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2011
SBC Team

Franchising for Beginners

Posted by SBC Team Nov 30, 2011

White-in-article-square.jpgDo your homework before leaping into a franchise business model.

 

by Sherron Lumley.

 

“I didn’t want to start from scratch,” says Ann Bell who bought a Subway sandwich-shop franchise in 2010 with her husband Steve. “I was a stay-at-home mom and our kids are older now and off to college, so I decided it was time to go back to work,” she says. Although her husband had small business experience, Bell was more of an entrepreneurial beginner, so buying a franchise appealed to her as a safe way to invest in a business and re-enter the work force. “I work better under structure,” she says.

 

Pull-Quote.pngIn the franchise form of business, a franchisor licenses to a franchisee the right to operate under a trade name, sell its products and services, and receive guidance, in exchange for a fee. “My first step was to research the business model, to see if I could believe in it and embrace it,” says Bell. Typically, the franchisor provides business expertise in the form of marketing plans, management guidance, financing assistance, training, and sometimes site location. The Bells who are from Oregon, went to “Subway School” in Connecticut for training.

Here is a look at three early steps to franchise ownership.

Step One - Decision to buy a franchise: Yes/No

A franchise is a familiar form of business in America, accounting for 10.5 percent of all businesses with paid employees, according to the U.S. Census Bureau. Clearly, the decision to buy a franchise has some strong advantages. In The Franchise Bible, How to Buy a Franchise, or Franchise your own Business, author Erwin J. Keup, says that group advertising power, recognizable trademarks, franchisor experience, patents and designs, training from experts, and a lower risk of failure or loss of investments are top reasons to become a franchisee. Other reasons are uniform operation, assistance in financial and accounting matters from the franchisor, and ongoing support.

Although ongoing support is typically considered one of the greatest advantages of franchising, it comes with a price. Nolo.com, a legal resource publisher, provides a look at some of the disadvantages to franchise ownership, which include royalty payments to the franchisor, advertising fees, and high start-up costs. Indeed, nine of the top ten U.S. franchises have start-up costs averaging more than $100,000 and the top three (Hampton Hotels, ampm convenience stores, and McDonald’s) are beyond the million-dollar mark to start.

 

For a sense of the ongoing fees franchisors expect, Subway requires franchisees like the Bells to pay 12.5 percent of their gross sales every week to the company; 8 percent of this goes toward franchise royalties and 4.5 percent goes towards advertising. This is in addition to the initial franchise fee of $15,000 and Subway franchise capital requirements fall between $115,000 and $258,000. However, not all franchises require such a hefty investment. Number seven on the list of the Franchise 500, Vanguard Cleaning Systems, has start-up costs of just $8,000 to $38,000.

 



 

For more information on choosing between launching your own business or buying into a franchise, check out our recent story: “My Way or the Buy Way.”

 

Step Two - Shopping for a franchise

Certainly, cost will be a factor and franchise options will be far different for a small business owner with a few thousand dollars of capital versus another with a million or more to invest. Here are a few of the many ways to shop for a franchise at all budget levels: 

 

The Franchise Registry, through a partnership with the U.S. Small Business Administration (SBA) maintains a list of companies with franchises that are pre-approved for expedited loans.

 

The Federal Trade Commission recommends attending a franchise exposition to compare a variety of franchise opportunities and using a franchise broker who can help with applications and paperwork. But remember, the brokers often work for the franchisor. Information about upcoming national and international franchise expos and trade shows is available online at FranchiseDirect.com.

 

Franchise.com is another popular online resource. It offers an interactive search of franchises for sale by budget, industry, and location. The Internet is full of franchise websites to research, but “be on the lookout for certain characteristics that are very common among untrustworthy or illegitimate franchising sites,” warns Kevin Murphy, author of The Franchise Handbook. He specifically cautions against dealing with a company that does not provide full financial details at the outset and says that websites with overly aggressive marketing and a lot of hype should also be avoided.

 

As with any small business venture, consider the demand, competition, and ability to operate the business in making a franchise selection. 

 

Step Three - Follow a franchise investigation strategy

“Never do business with people you have not met,” say the authors of Street Smart Franchising, Joe Mathews, Don DeBolt and Deb Percival. “Franchising at its best is a highly personal relationship. You are entrusting your dreams and capital into the care of the franchisor leadership,” they say. Visit the franchisor’s home office and further investigate the franchise by interviewing franchisees in person, and reviewing the Franchise Disclosure Document (FDD) with an attorney with expertise in franchise law.

 

In interviewing other franchise owners, ask questions about their experiences, both good and bad. “It’s important to interview people so you know the bad and ugly,” says Bell, who found this helped her know ahead of time what it would really be like to own a franchise. For example, she learned that unlike working for someone else, “It’s nice to work for yourself, but you do take your work home with you,” Bell says.

 

A look at financial prospects for franchising

 

Using Census Bureau data, the International Franchise Association released a detailed report on this segment of the U.S. economy called The Franchise Business Economic Outlook: 2011. It forecast growth in all industries except Business Services, reporting: “The largest percentage increases in the number of establishments in 2011 are projected in Lodging (4.4 percent), Automotive (3.9 percent), Retail Products and Services (3.9 percent), and Commercial and Residential Services (3.7 percent).”

 

“The forecast of stronger growth in 2011 for franchise businesses is good news for our country. When franchise businesses are stronger, so is our economy as a whole,” said IFA President and CEO Stephen J. Caldeira. “However, while the forecast reflects a stronger outlook for the franchise industry and the overall economy, franchise businesses will continue to struggle with accessing sufficient credit that would enable business expansion and job growth,” he said.

 

Caldeira says that lending to franchise businesses was down in 2010. “For 2011, the credit gap between supply and demand should show some improvement, but we are a long way off from the pre-recession, more robust appetite for business investment and lending.” According to the SBA, total small business lending peaked in 2008, when depository institutions in the United States held small business loans valued at more than $711 billion, then declined by 8.3 percent to $652 billion by 2010. In the first quarter of 2011, the SBA reported bank lending to small business [including franchises] fell by $15 billion.


 

Since 2007 when the Census Bureau first gathered franchise data, the number of franchise establishments is estimated to have grown steadily from 765,723 to 784,802, whereas overall entrepreneurship has had a slight decline. (Bureau of Labor Statistics data for self-employment in non-agricultural industries.) Perhaps one explanation for this is that risk-averse behavior kicks in during times of economic duress. The Bells wanted to own a small business, without all of the risks involved with going solo. By buying into something larger, gaining considerable expertise and centralized marketing, advertising, and promotion, Bell says she felt comfortable with the decision to buy a franchise. “I’m really happy with my outcome,” she says.

 

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Additional Franchise resources:

 

White-in-article.jpgby Cindy Waxer.

 

Cary Cheung wakes up at 4:30 a.m. every morning to run a business that requires him to pay a fee. He doesn’t own it outright, and it doesn’t even bear his name. And yet he couldn’t be happier.

 

That’s because Cheung is a franchise owner of Doc Popcorn, a maker of flavored popcorn that uses a variety of organic and all-natural ingredients. In fact, Cheung abandoned his career as an assistant vice-president at WaMu Investments to become Doc Popcorn’s very first franchisee in November 2009. And just a few weeks ago, Cheung and his wife, Judy, opened their second Doc Popcorn location in California.

 

Pull-Quote-Tall.pngThe Cheungs aren’t alone. According to the International Franchise Association, approximately 4 percent of all businesses in the United States are franchisee-worked. And the consultancy Franchise Marketing Systems says that franchising is a business model that generates more than $1 trillion in U.S. sales annually across more than 70 industries. Franchised businesses ran 767,483 establishments in the United States through 2008, including establishments owned by both franchisees and franchisors.

 

But while running a franchise business can be both professionally attractive and personally satisfying, not everyone is cut out for the task. Just ask Amy Bennett, owner of The Greene Grape, a Brooklyn, New York-based seller of fine food and wine. The choice was obvious to Bennett: “Part of opening my own business rather than a franchise was for it to be a creative outlet for me. I wanted something I could contribute to meaningfully.” Add that desire for creativity to the many negatives associated with franchising, such as royalty fees, restrictive licenses, meddlesome franchising authorities, and a lack of ownership, and it is easy to see why many are dissuaded from signing up to become a party to a franchise.

 

For many others, of course, those negatives are more than outweighed by the many benefits of running a business associated with an established brand and backed by the marketing muscle and support of a large corporation. So how do you know if you’re best suited to run a franchise or if you should strike out on your own? Answering these five questions can get you a step closer to the right answer.

 

1. How much legwork are you willing to do?

“When you invest in a franchise, you’re getting the brand name of the franchisor, the operating system, a proven track record, not to mention ongoing support, education and training,” says Brian Miller, president of The Entrepreneur’s Source, a business ownership consultancy in Connecticut. “If you started out running your own business, however, you really wouldn’t have anybody to rely on.”

 

That kind of pre-existing structure was precisely why the Cheungs opted to run a franchise. “My parents owned their own restaurant so I saw the struggles they had starting off and all those lessons they had to learn,” he says. “The attraction of a franchise is the system is created for you.”

 

“There are very few people who are true entrepreneurs and who can really go out and make a business their own,” says Miller. “But there are a lot of people who have that passion and fire in their belly and know that they want to take control of their own destiny but need a little bit of help.”

 

2. What are you willing to invest financially?

Launching your own business often requires little to no capital, especially if you start small. But many popular franchises demand lots of upfront capital and collateral—sometimes up to millions of dollars—from a prospective franchisee before offering a contract. These “working capital reserves,” as they’re called, are often required by franchisors so that they will feel comfortable that a franchisee can stay in business until he or she reaches the financial break-even point.

 

In the case of Cheung, he invested between $100,000 and $150,000 to open his first store, including upfront franchise fees. “That was a main reason why we chose Doc Popcorn—the low entry point.” Every other franchise he looked at was going to cost from $200,000 to $250,000 to start, he says.

 

Still, some franchises are willing to lend a helping financial hand. “My wife and I funded the store on our own, but I know that Doc Popcorn has third-party connections to help with funding,” says Cheung.

 

To learn more, check out our previous article on franchise startup costs.

3. Can you back someone else’s product?

While there’s definitely something to be said for creating your own business, many entrepreneurs are proud to peddle a franchise’s products. “The only reason we signed with Doc Popcorn is because of the product and what it represents,” says Cheung. “Of course, trying to make money is always a goal for all business owners but you have to believe in the product.”

 

For Bennett, however, launching The Greene Grape was an opportunity to express herself and act on her vision of a perfect wine shop. “At the time I opened my first wine store, there wasn’t really a franchise that focused on handcrafted, affordable wine,” she says.  “My twist on a regular wine store was part of the creative process.”

 

4. How much say would you like in the business?

The advantages to running your own business are mostly in creative control,” says Bennett. “I can market the way I want, my store can have a personality that reflects who we are. This means a lot more work, of course, but at the end of the day I can step back and be proud of how the store is presented.”

 

That’s not to suggest that franchisees don’t have any input. Rather, Miller explains, “As you become successful in a franchise system, there are opportunities for you to work collaboratively and to develop new products and services.”

 

5. How long can you wait to break even?

According to Miller, “the support given by a franchise in the beginning in terms of brand recognition means that you might have a quicker start in terms of sales. Educating the consumer for a new business definitely takes more time. Depending on how a franchise agreement is structured, that could mean breaking even for the franchisee earlier.”

 

Still, if the substantial franchise buy-in requirements are too steep, taking the franchise route (and its more desirable, early break-even point) may not be a realistic option for many budding entrepreneurs. Instead, they may have no other option but to launch on their own, either diving into entrepreneurship full-time and striving for a quick rise in profits or running a side or part-time venture for a longer period of time, until the business proves it can stand on its own.

White-in-article.jpgBy Sherron Lumley

 

“I’m at work all the time,” says Beth Rountree, owner of Beth Rountree Design in Austin, Texas, a home-based graphic design business specializing in print media. “I had my daughter in 2000 and was on maternity leave when I got my first client, then it ballooned into a business,” she says. “Having the flexibility to stop and be with my family for dinner is huge for me,” she adds.

 

More than half of all U.S. businesses are home-based, according to the U.S. Small Business Administration (SBA). For some people, the dream of working from home stems from a desire to be a stay-at-home parent, others want the opportunity to pursue what they love, and then there are those who just want to avoid an unnecessary commute. Although the reasons behind it are many, operating a business from home is a rewarding, yet challenging, balancing act that many people are choosing to pursue across a broad spectrum of industries. Here’s a look at five popular choices, followed by a word of caution about fraudulent work-at-home schemes. 

 

1. Service Businesses

For John and Laura Roberts, owners of Burnt Ends BBQ in Portland, Oregon, their part-time venture started from a hobby. “Our business grew out of our experience competing in professional barbeque contests,” John Roberts says. “People started asking us if we catered, and now we have an office set up within the home,” he says.

 

Pull-Quote---Tall.pngRountree and Roberts give a peek at what its like to say, “I’ll be home for business,” in the service sector, which accounts for more than half—52 percent—of all home based-businesses in the United States, according to a report for the U.S. Small Business Administration Office of Advocacy.

 

“A big advantage for me,” says Rountree, “is being home for my family and being able to be active with my kids.” But there can be drawbacks, too, she acknowledges. “The downside is that I have to wear so many hats,” she says. “Also, you never know when you’re going to get paid. That’s a tough pill to swallow. You go on vacation—you don’t get paid.”

 

The Roberts couple adds, “One of the challenges is that we are fitting it around our other work schedules.” In addition to the demands of running the catering business, including marketing efforts such as creating brochures, placing local advertisements, and updating their web presence, they are still maintaining other full-time jobs outside of the home.

 

2. Construction

A distant second to the service industry, representing 16 percent of home-based businesses, is construction. Though only one-third of carpenters are self-employed, an overwhelming 93 percent of them are home-based. Similarly, of all the general contractors in the country, approximately one in four are home-based businesses, according to the Bureau of Labor Statistics. For more on working out of one’s home in the construction industry, the SBA provides information and resources, including relevant details about issues such as energy efficiency, federal contracting, and hazardous materials.

 

3. Web Stores

Retail trade accounts for another 14 percent of home businesses and Web-based storefronts have become even more popular among the work-at-home crowd in recent years. In Do-It-Yourself Web Stores for Dummies, author Joel Elad says, “Your ultimate goal as a web store owner is to purchase your inventory via wholesale channels.” For product sourcing, he lists a few websites to get started: Worldwidebrands.com, Whatdoisell.com, and Liquidation.com.

 

4. Finance, Insurance and Real Estate

Finance, insurance, and real estate make up five percent of home-based businesses. These require licensing by various national and state agencies based on educational requirements and exams. About one in ten professionals in this sector works from home, with the highest percentage found in real estate. The National Association of Realtors (NAR) lists many types of real estate businesses including residential, commercial and industrial brokerage, farm and land brokerage, and appraisal.

 

5. Transportation

Transportation ranks fifth place for home-based businesses, comprising four percent. A popular new concept in this category is non-emergency medical transportation, helping those who need assistance, such as people who use a cane, walker or wheelchair. Check with the local department of health-and-human services for specific requirements, which vary state by state..

 

You can also check out our earlier article on the too-good-to-be-true nature of many work-at-home schemes.


Keeping it legal:  Zoning laws

Most if not all cities in the U.S. have zoning laws in place regarding which businesses can be run from home. “In terms of zoning, the potential issues for home businesses include: exterior signage, parking, noise, pollution, fire and hazardous substances, employees working in the home, client visits, deliveries and shipping, water runoff and drainage,” say James Stephenson and Rich Mintzer in the Ultimate Homebased Business Handbook. Check with city officials to learn what local laws are in place governing home based businesses in your location.

 

Taxes

There are home office tax deductions available for home-based businesses in every industry. To learn more about them, visit the Internal Revenue Service (IRS) web page on home office deductions. “Generally, deductions for a home office are based on the percentage of your home devoted to business use,” the IRS says.

 

(Home-based) Buyer Beware

There are many models for home businesses and buying a legitimate work-at-home franchise is an option gaining momentum, but an ounce of prevention against fraud is a must. The SBA counsels prospective entrepreneurs to investigate any franchise opportunity by asking previous and current investors about their experiences and having an attorney review the offer. Get all the facts about the franchise, including a written substantiation of any income projections or profit claims, which the Federal Trade Commission (FTC) requires that any franchisor must provide upon request.

 

So, if that work from home medical transcription job or online Mystery Shopper opportunity sounds to good to be true, it very likely is. Doing your due diligence is the only way to know for sure. A good place to start one’s search is the FTC’s Scam Watch site, which explains how to avoid bogus business opportunities and offers key clues for spotting fraud, such as claims of exorbitant or guaranteed pay as well as promises of ideal work situations. It also lists the most popular work-at-home schemes in its top 10 online scams.

 

To determine if a home-based business franchise is a legitimate opportunity: investigate, investigate, investigate. Start with a reliable source such as the Better Business Bureau or FranchiseDirect, which is a BBB-accredited company that provides a directory of legitimate franchises for sale, including a home-based category. Only then will you begin to know if you’re ready to say, “I’ll be home for business.”

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