August 15, 2010Buying a Franchise vs. Starting Your Own Business
I was recently interviewed on this topic for a major online news magazine. The questions and my answers were as follows:
Why do many former corp. executives prefer to buy a franchise rather than starting a business from scratch?
In three words -- safety, security and support. When you buy a franchise, you are buying a model that has been proven successful in dozens, sometimes hundreds, of other places. Also, you get extensive training and 24/7 support. As a result, franchised businesses tend to fail much less often than their standalone counterparts. For middle aged executives (people aged 50 to 60), franchises are especially attractive because the typical franchise term is 10 to 15 years thus creating a "bridge to retirement". The executive can build the business and then either sell it or hand it off to the next generation when it comes up for renewal.
What are the advantages to a "turnkey" business, especially for someone who really didn't start out wanting to have a business of their own?
In two words, "less risk". Unlike a startup business, an existing business has a location (and you often can assume the seller's existing lease without negotiating an entirely new one), employees (and you may want to keep some of them), equipment (most of which doesn't need replacement), and customers (many of whom will likely continue with the business after it changes ownership). Also, because the business has a history, you can review financial statements, tax returns and other data to help you determine how much you will be able to take out of the business each month as compensation (called "Owner's Discretionary Income" or "ODI"), how long it will take you to recoup your investment in the business, and so forth.
What kind of due diligence should you do before signing a franchise contract?
First, you should speak to as many franchisees as possible. Don't be afraid to talk to every franchisee in your area, even if you have to ask the same questions over and over again. Don't just listen to their words: listen to the "music" as well. Do they seem happy? Are they satisfied with the support the franchise is giving them? Are they still as excited about the franchise as they were when they first bought into it? Sometimes the 19th franchisee you talk to will tell you something the first 18 didn't, and that will be the information that helps you decide whether you really want to buy the franchise or not.
Second, don't rely on the franchise's estimates of the cost of starting up the franchised business. Get "real world" quotes in your area and do a spreadsheet showing how and when you will be profitable. Many franchises start in low-cost areas of the country, where real estate and employees are plentiful and inexpensive, only to have their franchise models break down when they expand to the East and West Coasts where everything's more expensive. You have to sell an awful lot of doughnuts each month to pay rent that's $60 a square foot or more.
Third, always, always have an attorney review your franchise contract before you sign it -- even though most franchises don't negotiate or change their franchise contracts, a good attorney can help educate you on the risks of buying that particular business. Also, most franchises will if pressed give you a "clarification letter" explaining provisions in their contract that might be ambiguous -- that could be a useful document to have if you have to sue them down the road.
What are the biggest mistakes your clients make when buying a franchise?
By far, assuming that the franchise will do all of the work of marketing and promoting the business. When you buy a franchise, you are halfway between working for yourself and working for someone else -- you are executing someone else's business model (the franchise's) but you are just as responsible for growing your franchise outlet and generating sales as a startup entrepreneur would be. Franchisees who sit behind the cash register waiting for customers to show up, relying on the franchise name and reputation to generate business, rarely succeed. The people who succeed at franchise ownership take it upon themselves to get out there, hustle, get involved in their communities, and make sure the phones are ringing and the customers are showing up at the door.
Any other advice on the topic?
Buy only franchises that have proven their concept and that have at least 30 to 40 existing locations in different markets. Look for franchises with business models that are likely to last for a long time and are keeping pace with new technologies -- Blockbuster Video® was one of the hottest franchises of the 1980s but I'm not sure how their model will stand up in the age of Netflix and RedBox.
Finally, look at the people -- after all, you are relying on them to be there for you when the going gets rough. Do they have the experience to run the franchise and keep the model up to date? Do they know the industry? Do you trust them? Is the franchise overly dependent on a "key" individual who could get run over by a truck at any time? At the end of the day, if you don't "buy" the people, don't buy the franchise.
) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
. COPYRIGHT 2010 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS.COM. Permission granted for use on DrLaura.com.
Posted by Staff at 12:51 AM