs and advantages of a franchise. They should also be forthcoming about the pitfalls and be willing to help you work through those.

A name. Everyone knows the million dollar franchises (ones that make the purchases millionaires). Those kinds of franchises usually cost a great deal to get into. However, there are many other companies that offer franchises that are at the level many average people can afford. The better known the name, the better it is for you. However, be sure the name is positive in the customers minds, not just because you have seen it a million times on television or in print advertising.

Support. Support includes all startup information, extensive training for you and even for your employees, problem solving solutions based on their experience and marketing materials/advertising.

In the Jensen's case in the two months after they purchased the ServiceMaster franchise they had training a myriad of things and their firs job came to them in April. And it wasn't really much different from actually doing a regular startup in some respects.

"We started it in our garage with no employees except us," said Mr. Jensen. "Now we have an 8,000 square foot office and shop, a lot of equipment and several employees."

Check it out fully

While buying into a franchise seems easy for some people, it may not always be a bed of roses for others. Those selling franchises design their materials that they are using to get you to buy into the company. They usually show you a plan that will demonstrate longevity and good revenues.

But one must be careful about any franchise, even many name brand ones. Those selling franchises are in the business to make money, and they make money by getting you to purchase one of their franchise. Of course they also want you to succeed because franchises get money not only from the initial sale, but also from fees and charges you pay while you run the business.

There are a number of things you should ask about and evaluate carefully.

First is finances. Is the franchise company stable. How much debt do they have and how are their existing franchisees doing.

You should get a financial disclosure statement from them when considering the buy. If you aren't sure you understand it all (because often these documents can be complex and daunting to look at) get someone professional who can. Their past actions are important because it shows tendencies and trends, but you should also look at their growth and their plans for the future.

In the Jensen's case this was one of the pluses. The business was sustaining right from the get go, but it was still a bit of struggle.

"They gave us the business tools to sustain our operation for the long term," said Mr. Jensen. "And in our case we also get to work some national contracts that we wouldn't get if we had our own operation."

Next ask about who your competition might be from the same company. If you buy a franchise with the company, is there a protected area? Geographically if someone else can buy a franchise for the same service in a rural area, it could cause you a lot of heartache.

Evaluate the competition. Whether the franchise is known for making hamburgers or for cleaning houses, there will be competition. Some who sell franchises often speak of their unique way of doing things that differentiate them from any competition. This may be true in fact, but the perception of the customer who will be buying from you to support your business may not be able to really discern the difference between Joe's Diner's fried chicken down the street and your new International House of Wings restaurant franchise you want to buy. A new guy on the block often gets some initial good business because it is new, but longevity in a market makes existing competition a real obstacle, especially if what they do pleases the customer.

Look for costs you can't see. A franchise costs money to buy. Then there are fees that must be paid to the company as well.

In the case of the Jensen's his research showed what those costs would be.

"We pay 10 percent of every dollar to ServiceMaster for having the franchise," he said. "Then there is another 1 percent we pay for the marketing and promotion they provide."

Those are the up front costs and you need to ask what they supply for that initial price.

Then also understand that you will need money to finance the business for at least a year. That means paying employees, material costs, equipment costs, rent, and to have enough money for you to get by on for that long too. You must also think about all the things that are extra besides these items such as paying taxes and license fees. Insurance is needed in many different forms for businesses from liability coverage to workers compensation.

Finally you need contingency money too. What if a year is just not quite long enough to get a beach head started in the community for your business. You may need more, so plan on a reserve.

Who will do and pay for the marketing and advertising. In the Jensen's case the national organization does that, but what about local advertising? Many franchises have marketing programs to get the word out about their franchisees. Big franchisers have national television ads and internet ads. Smaller ones have various other ways of doing it. Who will make the decisions about advertising. Under their umbrella will you be allowed to advertise locally in the newspaper? What kind of support does the company give for local advertising? Is their co-op advertising where the company pays part and the local franchise pays part? Many franchises put a strict hold on what they will advertise locally or even if they will do it at all.

Finally, how will you work under such a system. Many who buy franchises have either tried to start their own business or have been a part of another start up business. A franchise is a road map, with advisory signs all along the way. But just like any road map if the directions say go left and you decide you are smarter than the map and you go right, you could end up driving right off the map. The fact is that many entrepreneurs are self starters, but they are also very much self thinkers. It is hard for some people to accept advice, especially if they have vast experience in a field which the franchise deals with in the first place. Some of the most successful franchisees in business knew very little about the nuts and bolts workings of the business they bought into when they began. Remember that if you buy a franchise, you paid for the advice and the map of how to get to success.

And remember too that besides the economic and personnel bumps in the road that could be experienced, no franchise company is perfect. Sometimes they may just not understand your situation completely.

"There are a lot of pluses to having a franchise, but there are some cons as well," said Mr. Jensen. "One of those is that often franchises are run by people from metro areas and may not understand what a rural business has to face. For instance they sometimes don't understand the distances we have to travel to do a job."

In the Jensen's case, despite some of the drawbacks, buying a franchise is a good move, but it isn't a piece of cake either. Depending on the franchise and what it does may require real sacrifice, not only in terms of money to begin with but huge amounts of time.

"We are on call all the time because of the business we are in," stated Mr. Jensen. "That's just the kind of business it is."

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August 29, 2013
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