When Ron Holt signed up to buy a house-cleaning franchise in Pensacola, Florida 10 years ago, he was, in his words, a "bright-eyed 28-year-old full of blind energy." Unfortunately, his eagerness quickly turned into disappointment and disillusionment—and that was during the initial training week.
"I realized that the franchise system worked extremely hard to limit my success," recalls Holt. "I knew that I was going to be charged a royalty on all revenues, but I had no idea that so many other costs were going to be originating from the franchise home office.”
In compliance with rules, the franchisor mandated that all franchisees buy marketing materials from its home office. This edict also applied to cleaning and office supplies as well.
"Worst of all, there was a vague technology fee that the franchisor demanded for IT support," Holt explains. “It disturbed me because I truly wanted to live the life of an entrepreneur."
After paying a penalty fee, Holt backed out of the franchise agreement. He soon bought a small mom-and-pop cleaning shop that has since grown into Two Maids & A Mop, a thriving business with 12 locations in Alabama, Florida, Georgia, North Carolina and Tennessee. Now comes the twist: Although Holt had vowed never to consider franchising his business, Two Maids & A Mop recently sold its first franchise in Tampa, Florida. Holt adds that more franchise deals are scheduled to be signed before year-end.
So what happened to convert this one-time franchise skeptic?
"I knew what was wrong with the house-cleaning franchising industry based on my early experiences,” he says. “But what if I could do things differently? What if I could set up the franchisee for success rather than for my maximum profit?"
By charging only royalties—and nothing else—to potential franchisees, Holt feels he's reinvented the franchise business model. Time will tell if this blueprint will be successful. But it's certainly an example of turning a negative franchise experience into a new way of operating. Consider these lessons before you sign on to become a franchisee:
As Holt's anecdote demonstrates, had he done his research before signing up with his first franchise, he would not have been so blindsided by the franchisor's requirements. Consequently, Holt wasted time and money (approximately $25,000, which Holt says was separate from the initial franchise fee and miscellaneous startup costs) when he could have been building an independent small business for himself.
Edward Kushell, president of the Los Angeles-based The Franchise Consulting Group, which helps entrepreneurs franchise their business operations, agrees wholeheartedly.
"The irony in [not doing your due diligence as a potential franchisee] is that in today’s world where there is instant and comprehensive information available on almost anything, learning about given franchise opportunities is not difficult,” he says, noting that he’s the former owner of eight franchises. “Moreover, franchising is regulated by certain states or by the Federal Trade Commission and requires franchisors to disclose information to a prospective franchisee prior to any franchise sale."
In addition to gathering as much information as you can about your potential franchise opportunity, Kushell also advises franchisee candidates to check consumer watchdog sites such as Ripoff Report or BlueMauMau, to uncover any unethical practices. And of course, scrutinize and vet the franchisor website thoroughly.
"Note all the promises and representations they make," counsels Kushell. "These should be the basis of many of the questions you will ask when and if you meet with them."
Read the Franchise Disclosure Document carefully
This might sound like a basic lesson in Business 101—but it’s worth repeating: never sign anything unless you know what you're getting into. This tenet applies especially when it comes to franchise disclosure documents (FDD).
Holt advises potential franchisees to absorb everything contained within these documents, so that you can fully understand the investment, the business, and the risk. “In my case, I saw so many franchises within the system growing their business and simply assumed that success would follow me too,” he says. “It was true that many of the franchisees were growing, but I neglected to examine the expense side of the income statement. The FDD contains several items that should provide you with specific information on the expected investment and expected return based on real data from current franchisees within the system."
Speak to current and former franchisees
A good way to size up whether a particular franchise model is right for you is to speak to franchisees, both former and current. Just as many consumers use review sites such as Yelp when deciding to buy a specific computer brand or patronize a certain restaurant, so should you, as a potential franchisee, seek out those who have experience in this realm—even if it's negative. By learning and weighing all the pros and cons, you will be able to make a better informed decision about becoming a franchisee.
Kushell concurs, adding that it’s preferable for potential franchisees to meet ex- and current franchisees in person rather than soliciting their feedback via phone or e-mail.
"Ask them penetrating questions as to what their experience has been with the franchisor, how supportive they are, the problems, the positives, and most important, are they profitable?" suggests Kushell. "Many franchisees are willing to share this information with you."
Like with any start-up, developing a business forecast is a strategic imperative for potential franchisees. Don't assume that you're going to make money from a franchise model simply because it’s designed to do that.
Kushell says the plan should contain financial forecasts looking out at least five years, and should be conservative, he adds.
Also, ask trusted associates for their feedback about your plan. "Have them review it and offer their opinions before making a final decision," continues Kushell.
As with launching any small business, franchising is not for everyone. As Holt, the ex-franchisee, learned the hard way, eagerness is not an excuse to avoid doing due diligence. Investigate your franchise and listen to the opinions of others who've been there. Otherwise, you might end up making a serious mistake that could end up costing you dearly, both financially and professionally.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.