Franchising – Getting Over the Fear of Buying One

If you’re looking for the safest way to expand or diversify a business, it’s franchising.

Now if that’s true, why do so many people fear franchising?

Since its beginning in the late 1800s, and with its post World War II expansion especially in the United States, franchising has developed one of the greatest business success stories of all time. Main Street America is populated by franchise outlets. From restaurants to specialty food shops, bookstores to clothing stores, beauty shops to postal centers, and a plethora of service providers, including carpet cleaners, auto shops and home remodelers, franchising is everywhere. Franchise businesses take in 40 percent of all retail sales in the United States.

There are some 2,000+ franchise companies supporting more than 900,000 franchised outlets in America. Countless people have become wealthy through franchising, and there are no financial or educational barriers to keep anyone from using this concept successfully. Governments around the world, and especially in the United States, have made it possible for the average person to investigate franchising and predict the outcome of a franchise investment. University studies, government statistics, and even polls by the Gallop Organization support the success of franchising.

So what’s to fear about franchising?

Critics say there are plenty of things to scare you away from the concept. Listen to the critics-some of whom failed in franchising and therefore believe they have the “credentials” to be critics–and they’ll tell you all the horror stories about franchising. Of course, there are horror stories about businesses of all kinds, yet only a misinformed person would say that owning a business is bad. Anyone who is willing to believe franchise critics, without doing their own homework, is probably better off fearing franchising. They’d also be better off not owning a business of any kind!

Fear is normal among business owners. Few people succeed without at least some fear. People like a little fear-they find it motivating. The greater the fear, the harder they work! Fear is only a problem when it stops you dead in your tracks. If you were so fearful of franchising that you couldn’t make a decision to buy one, that could be a mistake. However, that’s not to say that franchising is for everyone. It’s not. In fact, it may not be for you. But how will you know unless you move beyond your fear?

Let’s look at a few of the objections posed by franchise critics. Their information is not all wrong. It’s just not entirely accurate. And much of it decries simple common sense. They want people to believe that franchising is evil when, in fact, countless people will tell you that franchising helped them climb to greater levels of satisfaction and profit through their businesses. Franchising in America has helped tens of thousands of business owners become more successful.

Of all the franchise companies operating in the United States, some are better than others, but they are not all bad. Of all the franchisees in the United States, some are more profitable than others, but they are not all struggling for survival or even at odds with their franchisor, as some critics would have you believe. A little bit of investigation will show anyone who’s interested that there’s more good than evil in franchising.

Critics of franchising–including some misinformed legislators, educators, attorneys, accountants, reporters, and others who may have personal agendas-frequently miss the point about the success of franchising. Here’s the first complaint from many of them:

“The franchisor will make you pay a fee–upfront.”

That’s true. And let me quickly point out that these fees are sometimes hefty, up to $50,000 (though many cost less than $20,000). Critics say these fees are inflated and often unnecessary. They’ll have you think you can start a business independent of a franchisor without paying an upfront fee. And perhaps you can.

So why do franchisors charge franchise fees? If they didn’t have to, they wouldn’t! It would be a lot easier to sell franchises without an upfront fee. But franchise fees are necessary for several good reasons.

First, the franchise fee helps the franchisor recover money invested to start-up and maintain the franchise network. A franchise start-up can easily cost millions of dollars, and the ongoing legal, administrative, and operational costs can be staggering. A well-advised franchisor understands that break-even may be years away, requiring a specific number of franchises to be sold and supported. There’s a cost to franchising, just as there is to any product or service that’s sold. Surely it’s easy to understand that a franchisor has a right to recover this money.

Ah, but does it have to be paid upfront? That’s the rub for many critics, as well as for many would-be investors. Yes, it has to be paid upfront, and for another good reason. Let’s say you’re asked to reveal all your trade secrets plus train someone how to operate your business. Are you willing to do that without a financial guarantee? Before you spill your beans, you’ll want some money upfront. So does a franchisor.

Think for a moment about the value of paying an upfront franchise fee. What’s it worth if a franchisor hands you an established business system, one that you can use to churn out a profit year after year? You don’t have to invent the system, or even test it. It’s already a proven, working system! What would it have cost you to invent this system, assuming that you could? What’s it worth if the franchisor not only gives you the system, but spends a couple of weeks or more training you to use it?

Now, if you already know how to build and expand a business you probably don’t need a franchisor. But what if you don’t know? Do you have the franchisor’s experience of site selection, personnel recruiting and development, training, sales and production, marketing, advertising, operations, and all other factors relative to a thriving business? Do you have the benefit of group buying power and name recognition? If not, then the franchisor’s business system alone-without the training and support-may very well justify the upfront franchise fee. Go out and ask people who failed as independent business owners if they wouldn’t have preferred to buy a franchisor’s expertise and guidance. Ask someone who has spent 60 to 80 hours a week in the same business for 25 years, struggling most of the time, if it wouldn’t have been worth it-years earlier-to pay a franchisor to show them how to accomplish success faster and bigger. What would that have done for their quality of life?

Yes, success does come with a price and it’s called a franchise fee, and it will be required upfront. Keep in mind, not all franchises are created equal. Some are better than others. Some have inflated their franchise fees and they do not deliver on what they promise. But with a little homework-asking questions of existing franchisees, for example-you can easily determine which franchises are worth an upfront fee.

Critics say: “You’ll have to pay the franchisor a royalty. Forever!”

Yes, you will. Not forever, but for as long as you remain a franchisee. Franchisors generally collect a weekly or monthly percentage of a franchisee’s gross sales. That’s their royalty. The percentage will range from several points to double digits. Generally, royalties are higher than 5% and less than 10%.

While franchise fees help franchisors recover dollars invested in the business system, royalties supplement the franchisor’s ongoing operating costs, and provide a profit. Accountants and lawyers, who are not necessarily critics of franchising, have advised clients not to buy franchises because they thought the royalty fee was unnecessary, or too high, or it would prevent the client from turning a profit. Let’s look at the facts.

Support is a primary reason for the success of franchised businesses. Why do so many non-franchised businesses go out of business? It’s not for lack of capital, even though under-capitalization is often an issue. However, there are many instances where the business owner had plenty of money. But he or she ran out of money trying to figure out how to turn a profit. Franchisees usually don’t face that issue. First, they are licensed to use a proven business system. Second, they get ongoing support from a coach-their franchisor. Just like athletes who benefit from a coach giving them encouragement as well as helping them improve their style and performance, business owners can also benefit from ongoing coaching. You might already be pretty good at running your business, but imagine what might happen if you had someone who could help you improve just a notch or two! That’s what good franchisors provide to franchisees.

Of course, good franchisors are well staffed. Operating a franchisor’s home office is a huge financial undertaking. Making the payroll for 30, 50 or more than 100 people requires cash flow. Where does the franchisor get the money? Royalties! Successful franchisees recognize the value of the franchisor’s training and field operations staffs. They come to appreciate the research and development people, the technical, financial, legal and media experts employed by the franchisor. Successful franchisees don’t quibble about paying a franchisor a percentage of their gross sales because they know it’s a good investment in their business. Again, not all franchisors are created equal. Some provide more value than others. Before you invest in a franchise, find out if your franchisor of choice delivers what you will need to be successful.

Critics say: “Owning a franchise is just like having a job. You’ve got to take orders from the franchisor. You’re not really in business for yourself. You’re like an indentured servant.”

Entrepreneurial people are difficult to train as franchisees. We value our right to make decisions. We cherish freedom. We do not like following orders. We want the right to do things our way, even if it’s the wrong way. If you don’t want to march to a franchisor’s drumbeat, do yourself and franchising a favor and do not buy a franchise. You may never become as successful as you had hoped, but buying a franchise won’t get you there, either.

Believe it or not, like it or not, consumers prefer the same old same old. Think about it for a moment. If you’ve patronized a particular business in the past-a restaurant, a beauty shop, a home decorator, the auto repair shop-and you were pleased with the results, would you return to that same business again and again? Of course you would. If you moved to another state and needed a particular service or product, would you patronize a business you never heard of, or look for one that you recognize? Once again, it’s an easy answer. You like knowing what you’re going to get before you buy it. You like familiarity, and franchisors and franchisees know that familiarity breeds more business.

Familiarity is one of the reasons franchised businesses succeed. Each one that’s successful follows a system. The system has been crafted to meet the needs of consumers and ultimately to produce a profit for the person who implements the system. That’s called franchising. When franchisees refuse or fail to implement the system, their business under-performs and may eventually fail. Requiring franchisees to follow a system makes good sense!

Most small business owners, including franchisees, have little expertise in running a business. They may have perfected a skill or a craft, but that’s not the same as running a business. To succeed in business, an operator needs a system-even more than money-to survive and succeed. The system is one of the primary reasons for investing in a franchise. You may not like a franchisor’s system, or parts of the system. You might not like the way the franchisor advertises, markets and sells its products and services. You might not like the franchisor’s dress code, or decorating scheme, or hours of operation. But you best not minimize or ignore the franchisor’s system, and you are required to implement it to a T. If you don’t follow the system, the franchisor has the right to disenfranchise you, and for the sake of the franchise network, the sooner the better. A renegade franchisee can destroy an entire company. Franchised businesses work because they are systematized.

If you don’t like that, or you don’t like systems, or you don’t want to follow another’s system, do not invest in a franchise! It’s not for you.

Don’t believe the argument that in every instance franchising is buying yourself a job. Do you know anyone who sold their job after they quit, or retired? You can’t sell a job, but you surely can sell your franchise business. And just imagine how valuable it may be. With a franchisor’s brand name and goodwill, the operating system, as well as marketing and sales systems, plus research and development and ongoing training and coaching, your business is likely to attract an enviable sales price. With a good franchise, you’ll have an asset than many people may want to buy.

And one more point about the nonsense of buying a job. Franchisors do not make all the decisions for franchisees. A franchisor doesn’t show up in a franchisee’s office or store every morning to motivate the staff, or even to hire and train the staff. Personnel decisions almost always belong to the franchisees. Customer and vendor relationships also remain the domain of franchisees. Franchisors provide instruction and coaching, but they do not do the work of the franchisee. Ultimately, it’s your hard work that builds a successful business. Even so, a good franchisor provides its franchisees with many opportunities to voice their opinions and to help shape the franchise business.

So if you’ve lost some of the fear you might have had about franchising, how would you go about finding a good franchise opportunity? There are many online resources that you can consult beginning with the International Franchise Association’s (IFA) site at Franchise.org. There are seminars produced by the International Franchise Expo–see FranchiseExpo.com–and there’s plenty of good reading material.

Perhaps the best resource is the franchisor’s disclosure document, which is required by federal law. Franchisors must give it to you free before you can invest in their franchise. Be sure to ask for it! It’s critical reading. The disclosure document is written in a layman’s language so it’s reasonably easy to understand. Almost everything you need to evaluate a franchise opportunity can be found in the disclosure document.

The document includes a description of the franchise, a list of all fees required, the franchisee’s obligations, the franchisor’s obligations, information about territory, restrictions on what the franchisee may sell, financial statements for the franchisor and even the franchisor’s litigation and bankruptcy history, if any. However, the single most important section of the disclosure document may be the list of the franchise outlets. There you will find contact information for existing as well as previous franchisees.

Armed with this information, get on the telephone and start doing some research. Call as many of the existing franchisees as you want-there’s no limit. Ask them whatever you want. For example, “Would you buy the franchise all over again, knowing what you know now?” . . . “Does the franchisor deliver on its promises?” . . . “How has the franchisor’s system helped you advance the growth and profit of your business?”

Critics will tell you that existing franchisees will lie to you because the franchisor pays them. But you should know that if the franchisor pays them for helping to sell a franchise, that information has to be disclosed. If you call a dozen to 20 or more franchisees, you’ll likely hear some negatives as well as positives about the business and the franchisor. Call enough franchisees to get a fair sampling. Stop calling when you feel you have enough information to evaluate the franchise opportunity.

Along with this research, you should also consult with a franchise attorney and an accountant that understands franchising. Rely on the IFA to lead you to good sources. You may need to investigate several franchises before you find a good one, and one that’s a right fit for you.

Ray Kroc, the founder of McDonald’s, coined the phrase: Franchising is going into business for yourself, but not by yourself. That says it all. When you accept franchising for what it is, you accept the world’s most powerful system for building and expanding a business. If you explore what franchising offers, and thoroughly investigate the franchise opportunities of your choice before you invest, you can expect to succeed as a franchisee.

Will you succeed without fear? No. You’ll be afraid from time to time. But you ought to be scared to death to go into business without franchising!